Tax avoidance, tax evasion. What’s the difference?
Okay, so none of us as either individuals or businesses like to pay taxes. But, without taxes a huge amount of what economists call ‘public goods’ probably wouldn’t happen. Can you imagine no public transport, health and so on! In the press you’ll often read about tax avoidance schemes operated by large businesses or wealthy individuals, and also about tax evasion? But what’s the difference.
Tax avoidance means using legitimate means to reduce tax payable. While we might think this is limited to big firms and the rich, we all can (and do) engage in tax avoidance at some point in our lives. For example, in Ireland, I can buy a low emissions diesel car which avoids tax in two ways 1) on the registration tax is low as it’s based on CO2 emissions, and 2) by paying less fuel duty each time I visit a service station. Or I could by something online from another country in the EU because it’s cheaper – in this case the VAT in Ireland is avoided. In businesses, large companies often organise themselves so that as much profits as possible are attributed to a low tax country. So tax avoidance is a conscious choice, within the law, to reduce tax payable by an individual or business. Tax evasion is a little different in that a person or business purposely conceals income or profits so as to not pay taxes. The easiest example of tax evasion is what is commonly known as the ‘black economy’. A recent article in the Irish Independent quoted research which estimated undeclared black economy activity in Ireland at 14% of GDP, which translates to around €1billion in VAT. The same research estimates black economic activity in Europe at €2trillion. Without doubt, any black economy activity adds to a countries woes in recessionary times.