Content uploaded by James Alm
Author content
All content in this area was uploaded by James Alm on Jan 12, 2016
Content may be subject to copyright.
A preview of the PDF is not available
Compliance Costs and the Tax Avoidance-Tax Evasion Decision
Abstract
The analysis of the individual's choice of illegal tax evasion has typically ignored an alternative, legal method by which taxes can be reduced: tax avoidance. This article analyzes the joint individual choice of evasion and avoidance; it also examines optimal government policy in such a world. Its principal conclusion is that the existence of another channel for tax reduction alters many of the conclusions of the simpler evasion literature. Specifically, government policies that reduce evasion may not increase the tax base because avoidance may increase instead, and tax rate reductions may be a powerful tool for generating tax base increases because reductions make both evasion and avoidance less attractive. In addition, optimal government choices depend critically upon its objectives. The government selects larger values for its instruments when its goal is net revenue maximization or when those individuals who evade are not valued highly in its welfare function. It also appears that greater tax complexity generates more tax revenues.
... The components of tax compliance costs are tax liability and tax compliance administration in complying with taxation law such as agent fees (Mahangila, 2017). Alm (1988) examined that the tax compliance costs will lead to tax avoidance because taxpayers incur costs in complying with the taxation laws such as hiring tax agents, administration costs and paying the tax liability. Tax rate refers to the fairness of the tax system in charging the tax rate towards the taxpayers and the government transparency spending refer to the disclosure of spending in social and economic development by the government in the country. ...
... Tax compliance costs lead to the issue of the tax burden on taxpayers. Thus, there is a positive relationship between tax compliance costs and tax avoidance because taxpayers do so with the aim to reduce their tax burden (Kim & Im, 2016;Atawodi & Ojeka 2012;Sapiei & Kasipillai, 2014;Alm, 1988). ...
... The second hypothesis on tax compliance costs was also accepted and show a positive and significant relationship with tax avoidance activities. Alm (1988) examined that tax compliance costs will lead to tax avoidance. The third hypothesis is the tax rate and government transparency spending shows a negative and insignificant relationship with tax avoidance activities. ...
The tax avoidance cases in Malaysia increased year by year. The tax avoidance led to country revenue under collected. Therefore, this study aims to investigate the factors that lead to tax avoidance among SME taxpayers in Penang, Malaysia. The study is performed by adopting the Approach-Avoidance Theory model. This model widely used to explain the decision making by the taxpayers to involve in tax avoidance activities. The framework of the study focused on four level factors namely tax complexity, tax compliance costs, tax rate and government transparency spending and tax education and tax knowledge. The objectives of this study are to determine the level and the relationship of tax complexity, tax compliance costs, tax rate and government transparency spending and tax education and tax knowledge and tax avoidance. This study employed the quantitative method by distributing the surveys to the SME taxpayers in Penang state. The total sample of this study was 420 respondents. Collected data were analyzed by using SPSS statistic version 25. As a result, the findings from the regression analysis revealed that tax complexity, tax compliance costs and tax education and tax knowledge significantly on the tax avoidance activities among SME taxpayers in Penang state. However, the study discovered that there is an insignificantly relationship between tax rate and government transparency spending with tax avoidance activities in Penang state. The results of this research are used to develop awareness among the SME owners and to reduce the tax avoidance cases in Penang, Malaysia.
... The aim of the study is to examine the role of trust in, normative expectations of, and the perceived effectiveness of the tax authority in informing tax compliance motivations in the context of a corruption scandal. Weak tax compliance motivations may imply either illegal tax evasion or tax avoidance (that is, legal methods by which the tax burden can be reduced) (Alm 1988). Although these are conceptually and empirically distinct phenomena, this study investigates the general attitudes of citizens towards tax behaviour, measuring to what extent respondents uphold the view that taxes should be paid. ...
... A primary cause of firms and individuals operating in the underground or shadow sectors has been to evade burdensome regulations and/or taxes. While the traditional arguments for tax evasion pre-date the arrival of digital currencies (see, for example, Alm (1988)), the advent of digital currencies, with their international and clandestine nature, might provide individuals a new avenue to avoid taxes. Given its newness and its international prevalence, the governance and taxation of digital or cryptocurrencies are questionable, with nations still trying to formulate effective strategies (Bal 2015;Böhme et al. 2015;Dniprov et al. 2019;Schilling and Uhlig 2019;Stolbov and Shchepeleva 2020;Yadav et al. 2022)). ...
This research considers a new dimension of the effects of the underground sector by examining the spillovers on cryptocurrency holdings. Cryptocurrencies offer a relatively greater ability to dodge taxes and ensure the anonymity of holders, providing attractive avenues for underground operators to stash their informal-sector earnings. Our results, based on data from more than 50 nations, show that a greater prevalence of the underground economy in a nation is indeed associated with greater cryptocurrency holdings. This result holds across an alternative measure of the shadow economy, and when the bi-directional causality between the shadow economy and cryptocurrency holdings is considered. In other noteworthy findings, greater FDI crowded out cryptocurrency holdings, while greater financial globalization and greater economic uncertainty, ceteris paribus, increased them.
... Tax compliance is the primary objective of tax authorities implementing TA regimes (Alm et al., 2009). However, studies show that TA schemes do not ensure sustainable tax compliance (Alm, 1988;Alm and Martinez-Vazquez, 2007;Alm et al., 1990Alm et al., , 2009Christian et al., 2002;Fisher et al., 1989;Hasseldine and Bebbington, 1991;Joulfaian, 1988;Luitel and Sobel, 2007;Sudarma and Darmayasa, 2017;Torgler et al., 2003;Uchitelle, 1989). ...
Purpose
Tax amnesty (TA) schemes are typical in developing countries. Governments’ claims and suppositions are continually heightened; however, this may differ in actuality. This study aims to present an overview of the effectiveness of TA schemes and the problems they raise in implementing anti-money laundering regulations.
Design/methodology/approach
This study used a qualitative research design. Content analysis was used to analyse research articles, reports, legal documents and news articles.
Findings
Every amnesty offered in Pakistan from 1956 to 2018 failed to meet government expectations. Instead, the continuity resulted in an irrepressible black economy. The black economy’s uncontrollability undermines tax collection and hinders a robust anti-money laundering regime. Significantly, tax holidays with discrepant legislation strengthen evaders, plunderers and launderers. These policies severely impede the implementation of anti-money laundering policies in the financial institutions of Pakistan. Additionally, Pakistan's geopolitical location, circumstance and war against terror cannot afford any policy that provides monetary relaxation to offenders.
Practical implications
There is no concrete evidence to support long-term economic progress through the implementation of amnesty schemes as a revenue collection policy. This study evaluates previous studies and findings to understand the effect of tax amnesties on the financial industry of Pakistan. The findings have practical implications for tax collection authorities, policymakers and international financial bodies.
Originality/value
Previous studies have discussed the advantages and disadvantages of Pakistan’s regular tax amnesties. However, this study discusses the implementation of TA schemes concerning anti-money laundering regulations and customer due diligence by financial institutes and provides suggestions to minimise its negative implications.
... 3 Notable exceptions considering both avoidance and evasion are Alm (1988a), , Alm and McCallin (1990), and Gamannossi degl' Innocenti and Rablen (2017). ...
We study an intertemporal utility maximization problem where taxpayers can engage in both tax avoidance and tax evasion. Evasion is costless but is ned if discovered, while avoidance is costly but might be successful (i.e. deemed legitimate) with a given probability (β) upon audit. We nd that traditional deterrence instruments (ne and frequency of audit) reduce optimal evasion but, in contrast with results in a static framework, they have no impact on optimal avoidance. In fact, tax avoidance depends negatively on its marginal cost and positively on both its probability of success (β) and the tax rate. We show that non-compliance behavior may result in a Laer curve for scal revenues and that the revenue maximizing tax rate is lower the higher β. We characterize the optimal level of β by taking into account dierent government objectives: minimizing evasion, minimizing non-compliance (evasion plus avoidance), or maximizing revenues. Our results suggest that specic policies (e.g., tax simplication) need to be implemented to deter avoidance and we illustrate their impact on evasion.
... With the second-best outcome, 1 , infeasible, to participate in the scheme, 11 Promoters of failed schemes typically go quickly into voluntary liquidation, thereby preventing the recovery of fees. 12 By contrast, much early literature treats tax avoidance as riskless (e.g., Alm, 1988;Alm et al., 1990). such taxpayers opt for the third-best outcome = < 1 , while still paying the minimum fee . ...
Recent years have witnessed the growth of mass-marketed tax avoidance schemes aimed at the middle (not top) of the income distribution, with significant implications for tax revenue. We examine the consequences for the structure of income tax, and for tax authority anti-avoidance efforts, of tax avoidance of this type. In a model that allows for both demand- and supply-side considerations, we find that (1) there is an endogenous threshold income below which taxpayers do not avoid, and above which they avoid maximally; (2) the per-dollar price of tax avoidance is decreasing in income under progressive taxation; (3) endogenous adjustments in the price of avoidance make supply less responsive to anti-avoidance activity than thought previously; and (4) that avoidance may drive a non-monotone relationship between tax rates and tax revenue. The findings suggest that new approaches to anti-avoidance, beyond legal enforcement, may be needed.
There are wide and persistent gender and race differences in wage and salary incomes. Much of the literature attempting to explain these differences relies on self-reported earnings. Many self-reported wages and salary incomes differ, however, from those reported by employers. These errors can bias the measurement of the returns to education and the decomposition of racial and gender earnings gaps. This article examines the implications of using selfreported data for measuring gender and race disparities in earnings. We find that relative to employer-reported data, self-reports understate the wage and salary incomes of black women with low educational levels and overstate the returns to higher education for black women. These previously unexplored and unrecognised findings of bias in the estimation of the returns to black women’s education and the large understatement of earnings among less-well educated black women have implications for interpreting the sources of race and gender earnings inequality.
The purpose of this study is to investigate the key determinants of tax evasion across countries. Accordingly, the relationship between socio-economic determinants and tax evasion is examined by using panel data analysis. Based on the data for the European Union, the results show that economic variables have generally stronger effects than non-economic variables on tax evasion. The findings indicate that the lower the level of sound money and the higher level of social capital, economic quality and rule of law, the lower is the level of tax evasion across countries. These results may lead policy makers to design the policies by understanding the main determinants of tax evasion internationally.
Food as a fundamental need for people globally has become a universal concern as the world population increases. The technological advancement, Research and Development have helped economies worldwide to be efficient enough in fulfilling the food consumption. Unfortunately, the world still faces food crisis such as hunger, food insecurity, food wastage and so on, particularly among least developed
countries and developing countries like Malaysia. In line with this, Sustainable Development Goal 2, established by the United Nations in 2015, aims to end hunger, achieve food security, improved nutrition and promote sustainable agriculture. In the context of Malaysia, the country once known as an agricultural country, evolved and transformed its economic structure into more diversified and constantly moving towards industrialisation and digitalisation. Even though various strategies and polices being implemented to make agriculture as a competitive industry, particularly in being an important source of food, there are some drawbacks that have brought to food insecurity and food wastage issues in Malaysia recently. This issues requires more in-depth study from various perspectives. Thus, this study serves as a perception based analysis, concerning food insecurity and food wastage. Using both primary and secondary data, the present study explores the level of public awareness, communities’ perception towards policy relevance and effectiveness, food banking system, the role of NGOs and related economic sectors. This study has a potential in drawing greater attention among communities and policymakers towards prioritizing food security and safety in the country
In a game-simulation context, tax evasion behavior of 15 subjects was observed. Large fines were found to be more effective deterrents than frequent audits. The decision to underreport income appears to be influenced by different factors than the magnitude of underreporting. Tax evasion behavior differed widely among individuals.
The existing literature on income tax evasion lays claim to two important implications: one is that higher tax rates induce greater income declarations and the other is that increases in gross income induce a fall in the fraction of income declared. The purpose of this paper is to examine the robustness of these results with respect to three modifications of the standard model. The first involves relaxing the assumption of linear income tax schedules. The second modification is to consider an alternative form for the penalty function. Thirdly, we consider the consequences of the tax payer making a joint hours of work-income declaration decision.
A simple theoretical model of tax evasion behaviour is used to analyse whether a large fine (with small probability of detection) is a more powerful deterrent to tax evasion than a high probability of detection (with a small penalty). The effect of a higher tax rate on the amount of tax escaping the tax collector is also examined.
Previous analyses have modeled income tax evasion as a ‘portfolio problem’, deriving the optimal consumption of the ‘risky asset’ (unreported income) assuming a fixed probability of detection. We compare an alternative audit policy to the standard random audit policy. We focus on an ‘audit cutoff’ policy, in which an agent triggers an audit if reported income is ‘too low’, and is not audited if reported income is ‘sufficiently high’. We find that random audit rules are weakly dominated by audit cutoff rules. Given lump-sum taxes and fines, audit cutoff rules are the least-cost policies which induce truthful reporting of income.
This paper is an attempt to incorporate tax evasion into the analysis of optimum income taxation. A model of variable labour supply with tax evasion is used to derive supply functions for labour in ‘regular’ and ‘irregular’ markets. Given taxpayer behaviour, the government chooses tax rates, penalties and the probability of detection to maximize a utilitarian social welfare function. The results consist in the derivation of a formula for the optimum marginal tax rate and a characterization of the factors determining the choice between the penalty rate and the probability of detection as instruments for the control of tax evasion.