There is a clear-cut difference between tax avoidance and tax evasion. One is legally acceptable and another is an offense. Unfortunately however many consultants even yet in this country don't realize the difference between tax avoidance and tax evasion. The majority of the planning aspects that have been suggested by these consultants often fall into the group of tax evasion (that is illegal) and so will put clients right into a risky situation and in addition diminish the value of tax planning.
This may be one of the prime reasons where clients have lost faith in tax planning consultants as most of them have often suggested dubious systems which are clearly under the category of tax evasion.
In this chapter I provide a few examples and case studies (including legal cases) of how tax evasion (often suggested by consultants purporting to be specialists in tax planning) is undertaken not merely in this country however in many parts of the world. It is true that many people do not like to cover their hard-earned money to the government. However doing this in an illegal manner such as for example by tax evasion is not the answer. Good tax planning involves tax avoidance or the reduced amount of the tax incidence. If this is done properly it can save substantial amounts of money in a legally acceptable way. This chapter also highlights some practical examples and case studies (including legal) of tax avoidance.
Why Governments Need Your Taxes (Basic Economic Arguments)
Income tax the biggest way to obtain government funds today generally in most countries is a comparatively recent invention, probably because the notion of annual income is itself today's concept. Governments preferred to tax things that were an easy task to measure and on which it had been thus easy to calculate the liability. That is why early taxes Fiscal concentrated on tangible items such as land and property, physical goods, commodities and ships, along with things such as the number of windows or fireplaces in a building. In the 20th century, particularly the second half, governments around the world took a growing share of these country's national income in tax, mainly to pay for increasingly more expensive defense efforts and for today's welfare state. Indirect tax on consumption, such as value-added tax, is becoming increasingly important as direct taxation on income and wealth has become increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For instance, in United States tax revenue amounts to around one-third of its GDP (gross domestic product), whereas in Sweden it really is closer to half.
Others are the preferred methods of collecting it (direct versus indirect), the rates at which it is levied and the definition of the tax base to which these rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also big differences in the way responsibility for taxation is divided among different degrees of government. Arguably in line with the discipline of economics any tax is really a bad tax. But public goods along with other government activities must be paid for somehow, and economists often have strong views on which ways of taxation tend to be more or less efficient. Most economists agree that the best tax is one which has as little impact as possible on people's decisions about whether to undertake a productive economic activity. High rates of tax on labour may discourage people from working, and so bring about lower tax revenue than there will be if the tax rate were lower, an idea captured in the Laffer curve in economics theory.
Certainly, the marginal rate of tax could have a bigger influence on incentives than the overall tax burden. Land tax is regarded as the most efficient by some economists and tax on expenditure by others, as it does all the taking after the wealth creation is performed. Some economists favor a neutral tax system that will not influence the sorts of economic activities that happen. Others favor using tax, and tax breaks, to guide economic activity with techniques they favor, such as to reduce pollution and to increase the attractiveness of employing people instead of capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity, because this is fair, and since when the tax system is fair people could find it harder to justify tax evasion or avoidance.
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