- Tax evasion was determined by the trade off between tax rates and the cost of punishment for noncompliance. Higher tax rates increase the incentive to cheat as one saves more money from evasion, while the cost of noncompliance deters avoidance.
- In the United States cheating on taxes is a criminal offence and offenders will be imprisoned as a consequence. In Switzerland, it is a civil offense: they levy a fine, then send you back to work, in order to earn and pay. Some Scandinavian countries with high tax rates and comfortable prisons have low tax evasion.
- It is the psychological factor of "citizen trust" that is determinant in explaining the pervasiveness of tax evasion in India.
- With respect to taxation, citizens need to sense three types of trust: (i) The taxes levied will be used to pay for valued services (ii) Their fellow citizens will pay their due share (iii) There is a fair process for revenue collection.
- In India, less than 2% of the population pays income tax, is that the trust of citizens on all these three dimensions is low.
- Taxes are necessary for government for meeting expenses of governance, law and order, defense, welfare, infrastructure, etc. While governments will always be inefficient, because they are spending someone else’s money rather their own, it is a question of how much inefficient they are.
- It is crisis in trust between citizens and the government. While revenue collection has grown by leaps and bounds, citizens do not see any tangible effects on their lives. Roads are worse, public transportation is broken, the police are viewed as widely corrupt, and government schools and hospitals are always the last resort. Consequently, Indians do not see their taxes being used efficiently.
- The perception is that the largest tax offenders go scot free, while the more honest or compliant individuals and enterprises are pursued aggressively. To many, it seems there is a penalty for being honest.
Our distrust is very expensive ... RW Emerson
It is well known that corruption is rampant at all levels in public domain. Any honest person is either sidelined or crushed. Govt schools and hospitals, in dilapidated condition, are the last resort of poorest person. Firstly, transparency and accountability, legitimacy, checks and balances must be enforced at all levels in public domain encompassing politicians, civil servants, police, judiciary and businessmen by bringing them under Lok Pal and RTI and granting autonomy & teeth to CVC, CBI, ACB etc, otherwise rebuilding public trust & confidence is impossible. Secondly, reforms in elections, justice dispensation systems etc to reduce role of dirty money effecting day to day life of common man. Thirdly, discretionary powers should be replaced with well defined processes at all levels. Fourthly, no public expenditure should be incurred without budget and prior legislative approval with the exception of managing calamities & disasters. All these require several years or even decades, but foundation has to be laid now. Quality education and healthcare should be made affordable and accessible to even to the poorest man. Education, awareness creation and strengthening institutions are the keys. Corruption, tax evasion, crimes etc are at present high profit and low risk activities and should be transformed into low profit and high risk activities, with active vigilance and heavier penalties & punishments. Finally tax administration reforms and tracking data, without intruding citizen's rights and privacy, will yield favorable results over time. Both political will and administrative honesty are necessary for any meaningful reforms and transformation to take place. Integrity, transparency, accountability, legitimacy, honesty, ethics, efficiency, economy, effectiveness, professionalism and social equity are principles of public administration and politics. These traits must be inculcated through continuous training especially in civil servants, who are the face of government with people. Not so easy, but beginning must be made and over time every thing will happen otherwise we will diminish ourselves into rogue nation.