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Every day, I take one step forward, I find my feet placed in two different worlds. One world where ambitions are fulfilled in equally ambitiously high-ending sky-scrapers. On the other side, my second leg finds its ground on shanties where ambitions are created. The contrast represents a grave issue: Income inequality. It has been reportedly stated that ‘tax evasion is a major cause of income inequality.’ 

Thus, the article tries to specifically analyze tax evasion via empirical and understand it prospects and consequences in conjunction with income inequality. Financial secrecy index is an index developed by Tax justice network to identify countries who are more likely to be involved in an illicit financial transaction like tax evasions.

Image Title: Financial Secrecy Index Table

 

 Image credit: (Tax Justice Network, 2018)

FSI has used as a measure countries with more and least likely to participate in tax evasion. The analysis is simplified by excluding mid-tier FSI valued countries and overseas territories as well as based on accurate data collection.It can be identified that two countries who highly participate in tax evasions are Switzerland and USA while the Gambia and San Marino are countries least likely to participate in tax evasions. It is important to evaluate why the countries chose are likely to participate in tax evasion based on criteria: Rate of exploitation, GINI Co-efficient, GDP/Capita, Economic growth and Corporate Tax rate.

In our socio-economic scenarios, everyone has come to terms like capitalist and socialist ideology. There has been a sudden interest in Marxist theories to understand the evident pecuniary divide between global bourgeoisie and proletariat. Rate of exploitation is a ratio between the unpaid labor and paid labor. My analysis excludes constant capital (machinery) to spot the direct impact on the working labor who pay taxes in the economy.

Table 1: Rate of exploitation calculations

Countries

Real GDP/workforce (output) Annually (USD billions)

Paid Labor (Average monthly salary net {after tax} * 12 months)

Surplus

(Unpaid labor)

Rate of exploitation (Unpaid labor/ Paid labor)

USA

19,362.13/163,364,864

$ 35,744.04

$82,776.7  

2.32

Switzerland  

680.65/4916004

4,622.16  Fr.     

*12*$1.07

 

 

$79,107.4

1.33

San Marino

 1.638/21,960

 

€2,445.00 *12*$1.25

 

 

$37,550.9

1.024

Gambia

1.04/680394 

D2,750.00 *12*$0.021  

$835.5

1.20

 

A statement can be proposed that countries more likely to participate in tax evasion have higher rate of exploitation than countries less likely to participate in tax evasion. This statement could be analyzed by how the country perform in conventional parameters used in tax evasion analysis to understand whether does the simplistic hypothesis hold true or not.

Table 2: Empirical for the proposed hypothesis

Countries

Economic growth (%)

GINI Co-efficient (Inequality measure)

Corporate Tax rate (%)

GDP/Capita ($)

(Living standards)

USA

2.2

41

43.8

59,495

Switzerland  

1

32.50

 

28.8

80,837

Gambia

3

47.3

51.3

488

San Marino

1.2

34.7 

35.4

47,302


Gambia has low FSI and rate of exploitation still faces high Gini coefficient suggests that higher taxes can’t solve the pressing issue of societal inequality. It is evident from its GDP per capita that Gambia belongs to LEDC group where the government is the responsible and reliable source of investment in boosting production capacity but one needs to understand that poor governance can under-provide public goods to lower income group.  Thus, it reduces the labor productivity and creates more unequal society.

The economic growth represents the ‘animal spirit’ as coined by Keynes. It has been noted that country with high tax evasion have lower economic growth because the tax revenue is composed of budget used to fund government spending. It results in a lower budget that causes fall in real GDP. However, USA and Switzerland earn the highest GDP per capita in the analysis suggest that these countries comparatively enjoy high living standards as higher disposable incomes and net profits may perversely boost the aggregate demand so it improves economic growth to a certain degree.

Investment can be divided into two groups: Autonomous and Induced.

Government spending is an autonomous investment hence is more likely to be stable while induced (private investment) fluctuates depending on the trade cycle. The private investment includes accumulated retained profits used by firms, disposable income (net profits after tax) and loans so the most mutable amongst the three component is current net profits. The fall in this component along with volatile accumulated consumer expenditure creates a disequilibrium between high leakages and injections that shifts the expenditure on consumer and investment goods to the left, resulting in lower economic growth and utility that causes resentment amongst the workforce in the economy.

Moving on, the inequality concept forces us to ponder whether income inequality causes tax evasion or tax evasion cause income inequality. The rate of exploitation as mentioned in previous paragraphs represents an opportunity cost for labors who pay taxes. A higher rate of exploitation along with high GDP per capita motivates the MEDCs’ citizens to adopt a less altruistic attitude to climb the socio-economic ladder. Tax evasion could lead to higher disposable income that allows a household to proportionally spend on luxury goods over inferior goods to be in-sync with the bourgeoisie.

The income inequality may conversely boost many firms’ profits as demand for higher value-added goods becomes inelastic for certain strata and labor from the financially vulnerable household may accept lower wages. It motivates firms to increase their aggregate supply in the economy so creates more employment opportunities and technological advancements. It further improves the full employment level in an economy and gives lower income earners a chance to maximize their utility thus promoting an equitable society.

Income inequality is never solved because of unfair identity politics played globally that restricts individuals social and occupational mobility.

Social stigma is a socially constructed reality that influences the market interactions based on shared values of fairness. The diffusion of ideas diverts markets from meritocracy system ends up dividing the economy into high-income earners vs low-income earners where access to basic needs are unequal hence standard of living is relatively low and gives individual an incentive to be less altruistic. It can be substantiated by pictograph implying the humongous income disparity between African-American and Whites in US society.

Image title: Income Inequality Amongst Races

Image credit: (McCarthy, 2016)

 

It leads to a fact that tax evasion is a victim and perpetuator of the inequality and the crux of inequality lies in the colored minds of individuals. However, it doesn’t imply that tax evasion is healthy because government investments are more reliable in need of financial crisis. Government budget deficit can cause major economic problems in countries because it shows the trust between citizens and government that influences various economic activity like investment and tax collection.

Greece is an example of budget deficit that forced government to sell bonds to cover its debts where tax revenues were not able to pay public debts.

Selling bonds means restricting the money supply in economy, raising real interest rates causing crowding-out effect as Interest expense rises for the private sector. Foreseeable recession forces consumers to save while firms are more likely to complete redundancy process where leakages are more than the injections thus rise in unemployment takes place. The tax evasion aimed to reduce the tax (leakages) in economy initially creates a bigger leakage (Savings) in times of economic uncertainty.

It is also essential to remember that taxes are sources of finance needed by the government to public goods and evasion causes ‘free rider’ problem. It creates an asymmetric provision for public goods that impact the livelihood of public sector workers in the economy. This callous attitude has caused disaster pay freeze in MEDCs like the UK. It increases the perpetual income gap and at the same time, gives less incentive for the public sector to improve their productivity level to an extent threatens human security in a country.

Thus, I must confess that tax evasion is a gross economic crime that is morally marauding but also parasitically delves on the economy’s health. Nevertheless, I found that the concept of income inequality stems not from tax evasion but rather inefficient allocation of resources by government, free rider problem and social hierarchy that reduces occupational and class mobility leading to establishment of bourgeoisie hegemon on wealth distribution globally.

Notes

[1] Rate of exploitation is a component of Marxist analysis, measuring labor exploitation in a capitalist economy. (Petri, 1990)

[2] Accumulated consumer expenditure including imports and retained profit refers to the evaded income from both firms and consumers used to spend in the economy. 

[3] San Marino is a microstate located in Italy so Italy’s Gini-coefficient was used to make a fairer comparison. (World Bank, n.d.)

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Image Source: CFO India

 

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Written By Tamanna S Mohanty

A writer with hope to change the world.

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