Tax Evasion & the Black Economy
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 resort to various means for plugging in scope of evasion and increasing the level of enforcement. Corruption by tax officials Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe.
Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped and southern European countries. Level of evasion and punishment Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are handled in the Swiss tax courts, not the criminal courts. In Switzerland, however, some tax misconduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment. BLACK ECONOMY / BLACK MARKET Is the economy in which illegal goods are traded. Due to the nature of the goods traded, the economy itself is forced to operate outside the formal economy, supported by the established state power.
Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services, e. g. “the black market in bush meat”. The black market is distinct from the grey market, in which commodities are distributed through channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer, and the white market, the legal market for goods and services. Worldwide, the underground economy is estimated to have provided 1. 8 billion jobs. Background
The literature on the black market has avoided a common usage and has instead offered a plethora of appellations including: subterranean; hidden; grey; shadow; informal; clandestine; illegal; unobserved; unreported; unrecorded; second; parallel and black. This profusion of vague labels attests to the confusion of a literature attempting to explore a largely uncharted area of economic activity. There is no single black economy; there are many. These black economies are omnipresent, existing in market oriented as well as in centrally planned nations, be they developed or developing.
Those engaged in underground activities circumvent, escape or are excluded from the institutional system of rules, rights, regulations and enforcement penalties that govern formal agents engaged in production and exchange. Different types of underground activities are distinguished according to the particular institutional rules that they violate. Five specific underground economies can be identified: 1. Illegal Economy 2. Unreported Economy 3. Unrecorded Economy 4. Informal Economy 5. Criminal Acts 1. ILLEGAL ECONOMY
The “illegal economy” consists of the income produced by those economic activities pursued in violation of legal statutes defining the scope of legitimate forms of commerce. Illegal economy participants engage in the production and distribution of prohibited goods and services, such as drug trafficking, arms trafficking, and prostitution. 2. UNREPORTED ECONOMY The “unreported economy” consists of those economic activities that circumvent or evade the institutionally established fiscal rules as codified in the tax code.
A summary measure of the unreported economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the unreported economy is the “tax gap”, namely the difference between the amount of tax revenues due the fiscal authority and the amount of tax revenue actually collected. 3. UNRECORDED ECONOMY The “unrecorded economy” consists of those economic activities that circumvent the institutional rules that define the reporting requirements of government statistical agencies.
A summary measure of the unrecorded economy is the amount of unrecorded income, namely the amount of income that should (under existing rules and conventions) be recorded in national accounting systems (e. g. National Income and Product Accounts) but is not. Unrecorded income is a particular problem in transition countries that switched from a socialist accounting system to UN standard national accounting. New methods have been proposed for estimating the size of the unrecorded (non-observed) economy. But there is still little consensus concerning the size of the unreported economies of transition countries. 4.
INFORMAL ECONOMY The “informal economy” comprises those economic activities that circumvent the costs and are excluded from the benefits and rights incorporated in the laws and administrative rules covering property relationships, commercial licensing, labor contracts, torts, financial credit and social security systems. A summary measure of the informal economy is the income generated by economic agents that operate informally. The informal sector is defined as the part of an economy that is not taxed, monitored by any form of government, or included in any gross national product (GNP), unlike the formal economy.
In developed countries the informal sector is characterized by unreported employment. This is hidden from the state for tax, social security or labor law purposes but is legal in all other aspects. On the other hand, the term black market can be used in reference to a specific part of the economy in which contraband is traded. Pricing Goods acquired illegally take one of two price levels: They may be cheaper than legal market prices. The supplier does not have to pay for production costs or taxes. This is usually the case in the black economy.
Criminals steal goods and sell them below the legal market price, but there is no receipt, guarantee, and so forth. They may be more expensive than legal market prices. The product is difficult to acquire or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as some drugs, their prices can be vastly inflated over the costs of production. Black market can form part of border trade near the borders of neighboring jurisdictions with little or no border control if there are substantially different tax rates, or where goods are legal on one side of the border but not on the other.
Products that are commonly smuggled like this include alcohol and tobacco. However, not all border trade is illegal. Prostitution Prostitution is illegal or highly regulated in most countries across the world. These places form a classic study of the black economy, because of consistent high demand from customers, relatively high pay, but labor intensive and low skilled work, which attracts a continual supply of workers. While prostitution exists in every country, studies show that it tends to flourish more in poorer countries, and in areas with large numbers of unattached men, such as around military bases.
Prostitutes in the black market generally operate with some degree of secrecy, sometimes negotiating prices and activities through codewords and subtle gestures. In countries such as the Netherlands, where prostitution is legal but regulated, illegal prostitutes exist whose services are offered cheaper without regard for the legal requirements or procedures— health checks, standards of accommodation, and so on. In other countries such as Nicaragua where legal prostitution is regulated, hotels may require both parties to identify themselves, to prevent the rise of child prostitution. Weapons
Fire Arms trafficking The legislatures of many countries forbid or restrict the personal ownership of weapons. These restrictions can range from small knives to firearms, either altogether or by classification (e. g. caliber, automation, etc. ), and explosives. The black market supplies the demands for weaponry that cannot be obtained legally, or may only be obtained legally after obtaining permits and paying fees. This may be by smuggling the arms from countries where they were bought legally or stolen, or by stealing from arms manufacturers within the country itself, using insiders.
In cases where the underground economy is unable to smuggle firearms, they can also satisfy requests by gunsmithing their own firearms. Those who may buy this way include criminals to use for illegal activities, gun collectors, and otherwise law abiding citizens interested in protecting their dwellings, families or businesses. Illegally logged timber Illegally logged timber is a huge problem. According to interpol, the illegal logging industry is worth almost as much as drug production industry, in some countries. Animals and animal products
Ivory trade / Wildlife trade In many developing countries, living animals are captured in the wild and sold as pets. Wild animals are also hunted and killed for their meat, hide, organs, … Organs and other animal parts are sold for use in traditional medicine. Alcohol / Tobacco It has been reported that smuggling one truckload of cigarettes from a low-tax US state to a high-tax state can lead to a profit of up to $2 million. The low-tax states are generally the major tobacco producers, and have come under enormous criticism for their reluctance to increase taxes.
Biological Organs Trade Organ trade is the trade involving inner organs (heart, liver, kidneys, etc. ) of a human for transplantation. There is a worldwide shortage of organs available for transplantation, yet trade in human organs is illegal in all countries except Iran. The problem of organ trafficking is widespread, although data on the exact scale of the organ market is difficult to obtain. Whether or not to legalize the organ trade, and the appropriate way to combat illegal trafficking, is a subject of much debate. Software piracy
Street vendors in countries where there is scant enforcement of copyright law, particularly in Asia and Latin America, often sell deeply discounted copies of films, music CDs, and computer software such as video games, sometimes even before the official release of the title. A determined counterfeiter with a few hundred dollars can make copies that are digitally identical to an original and suffer no loss in quality; innovations in consumer DVD and CD writers and the widespread availability of cracks on the Internet for most forms of copy protection technology make this cheap and easy to do.
