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Social Impact of Tax Fraud
A series introducing law students to the real world of tax.
Beyond the scandalous headlines, tax fraud has far-reaching social implications. By undermining the fiscal operations of governments, it affects many aspects of life, from public trust to the provision of essential services.
Economic Inequality
Tax fraud disproportionately benefits those who have the resources to engage in complex schemes to evade taxes, i.e., the wealthy and powerful. This creates a significant disparity in the tax burden shouldered by ordinary citizens. That is, most individuals may end up bearing a disproportionate share of a country’s tax burden. The result is the exacerbation of economic inequality and the fostering of an environment of resentment and mistrust among the population.
Erosion of Public Services
Tax revenue is the lifeblood of public services. From healthcare and education to infrastructure and national defence, adequate public funding ensures the maintenance of these essential services. When public funds are siphoned off fraudulently, these services deteriorate or even disappear, leading to a decrease in the quality of life and increased public dissatisfaction.
Undermining Public Trust
One of the most damaging impacts of tax fraud is the erosion of public trust in both the government and the economy. When taxpaying citizens see that those with wealth or power evade tax with impunity, they develop a perception of unfairness and corruption. The perception can even decrease the willingness of the general population to comply voluntarily with tax obligations, creating a vicious cycle where tax revenues continue to diminish, and the trust in government institutions to erode further.
Impact on Governance and Policy Making
Tax fraud can lead to bad policy decisions. When government revenues are uncertain due to tax avoidance, policymakers might be forced to reconsider the provision of beneficial public services. Moreover, where tax fraud goes unchecked, governments may feel compelled to enforcement strategies in ways that can be politically unpopular or harmful to the economy in the long run.
In defence of tax fraud?
Some may argue that individuals and businesses can allocate resources more efficiently than the government. From this viewpoint, keeping more money in the hands of private entities could lead to better use of capital.
In a competitive business context, some might argue that engaging in tax evasion is necessary to survive, if they believe that their competitors are also evading taxes. This is seen in industries and regions where tax fraud is rampant and lightly punished.
In some cases, tax evasion constitutes a form of protest against the legitimacy of certain government policies that are deemed unfair. There are historical examples of tax resistance used as a form of civil disobedience.
For instance, the Women’s Suffrage in the UK in the early 20th century utilised tax resistance as a protest strategy. Women used the slogan “No taxation without representation” to justify their refusal to pay taxes.
Final thoughts
All things considered, the social impact of tax fraud extends far beyond the direct financial losses. Tackling tax fraud is not simply recovering lost revenues but depends on restoring fairness and confidence in a system that serves citizens fairly.
Article by David Zheng
For more articles in the tax law series:
M&A Tax: How does M&A save companies billions in tax?
Transfer Pricing: What is transfer pricing, and how does it minimise tax burdens?
Carousel Fraud: VAT, but the government pays you.
