Tax: Evasion, Avoidance, Mitigation, Protest, Resistance …
July 1st is another of those professional holidays which were a feature of the Soviet Union which has been passed over and continued in the newly independent states that emerged – including the Kyrgyz Republic. This one is Tax Inspectors’ Day!
The role of the tax inspector is to ensure that people pay the right amount of tax that is due … and on time.
Even if everyone accepts Benjamin Franklin’s dictum about the only two things that are certain in life being “Death and Taxes”, most people still don’t like paying taxes. As a result tax collectors are not exactly the most popular people, so it seems intriguing that they are granted the recognition of such a professional holiday – especially when the accounts of corrupt inspectors taking bribes are considered. On the other hand, it is also a mark of recognition of the important role that they play in servicing government and the functioning of society.
Taxes, after all, represent the way in which government’s raise the funds that they need in order to perform their functions and fulfill their role.
Even so, taxes represent a form of expenditure, but it’s not always obvious what the expenditure purchases. As a result, many people don’t make the connection between their taxers and the services they receive: law enforcement; emergency medical services; fire services; social security; education and defense; roads and other forms of infrastructure … and so on. Some people, of course, may wonder if the government is pending their money, (taxpayers’ money), wisely … but that’s another story. What is noticeable is that many people try to minimize their exposure to tax.
To a businessman, for example, tax is just another form of expense, like the cost of raw materials, labour, or overheads for lighting, heating, etc. A businessman tries to maximize profit by maximizing income and minimizing expenses … including their tax bill. Provided they do this legally, I maintained, there should not be an issue. One might want to close the “loopholes” which allow them to do so – but they should not be vilified for what was effectively “doing their job”.
I recent months a local think tank has published a new publication Tax for Teapots, which is how the series “… for Dummies” series is known here – that is “Tax for Dummies“. There has even a publication produced by a USAID project advising businessman on how to reduce their tax liabilities.
On the other hand, there are people, who are called tax protesters, who withhold tax on the pretext that they have discovered some law or interpretation of the legislation that shows that they should not be taxed – so the tax is not due. In America, for example, there are tax protesters who maintain that under the US constitution the Federal Government has no legal basis for levying and exacting a tax. Although this seems an extreme position, sometimes, in certain circumstances a tax protester might well have a point – but only the courts will be able to decide the issue. (That is why it is so important that the courts are independent and impartial).
Then there are people called tax resistors who refuse to pay some element of their taxes because they do agree with the way in which the government spends that money. The classic case used to be members of the public who opposed nuclear weapons and withheld a portion of their taxes which, they said, would go towards the production and deployment of such munitions. More recent example have involved protests against support for clinics which provide abortions, or stem cell research. If, however, the relevant procedures have all be properly followed, then it is arguable if there is any legal justification for this … and the appropriate course of action should be to lobby for a change in the decision and/or work for a change in the government rather than failing to fulfill a legal requirement.
Now, A few weeks ago, in one of my weekly emails, (which gets sent out as an email to those on the distribution list), included a comment about a recent proposal to reward “whistleblowers” for passing information to the authorities about cafes, shops etc. who do not paying their taxes. The suggestion was that they should receive 20% of any funds recovered for the state budget.
I said that this:
“may sound like a good idea, certainly a popular one, but I bet it won’t be as simple as all that … they’ll be all sorts of reasons why rewards won’t get paid.“
In fact, in a way, there already is a system involving such rewards in that the arrangements for the financing of the Schotnaya Palata, (the Accounts Chamber – the local version of the Audit Commission which examines the the use of public funds), includes a percentage of any monies that they recover. Personally, I am a little uneasy about this. Although I accept that this provides an element of incentive, it institutionalizes the reward system and means that the investigators are no longer independent and disinterested parties.
Anyway, I went on to comment that:
“There’s always a problem over definitions – especially when it comes to the distinction between tax evasion and tax avoidance. One is reducing the amount of tax paid by legal means,whilst the other is using measures which are not. Even in many Western countries these two are being confused, and where a person or corporation pays little or no tax because they are able to utilize “loopholes” they are treated like pariahs – even though, strictly speaking, they have done nothing wrong. One might question the “morality” involved and praise the steps taken to “close” the loopholes, but it seems a bit unreasonable to complain when they abide by the rules – even if it is to make sure that it works to their own advantage.”
As it happens, I am not alone in doubting the efficacy of the measure – some of the deputies have been voicing their doubts during a debate in the chamber – but for slightly different reasons: the risk of over burdening the law enforcement authorities with cases as members of the public make reports in search of rewards; and, curiously, that although investigations normally “goes well” but the recovery of funds is not as effective as might be hoped. Anyway, my comments brought this response from one of my readers:
It’s my understanding that Tax evasion is illegal and tax avoidance is legal. It’s not clear in your postcard.
I am sorry if it wasn’t clear, because I thought it was when I wrote it. In fact, although that is more or less correct, as I understand it, the situation isn’t quite as straight forward.
The distinction between evasion and avoidance is relatively new, and it originally emerged in the States, notably in a legal judgement delivered by the Supreme Court Judge, Oliver Wendell Holmes, but it wasn’t generally accepted across the Atlantic in Britain until much later. Even nowadays the distinction is sometimes drawn between “legal avoidance” and “illegal evasion”.
The situation has in recent years become more precise with a finer distinction being drawn between tax avoidance and tax mitigation, (a distinction which hasn’t really yet hit the mainstream media even though the concept has been circulating for around forty years).
Tax avoidance is now defined as taking steps to reduce the amount of tax paid which are designed to conflict with or defeat the evident intention of the legislature, (parliament in the UK), whereas mitigation does not – for example by making gifts or donations to charity. This concept, however, is not always clear and I see that this specific example has recently become a controversial issue in the UK. I presume that we will meet it here as well.
Whatever, I suppose that being as tax inspector is a difficult and thankless task … albeit a necessary one, and that they deserve a day when their contribution to the functioning of society is recognized.
Bishkek