Tuesday, September 30, 2008

What are the chances of being caught for tax evasion

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If one observes the way the government works its that they like to make examples of people, particularly high profile people. I am reminded of Rene Rivkin, a high flying, very successful trader and stockbroker, who was caught breaching the insider trading regulations covering stock trading. Of course everyone would engage in insider trading if they could, or if they had the opportunity. It goes without reason. Why would you not try to profit from information if you did not harm someone to obtain it.
I can assure you that the armies of brokers working in the stock market engage in stock trading. This is how brokers do it according to a person I know who works in the backoffice of a broking house. The ‘house’ funds’ are used. These are client funds held by the brokers to cover positions. This approach allows the broker to conceal the identity of the trader. This is easy because your inside information allows you to recommend the stock to your clients. The other opportunity is by using offshore bank accounts, which are difficult for governments to track.
The wealthy with the capacity to set up such structures benefit from this. I would also suggest that people can probably use CFDs to evade insider trading. I don’t know however if these markets are monitored for insider trading, but I doubt it.

So why is the observed ‘voluntary tax compliance’ so high?
Well the problem here is what you call voluntary compliance. ‘Voluntary’ in this context means being obedient before you are caught. The implication is that people are still be coerced into submission.
The tax system in Australia is based on self-assessment and voluntary compliance by taxpayers. The probability of receiving an audit by the Tax Office is considerably low. The chance of being caught blatantly avoiding or evading tax is also unlikely, and if a taxpayer is caught, the culpability penalties are relatively minor. Yet the majority of taxpayers still comply with their obligations and pay their tax with good will (Braithwaite, 2003).

There is evidence that perceptions of unfair tax burdens or policies can affect taxpayers’ compliance decisions. According to Betty Jackson & Valerie Milliron, tax fairness has at least two dimensions (Jackson & Milliron, 1986) related to:
  1. The benefits one receives for the tax dollars given.
  2. The perceived equity of the taxpayer’s burden compared to other individuals. The taxpayers’ perceptions are framed by the equity of the tax system (see also Kinsey & Grasmick, 1993). If a taxpayer felt they were paying more than their fair share of tax compared to wealthy taxpayers (i.e. vertical inequality), they are more likely to see paying tax as a burden.
I would argue that there are additional reasons to be disgruntled by the tax system:
1. The lack of opportunity to seek redress, both in terms of policy and assessments
2. The lack of ethical framework for levying the tax
3. The lack of choice in participating in it, or chosing between systems that might exist in different states. You can’t so readily choose your country, but you can chose your state.
We can understand why tax evasion results in problems. Consider a study by Spicer and Becker (1980), which found that taxpayers increased their level of tax evasion when they considered themselves victims of vertical inequity, but decreased their tax evasion when they perceived themselves to be the beneficiaries of vertical inequity. The implication is three-fold:
1. That some people are not consistent in their decisions. This is understandable. Why should they act with principles when the government doesn’t.
2. The system supports the majority and punishes the minorities or marginal electorates served by political parties, e.g. farmers, pensioners, welfare recipients and business. These groups also benefit from considerable social sympathy because they are political organised.
3. The system is unfairly designed
Research into procedural justice shows that taxpayers are generally more compliant when they think the tax authorities have treated them fairly and respectfully (Wenzel, 2003). The implication is that there are levels of discontent with government. What these studies fail to raise is the taxpayer discontent with the way governments spend money. There are several grounds for this discontent:
1. The seemingly political (self serving) nature of the expenditures
2. The slow political process to take action
3. The low efficiency of the tax expenditures
4. The failure of government spending to achieve its stated goals
5. The extent of government spending which they don’t support
6. The extent to which government spending is marked by corruption
7. The extent to which government appears to be doing nothing to remedy these problems
8. The extent to which the government appears to be concealing or denying its lack of efficacy or incompetency in these matters
There is little empirical research available on the attitudes and beliefs of taxpayers actually known to be engaged in aggressive tax planning (Refer to Murphy, 2002a; 2002b; in press; Murphy & Byng, 2002a; 2002b; Hobson, 2002; Williams, 2004). Most studies only consider the attitudes and beliefs of taxpayers in the general population. Non-compliant taxpayer might be dismayed by this, believing that they are the victims of unfair policies that burden them at the expense of the majority. One cannot assume that their resentment is purely concerned with the distribution of the burden. Other issues are the unfairness of the system in terms of:
  1. Administrative time & costs
  2. The resources made available
  3. The flexibility of the system to serve certain groups
  4. Pursuing certain types of tax payers
Clearly the problem collecting data on tax evasion is the unwillingness of people to draw attention to themselves, because they fear the type of treatment afforded Rene Rivkin until he died under the stress of constant court battles with a tax office with unlimited resources. So pity the small taxpayer who has even less resources than Rene.

Most of the survey-based studies conducted have instead tried to measure taxpayers’ propensity to evade or avoid tax (Wallschutzky, 1984; Wearing & Headey, 1997). The problem with this approach is that people (including government) are blind to the ethical reasons for why taxpayers might legitimately avoid taxation. Well – that is no longer the case for the Australian Tax Office because I sent them a letter of complaint against their tax policies, asking to engage in a debate with their most capable officer. This lack of survey results serves the government because there is no ‘ethical’ case against it. The other side of this issue is the impact on the psyche of those hounded by the tax office. I know a great many Australians will regard these tax delinquents as ‘criminals’, but I would challenge anyone to offer evidence of that. To defend this position is not simply about citing a piece of legislation, it’s about establishing an ethical basis for levying taxation on people. I.e. Keep asking why until you run out of answers.
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Andrew Sheldon www.sheldonthinks.com
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