Taxation is the backbone of many countries, funding vital infrastructures such as national defense and social security. Yet, a surprising number of people resent the sums of money that are taken from their salary and resort to tax evasion (deliberately underreporting their earnings) through a variety of methods. An investigation from Bloomberg shows that the richest 1% of Americans, a country widely known for its economic and political stability, hide 20% of their wealth. If such large sums are being withheld in the US, who knows what might be uncovered in less stable economies?

The article ‘Will America go from hunter to hunted in cross-border tax evasion?’ (Economist June 27th, 2019 version) seems to criticise America’s strict policies on tax evasion worldwide, particularly its refusal to adopt international methods. In 2010, America introduced the law known as the Foreign Account Tax Compliance Act (FACTA) – which helped the IRS identify and collect taxes from U.S. citizens who might otherwise hide income and assets abroad – resulting in the coughing up of $5.5bn from within Switzerland. Following this major victory, over 100 countries soon signed up to the ‘Common Reporting Standard’ (CRS), aiming to promote tax transparency by ensuring financial institutions report information on all clients. Although there seems to have been a massive step forward in accepting international policies, the USA had failed to join the CRS, and only partially shared information through FACTA; these messages were often very confusing and led nowhere. An investigation by a tax expert suggests that 90% of all assets aiming to avoid the CRS have moved into the USA, enjoying a sense of privacy as the US only shared partial information with 47 out of the 100 countries within the FACTA. This situation has prompted comparisons to push US efforts to combat tax avoidance in jurisdictions such as Lichtenstein or Switzerland. These allegations became very clear when Finnish citizens began to heavily withdraw money from ATMs, linked to American bank accounts, leading to the forced summoning of names and swift prosecution of those involved. 

Considering that the United States of America had received such a negative response throughout these allegations, it seems almost surprising that throughout a second article written by the Economist, the United Arab Emirates (UAE) is still legally allowed to offer people looking for tax havens to settle in their country. This is done through a simple process described by the Economist as: “A popular one is to procure residence in the United Arab Emirates and set up a company there.” This would allow people to easily set up companies with large amounts of cash invested with minimal time and money required, and evidence shows that this has become wildly popular: Ras al-Khaimah (one of the seven emirates) is home to 14,000 of these companies alone. Furthermore, the UAE implements another strategy to entice tax evaders by not handing out TINs (Tax Identification Numbers) and only giving out registration numbers. This creates many roadblocks for tax evasion investigations, as other countries and banks cannot recognise these registration numbers leaving them without concrete evidence of tax evasion. This type of ‘tax optimisation’ is particularly enticing as it seems to one-up other schemes; the scheme itself is extremely cheap. This is reinforced in the article ‘How the United Arab Emirates became an oasis for tax evaders’ when they expose that “companies can be formed, office space rented and residence acquired for the price of a decent suit and pair of shoes, says an adviser.” It is important to stress that the UAE is not the only country offering such schemes; similar examples are found in Bermuda, Guam, Taiwan, and Jersey.

With so many people involved in different tax efficiency schemes, from evasion to moving to tax havens, we must understand the motives of people who choose to risk possible prosecution for some more money. The reasons can easily be split into three main sectors, those being economic, demographical, and behavioural.

Firstly, many economic factors can be linked to people deciding to evade tax laws. An interesting study conducted by Jang-Ting Guo and Fu-Sheng Hung in 2020 shows an inverse correlation between tax evasion and the average financial literacy of a country. This can be due to either a complete lack of financial competence (due to a lack of education), leading to unknown tax evasion, or a strong drive to completely ignore taxes due to poor income. Furthermore, it can be argued that low-income countries (LICs) such as Nigeria often face tax evasion issues as a large majority of their workforce is in the informal sector (unregulated economic activity): Within Lagos, the capital of Nigeria which provides 25% of Nigeria’s GDP, 40% of the workforce is in the informal sector. Moreover, a research study conducted by M.G. Allingham, and A. Sandmo, showed that under the “von Neumann-Morgenstern rational axiom conditions(1) under the condition of uncertainty, a person’s preferences could be expressed by VNM utility function” (a mathematical representation of an individual’s preferences under uncertainty), and that under the stress of high taxes, the benefits of tax evasion would outweigh the drawbacks such as jail.

*(1)The Neumann-Morgenstern rational axiom shows a decision-maker faced with risky (probabilistic) outcomes of different choices will behave as if they are maximizing the expected value of some function – Wikipedia

Second of all, motives for tax evasion can also be demographical factors such as age, marital status, ethnicity, etc. TCMP statistics highlight that married couples over the age of 65 are much more likely to comply with tax laws than unmarried people under the age of 65. This is due to the larger amount of wealth that older people tend to accumulate. Furthermore, according to E.H. Sutherland, and D.R. Cressey (Criminology), younger and stronger people are more likely to become involved in crimes (such as tax evasion). 

Finally, one can also become driven to evade tax through behavioral factors. A study conducted by M.N.Spicer proved to show a negative relationship between ‘tax fairness’ and tax evasion, with tax fairness being the perception of how just the tax is in the country in which a person lives. It can be argued that people with pre-existing police records are more likely to evade tax laws as they have previously broken the law, with re-offending citizen rates being very high across the world. People with gambling addictions tend to follow the same path as their addiction fuels a large financial loss that can only be recovered through both debts and avoiding their taxes. 

To conclude, tax evasion across the world is still very prominent and the public advertisement of tax schemes (such as in the UAE) only makes it more difficult for governments to control their citizens. Many articles agree that tax evasion is a serious matter that should be addressed swiftly, criticising several countries, such as the USA and UAE. Hence, tax evasion may seem absurd to some, but a strong number of behavioural, demographical, and economic factors drive people to avoid taxation.