TAXATION

GROUP COURSEWORK
2011-2012 SEMESTER B Analyze the phenomenon of tax evasion and indicate ways to prevent such practices

CONTENTS
INTRODUCTION........3

TAX DEFINITION AND PURPOSE OF TAXATION....3

DISTINCTION OF TAXES....4

WHAT IS TAX EVASION AND FACTORS FOR TAX COMPLIANCE.6

CONSEQUENCES OF TAX EVASION....9

WAYS TO PREVENT TAX EVASION...10

CONCLUSION....10

REFERENCES....12

INTRODUCTION
According to Zimmern (1956), in the ideal Athens of the fifth century B.C., the liturgy system was very successful, where the liturgy was a form of tax for the wealthy in order to afford titles in exchange for tax payments for the state. The Greek Golden age with its magnificent monument of the Parthenon is the perfect result of the Athenian government regarding the collection of taxes. Especially from 454 BC, the sixtieth annual tax went for godness Athena and Pericles saved the money to build the famous temple. Tax compliance was an achievement of the democratic functioning of Ancient Athens. The Latin word evadere, which means escape, and avoid in taxation law, is used to describe forms of illegal behavior related to tax payment. The Tax evasion phenomenon has its causes not only in economic factors, but also in social and psychological causes. Tax morality, human egoism, and social norms, ethics and culture, are some causes of tax evasion worldwide.

TAX DEFINITION AND PURPOSE OF TAXATION

Dalton (1920) implies that tax is the compulsory contribution which imposes a public authority without regard to the exact amount of services supplied in exchange to the taxpayer and without imposing a criminal violation of any law. According to Andreadis (1935), in the Greek constitution of 1864, influenced by Montesquieu, Thiers, Locke and Smith, there is the theory of premium for the citizen before the state such as the insured and the insurance company and the tax is the price for the benefits from the this type of guarantee for this safety. Finokaliotis (1999) implies that there is also the theory of exchange for the services from the state. But Andreadis (1935), Finokaliotis (1999), Theocharopoulos (1975), imply that the most important reason for the existence of taxation is the necessity for the survival of the state. The taxation is imposed by this necessity and it is an inevitable sacrifice by the citizens. This sacrifice is also a duty of the citizens. The term legitimate evolves questions about the fairness but under special circumstances is fair. The imposing of taxes is justified, because nobody could be able to possess income or assets without the

support of constitutional, organized society in the form of a state. According to Georgakopoulos and Patsouratis (1993), the cost of providing free public goods and funding of other activities of public bodies, it is called tax burden. The tax burden must be distributed fairly. The progressive tax income is an excellent example to highlight one advantage of taxation, the distribution of income from richest to poorest because the progressive tax income is very important for the reduction of income and social inequalities and it gives the State the opportunity to give basic benefits to those who are very poor and weak. An example of statutory set of principles regarding taxation is the Greek Constitution that sets out the basic tax principles to be observed by the legislator and enforcer of the law on tax laws. In Articles 4 (paragraph 1 and 5), 20 (paragraph 1), 36 (paragraph 2), 73 (paragraph 5), 76 (paragraph 7), and 78 of the Constitution 1975/1986/2001 are the foundation of the Tax Law. The principles ensure the rule of law and social state of law in Greece : 1)The principle of legality of the tax, 2)The principle of the annual consent of parliament for the establishment and collection of tax, 3) The principle of certainty of tax 4)The principle of equality of tax, 5) The principle of universality of the tax, 6) The principle of non-retroactivity of tax, 7)Principles derived from the provisions of civil rights.

DISTINCTION OF TAXES
The basic distinction between taxes, are the direct and indirect taxes. Direct taxes are those imposed in the resulting income and wealth, while indirect taxes are imposed on trade, incidental or transitional. Personal taxation and corporate taxation according to ESA 95 are considered as the total of direct taxes along with profit taxation from lottery and dividend taxation. VAT and Consumption tax are considered Indirect Taxation. According to Atkinson (1977) the direct taxes refer to certain individuals or entities and they are imposed on the income or the property owned by the tax payers (e.g.income tax). Indirect taxes are imposed on the income spent and they are collected when certain transactions or events occur (VAT, value added tax). Also, the direct, the operative fact is the periodicity and regularity exists (e.g.the income tax collected each year) while the indirect tax is not periodicity. The indirect taxes are extensively used to excise tax, are not considered fair taxes, because they are not

progressive and they do not take into account minimum exceptions and differences in personal circumstances. The major indirect tax is the Value Added Tax and the major direct Tax is the Income Tax. Atkinson (1977) implies that Direct taxes are more fair and just because they are imposed in greater amounts on citizens with greater income. Indirect taxes are paid by all individuals with no exception. The Direct taxes are more stable and expected. Indirect taxes have immediate results and significant returns for the State because they are imposed easily to all citizens and entities. The taxation cost regarding the collection of indirect taxes is less than the cost of collection of direct taxes. According to Palaiodimos (2006), after the comparison of tax systems in EU countries, an important aspect of tax systems in the EU is that all the Nordic countries make their tax revenues over direct taxation and a similar picture emerges for Ireland, the United Kingdom, Belgium and Luxembourg. At the other extreme are Germany, France, Holland and Greece, whose share of direct taxes in total tax revenue is low and approaching that of the new Member States in EU. Corporations depict the state economy and tax view of a business is consisting of: a) the tax income, b) the VAT, c) by withholding taxes, d) from the property tax e) transfer taxes property, f) the tax of duties g) fees. The tax subject is not only citizens of a state but other persons, including foreigners residing permanently or temporarily, or transit or when economic relationship is by inheritance, by exercising business, from property and more. The State has more interest in the corporate taxation, because the legislature for fairness and universality and of course because of the amount of taxes. There is also a distinction of taxes relating to the tax base and distinction of taxes in accordance with the method of calculation. According to tax base distinction, they are real and personal taxes that are imposed on certain real economic data without taking into account the status and economic power of the taxpayer (eg.tax, real estate transfer tax). In contrast, for the determination of personal taxes, taxpayer's personal situation (marital status, annual costs affinity for the donor / deceased etc) are taken into account, eg. Income tax. There is another distinction according to the method of calculation, there the actual and implicit taxes. Another distinction regarding the calculation is the specials and at value : at value are those calculated on the price of the tax component such as tax income and Vat, and the specials are calculated on

specific kind such as oil. Distinctions are the personal taxation and the corporate taxation and capital gains tax. Of course there are taxes regarding the property, work and etc.

WHAT IS TAX EVASION AND FACTORS FOR TAX COMPLIANCE

According to the Greek national operational programs against tax evasion (2011), Tax evasion is, the illegal in any way hiding of income of individual or entities, aiming to reduce or eliminate tax liability. Costas(2011), president of Chair of the Taxation Committee of the Chamber, imply that Per Greek Tax legislation and the reporting of the economic crime prosecution body (SDOE), the following Illegal actions are considered tax evasion, such as the omission to declare any kind of taxable income , omission to issue tax documents, omission to pay withholding taxes (VAT), omission to declare and pay social security contributions, the illegal use of tax documents (forged, fictitious) and sometimes the non monetary barter of legal services and goods. The term illegal, indicates the separation from tax avoidance, which is a related concept where a taxpayer, e.g. Corporation record transactions in order to minimize tax payment. Feldman and Kay (1981), imply that there is strong similarity between tax evasion and tax avoidance. In Advanced Corporate Reporting the financial statements must depict the economic reality and the tax basis where the tax will be calculated, will be real. Rice (1992), implies that the big firms have the greatest tendency to tax evade, but also in much smaller companies , he concluded that tax non compliance in companies with low profits, it was a strategy by the managers in order to reduce cost. The tax evasion and the resistance towards the obligation to pay taxes, has many causes. There are microeconomic approaches based on mathematical models to analyse the tax evasion. Allingham and Sandmo (1972) developed the expected utility maximization approach where the taxpayer has to choose between the declarations of the actual income and to declare less than his actual income. The first choice leads to the full amount of tax payment, and the

second although he can pay less taxes, he may be detected and punished. The individual but especially a company wants to maximize the expected utility which comes from the income after tax and penalty (in the case of detection for tax evasion). The decision for tax evasion by declaring less income is risk averse. The tax rate effect on the reported income is indeterminate but in this theory the increased tax rate because of the tax evasion effect to state on collecting taxes, it finally leads the taxpayer to avoid the risk. The probability of detection is less attractive. To conclude, rational taxpayers decide how much to evade, given their income the marginal tax rate, and of course the possibility of detection. Srinivasan (1973), implies that the expected income maximization approach of that the taxpayer has accepted that his goal is to maximize his expected income after taxes and penalties and that the higher the probability of detection, the lower the proportion of income being evaded. If there is a progressive tax rate the richer the person, the large the unreported income. Both approaches are related to tax rates, and this factor is important to lead a Company or a person to declare directly less income in order to avoid the reduction of its income. According to Frey and Torgler (2007), a social norm is related to a type of behaviour of an individual or social group with general social approval or disapproval. Bordingnon (1993) implies a compliance model under Kantian principles, in order to promote fairness among taxpayers by considering fair amount of taxes. The effect will be the avoidance of tax evasion because of selfish behaviour. Benjamini and Maital (1985), imply that in societies where most tax payers evade, the social stigma is small and the result is the reduction of tax compliance. On the contrary in societies where a few only evade the stigma effect is great. Frey and Torgler (2007), imply that some governments promote a moral appeal for the taxpayer who complies and a low social standing of tax evaders in a great degree. This kind of compliance is greater in countries with a strong sense of social cohesion, patriotism. Tax morality is also a part of total morality of one society, and it reflects in the relation of social environment. Alm et al. (1995), imply after comparing tax compliance experiments that there is higher tax compliance in United States which is related to higher social norm than in Spain. Both countries have different culture and history. The United States in this research had the highest tax morale followed by Austria and Switzerland. There is

also a strong negative correlation between the size of unofficial economy and the degree of tax morale in those countries. The Greek national operational programs against tax evasion (2011), indicates clearly that the increasing intensity of tax evasion have overcome the reflexes of society against of tax evasion and there is permanent perception for the impunity of this phenomenon. It is of course a matter of complete morality of each individual taxpayer or corporation. Tax compliance is different for firms or corporations in contrast to individual taxpayers. Crocker and Slemrod (2005), and Chen and Chu (2005), imply that the existence of internal procedures such as the internal audit , affect their tax reporting and the importance of the firms external activities in the market where the corporate tax evasion can influence negatively the shareholders and stakeholders interest and the whole market in generally. According to KPMG survey (2011), every official authority has to reduce corporate income taxes but with consideration for the effects at the shareholder level because in many countries the income tax systems are based on the concept of integration. The shareholders have a credit for the underlying tax paid related to corporation. But many countries lately choose to give no credit and to reduce the corporate income tax rate. The reduction of rate has a minimum effect than the expected at the shareholders level. According to the results of the KPMG Benchmark Survey (2011) on VAT, corporations have to deal with the problem to manage their indirect tax risk and creating value and simultaneously to achieve full compliance. In many countries there is also the lack of confidence regarding the reliability of institution. According to Schneider and Enste (2000), Greece and Italy had the largest unofficial economy at 30 percent and 27 percent of GDP. There is a disposition towards public institutions, tax authorities and in general to government authorities. The low quality of services and the increase of public cost of the state, economic scandals and the public disposition regarding the legality of certain taxes especially in countries such as Greece where tax evasion is so common and the people trust the system less, leads to low tax morale. Tatsos (2001) implies that high earners in Greece were more inclined to tax evasion. Costas (2011), implies that the education factor regarding the Lack of education and conscious acceptance of the role of taxation is very important. The efficiency of the tax authorities mechanism for the

detection and audit are very important in order to promote the tax compliance especially to corporations. According to KPMG survey (2011), governments choose to rely on indirect taxes than the direct taxes such the tax income in order to promote competitiveness for investments. This political first off all act, set barriers to social change by not redistributing wealth to lower income citizens and smaller companies. According to OECD (1990), in most countries, companies and individuals can make a deal with tax inspectors in order to pay fewer penalties in order to collaborate.

CONSEQUENCES OF TAX EVASION

According to Slemrod and Bakija (2004), tax evasion has a great influence on the distribution of tax burden as well the resource cost of raising taxes and effect to social inequality and poverty. Tax evasion also forces governments to reduce the amount of tax free bracket in order to collect taxes and cut other tax free benefits. Greeces huge sovereign debt has almost limited the financial opportunity and survival in the European Community, the tax evasion is the most pressing challenge for any Greek government and perhaps is the main cause of the deficit. Vagianos et al. (2010), imply that the main cause of the deficit in Greece is the lack of public income because of tax evasion. The above is concluded by the comparison between the Greek Government expenditure with the average of the European Union but revenue is much lower because of tax evasion. Behrens et.al (2009), indicate that market distortions by the two transfer pricing rules in the OECD guidelines the Comparable Uncontrolled Price and the Comparable Uncontrolled Price, because the transfer pricing can be use for tax evasion. Sadmo (2005) implies that firms are able to allocate labor freely between official and unofficial economy. In this way workers and firms do not face incentives and disincentives to participate in the shadow economy and this has moral consequences in society. Matsaganis et al. (2010), indicate that tax evasion influences the redistribution of income, and the social benefits. Guth and Mackscheit (1984), emphasize that the redistribution of taxes and public goods comes from tax revenues. According to Gupta (2007), imply that tax revenue have a positive correlation with economic development. Reduction of the tax revenue because of tax evasion or tax

avoidance restricts the development opportunities. Tax refunds can be used in order to promote research and development in countries. Vagianos et. al (2010) , indicate that Tax evasion enhances the low technology and low activity against the growth of high technology and high growth activities because many of self employed individuals are not detected by tax authorities easily and tax burden falls in a great percentage to large firms. Fredericksen et. al., (2005) imply that lower tax revenues may ultimately lead to higher tax burdens to the reliable tax payers and that tax evasion will also distort labor supply decisions.

WAYS TO PREVENT TAX EVASION

Costas (2011), Chair of the Taxation Committee of the Chamber indicates measures to prevent taxation. Tax morale can be influenced with the education of taxpayers. Education regarding the acceptance of the role of taxation in society must be promoted. The education will enhance the morality and the patriotism of citizens in order to face the question of the quality of state institutions and the quality of public services, the doubt about the use of tax revenues because of scandals. Economic benefit also must be included in the reform of tax system, regarding the individuals or entities with high tax compliance behaviour in order to promote the tax compliance. Motivations for individuals but also for the entities must be included in order to increase the high compliance. Receipts measures regarding the personal taxation and tax credit in cases of payment in advance for companies are examples. A tax system reform will demand more participation to tax burden from self employed and independent professionals with increase of tax rate. The detection and the tax audit authorities must be more efficient. It would be better to emphasize in searching the resources of personal income and not just the corporate income or emphasizing to revenues of an entity. An example is that in Greece there are many entities with low corporate income for years but their boards are rich. It is obvious that there are tax evasion benefits from unreported transactions in these companies. Floropoulos et al. (2010) imply regarding the Taxis system, that Greek authorities in order to use

successfully the Information Technology must provide higher service quality. The tax code also must be stricter by increasing the penalties quantity and quality.

CONCLUSION
Shelmrod (1990), implies that optimal taxation as general framework for higher tax receipts, lower poverty, reduced inequalities, and a more progressive tax system, is costless but it is related to the structure of economy, and the availability of tax instruments. The policy in general is the most important factor in order to educate citizens and enhance the tax morals, to reform tax systems, to emphasize in direct taxes rather than indirect taxes , more progressive tax system and to create a just tax system to help the State to avoid increase of deficit. This leads governments to increase foreign or domestic borrowing. The first means less independence and freedom of economic and other options for the country, but an increase in debt due to the high rate of external borrowing. The political intention to control economy worldwide is obvious. The question is how serious is the connection between Political morals and tax morals of citizens.

REFERENCES
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