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 in this country do not understand the difference between tax avoidance and tax evasion. A lot of the planning aspects which were suggested by these consultants often belong to the group of tax evasion (that is illegal) and so will put clients right into a risky situation and also diminish the value of tax planning.

This may be one of the prime reasons where clients have lost faith in tax planning consultants because so many of these 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 only in this country however in many parts of the world. It is true that lots of people do not like to cover their hard-earned money to the government. However doing this within an illegal manner Felanitxsuch as by tax evasion is not the solution. Good tax planning involves tax avoidance or the reduced amount of the tax incidence. If that is done properly it could 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 in most countries is really a comparatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax items that were an easy task to measure and on which it had been thus easy to calculate the liability. This is the reason early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, together with things such as the quantity of windows or fireplaces in a building. In the 20th century, particularly the second half, governments all over the world took a growing share of these country's national income in tax, mainly to pay for a lot more expensive defense efforts and for today's welfare state. Indirect tax on consumption, such as for example value-added tax, is becoming increasingly important as direct taxation on income and wealth is becoming increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For instance, in USA 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 ways 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. Additionally, there are big differences in the manner responsibility for taxation is divided among different levels of government. Arguably according to the discipline of economics any tax is really a bad tax. But public goods and other government activities must be paid for somehow, and economists often have strong views on which ways of taxation are 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, a concept 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 probably the most efficient by some economists and tax on expenditure by others, as it does all the taking following the wealth creation is performed. Some economists favor a neutral tax system that will not influence the types 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 rather than capital. Some economists argue that the tax system ought to be seen as a both horizontal equity and vertical equity, because that is fair, and because when the tax system is fair people may find it harder to justify tax evasion or avoidance.

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