Tax Evasion & the Black Economy

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TAX EVASION

It is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability and includes in particular dishonest tax reporting, such as declaring less income, profits or gains than actually earned or overstating deductions.

Tax evasion is an activity commonly associated with the informal economy and one measure of the extent of tax evasion is the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported, which is also sometimes referred to as the tax gap.

Tax avoidance, on the other hand, is the legal utilization of the tax regime to one's own advantage to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system, though such characterization of tax avoidance is suspect, given that avoidance operates lawfully, within self-creating systems

Smuggling

Smuggling is importation or exportation of foreign products by unauthorized means. Smuggling is resorted to for total evasion of customs duties, as well as for the importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized customs port, and therefore are not subjected to declaration and payment of duties and taxes.

Ten countries with the largest absolute levels of tax evasion per year. It is estimated that global tax evasion amounts to 5 percent of the global economy. During the latter half of the twentieth century, value added tax (VAT) has emerged as a modern form of consumption tax through the world, with the notable exception of the United States. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.

In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the law in most cases. Such evasion is, especially, prevalent in federal states like the Nigeria, US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each goods sold by trader. The price must be clearly stated and the VAT distinct from the price of the good purchased. Any act by the trader contrary to this (like including VAT in the price of the goods) is punishable as attempting to syphoning the VAT. Borders between tax districts in the same nation usually lack the resources to enforce tax collection on goods carried in private vehicles from one district to another, so states only pursue sales and use tax collection on high-value items such as cars.

Government response

The level of evasion depends on a number of factors, one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often render control of evasion difficult. Tax administrations...
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