“When there is an income tax, the just man will pay more and the unjust less on the same amount of income.” – Plato
Firstly, it is important to distinguish between tax avoidance and tax evasion. Tax avoidance is defined as legal measures to use the tax regime to find ways to pay the lowest rate of tax while tax evasion is taking illegal steps to avoid paying tax.
Tax evasion is a tricky problem that affects most European countries nowadays. This type of fraud has serious impact for the economic development of countries, as the decline in public revenue. The parallel economy in Europe still represents about €2,15 trillion even though it decreasing for a minimum of 10 years.
In the World Values Surveys done between 1999 and 2002, respondents were asked whether, given the chance, tax evasion is never, sometimes, or always justified, where a value of 1 corresponds to “never justifiable” and a value of 10 corresponds to “always justifiable.” The U.S. average was 2.28, just slightly below the OECD average of 2.34. Those values vary across countries and most of European countries have a higher average.
To fight against tax evasion, the European Commission has a Action Plan which includes 10 essential points to increase the tax revenue on the next years. One of this points is “Tightening EU corporate tax rules against aggressive tax planning” that implies measures to close loopholes in the Parent-Subsidiary Directive and address national mismatches. This is an important point once numerous evasion and avoidance possibilities due to the many exceptions and loopholes. Another point is “negotiating with neighboring countries for greater transparency” that means the Commission will negotiate stronger tax agreements with “tax heaven” countries, as Andorra, Switzerland or Monaco, in order to the citizens not transfer their income to those countries. But recently, one of those key policy failed due to not acceptance from Luxembourg because its secretive banking culture.
The European context is troubling but the portuguese isn’t better. Considering a study of AT Kerney, it reveals that the shadow economy in our country represents one fifth of portuguese GDP, that is about €31 billions (far above of european average) – figure 1. So, the portuguese government implemented, as an incentive to fight the tax evasion, two programs. The first one is the “Lucky invoice” that gives the opportunity to all taxpayers win a luxury car per month with the invoices asked with their taxpayer number. Each car will cost to government about 40,000 euros but it will have bigger revenue with the decreasing of parallel economy. One the second program, since 2013, could be deduced on the taxable income 5% of the VAT of every payment that citizens in hairdressers, car repairs, restaurants and hotels.
Figure 1 – The Shadow Economy in Europe in relation to GDP
To conclude, tax evasion creates horizontal inequity because equally well-off people end up with different tax burdens, if the state imposes a piece-wise tax rate based on income, people tend to not declare it to pay less taxes. It also imposes efficiency costs. The most obvious are the resources taxpayers expend to implement noncompliance, and the resources the tax authority expends to address it.
José Maria Vaz Patto