Tax Research and Jurisprudence

(Author’s name)

(Institutional Affiliation)

Abstract

This paper takes special interest to the matters of tax jurisprudence and tax research, and some of the issues that result from these two concepts. The paper will mainly look at tax jurisprudence issues as opposed to tax research, which deals with practice- related research scenarios. The paper will take a particular form in trying to achieve this goal. The paper will separate its arguments into different sections that will include such things as the theoretical framework, concerns of government and tax administrators, concerns of businesses, tax avoidance, evolving frustrations, and current legislative elements in the UK, social solutions and legislative solutions. After the paper has addressed all these issues, it will then offer a number of recommendations on how to deal with issues arising from tax research and jurisprudence, and finally, the paper will make a conclusion recapturing all the entities in the paper.

Introduction

Adam Smith, in his Wealth of Nations, offered his ideologies on fairness of taxation and taxes. He argued that, ‘the subjects of every state out to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state’ (Smith, 1776, pp. 498). The ideology that fairness and justice requires a proportional association between taxpayer income and tax is what is the benefit principles. These principles, together with a number of other views and principles of tax equity, like the principle of standard of living, principle of equal sacrifice, and the principle of ability to pay are subordinate to a higher level of tax fairness structure that is made up of two norms of fairness. What is more essential is the influence courts of justice have on tax and taxation (Kanbur, et al., 2008). The influence laws of court have on matters of taxation is both far- reaching and significant. Initiated just a few years ago, this influence is progressively increasing and has reached a level that today there is rarely an area of taxation that is untouched. The approach the courts are using to direct tax matters is based on the authorization attributed to the institutions in Europe by the Rome treaty of creating a European Internal Market. Without any harmonizing legislation, the courts have taken a leading role in regulating and managing tax matters (Murphy, 1977).

Nevertheless, what is jurisprudence? This is the philosophy and theory of law. Legal theorists and scholars of the concept take up this study to achieve a higher understanding of law nature, legal systems, legal reasoning and legal institutions (Sterk, 2004).

The current concepts of jurisprudence started in the early eighteenth century and emphasized more on the natural law’s first principles, in addition to the first principles of civil law, and law of nations (Wacks, 2010). Scholars usually place the matter of jurisprudence under a number of categories, which theories of jurisprudence and research questions define. For instance, general jurisprudence puts these issues under two categories (Davies, 2001). The first category is placed under challenges to legal and law systems. The same concept places jurisprudence under the second group based on challenges of law as a specific social institution as it associates with the larger social and political situation in which it occurs. Answers to these two challenges derive from four different schools of thought in jurisprudence. These include natural law, legal positivism, legal realism and critical legal studies (Cotterrell, 2003).

Taxation, on the other hand, is a concept used in economic and financial studies to mean imposing of financial charges or other forms of levies on taxpayers by the state or a functional equivalent of the state such that failure to pay is a crime and punishable by law. Other different sub national entities also impose or levy taxes. Taxes consist of indirect and direct taxes and it is possible to pay them in terms of money or as an equivalent to labor. Taxes, therefore, are not voluntary contributions or donations but enforced contributions imposed pursuant to the law. Since the matter of taxation and jurisprudence is a broad area of study, this paper will pick one main concept from the broad topic and expound on it. The main issue of discussion of this paper, therefore, is tax avoidance (Pasternak & Rico, 2008).

Theoretical Framework

The federal government loses both corporate and individual income tax revenue from the shifting of income and profits into low- tax nations. The revenue losses deriving from this avoidance and evasion of tax are complicated and hard to measure, but some legal theorists have indicated that the annual cost of offshore abuses of taxes may amount to about 100 billion dollars each year. International law on evasion of taxes can result from rich individual investors and from huge multinational companies. Additionally, it can reflect illegal and legal actions (Pasternak & Rico, 2008).

Theorists at times use the term tax avoidance to refer to legal reductions of taxes; whereas tax evasion refers to tax reductions that are not legal. The paper discusses both of these types although clear dividing lines between the two is not clear. A multinational corporate that constructs a factory or industry in a low- tax jurisdiction other than in the US to exploit low foreign corporate taxes is engaged in tax avoidance. On the other hand, a US citizen who sets up, opens a secret bank account in the Caribbean, and does not disclose his interest income is participating in tax evasion (Kessler, 2011). There, however, are numerous activities particularly by firms and corporate that are usually referred to as avoidance of tax but could also be categorized as evasion. An example of such a situation is transfer pricing, in which case corporations charge abnormally low prices for sales to affiliates of low tax but pay high prices for purchases made by them. If these prices, which the law intends to be at a distance, are set and positioned in a level that is artificial then some view this activity as tax evasion, even if the courts do not overturn such pricing because evidence to set pricing is unavailable (Pasternak & Rico, 2008).

Most of the international tax reduction of individuals show evasion and several legal theorists have estimated this amount to range between 40 and 70 million dollars a year. This evasion takes place partly because the US and other nations do not withhold tax on numerous types of income that is passive like interest paid to foreign entities. If individuals from a certain nation can direct their investments through a foreign entity and do not disclose these assets’ holdings on their tax returns, they evade tax that the law requires them to pay. Furthermore, individuals participating in investment on foreign assets might realize some income from them (Murphy, 1977).

These legal theorists have also estimated reductions on corporate tax resulting from shifts in profits. Estimates of the losses on revenue from shifts on corporate profits vary significantly, ranging from about 10 billion dollars to 60 billion dollars (Pasternak & Rico, 2008). In addition to differentiating between corporate and individual activities, avoidance and evasion of tax, there also are difference in the features used to describe tax havens. Some definitions that are restrictive would restrict tax havens to those nations that, in addition to having non- existent or low tax rates on certain forms of income, also have such other traits like limited or non- existent transparency, lack of information sharing, bank secrecy and needing no or little economic activities for an entity to achieve legal status (Murphy, 1977). The OECD or the organization for economic development and cooperation used a definition integrating compound factors like these in their initiative for sheltering tax. Others, and especially economists, might describe as a tax haven any country with low taxes with the aim of attracting capital or just any nation that has non- existent or limited taxes (Murphy, 1977).

There are a number of ways through which individuals and corporate can avoid tax. One of these ways is through establishing their subsidiaries or companies in a jurisdiction found offshore. This is what we previously described as tax havens. Individuals and corporate avoid taxes by moving their residence of taxes to a tax haven or by becoming perpetual travelers. However, most nations like the US have adopted a strategy to limit this by taxing all of their citizens, companies and permanent residents on their total worldwide income (Kessler, 2011). In some of these cases, it is impossible to avoid taxes by simply moving abroad or transferring assets. The US is not similar with many other nations in that its permanent residents and citizens are subject to income tax by the US federal on all of their worldwide income even when they are living permanently or temporarily outside the US. The US citizens, therefore, find it difficult to avoid taxes by simply migrating to other nations. According to a number of sources, some citizens find it easier to give up their citizenship rather than subject their businesses to the United States tax system. However, citizens who live or stay for long periods outside their nation are at times able to avoid some taxes on their salaries earned overseas (Kessler, 2011).

Double taxation is also another way individuals can avoid taxes. Most nations impose taxes on gains realized or income gained within that nation regardless of the individual’s or corporate country of resident. As it follows, most countries have entered into double taxation treaties with numerous other countries to avoid taxing individuals who are not residents of a certain nation twice. However, relatively there is limited double- taxation treaties with nations regarded as tax havens. To avoid tax, moving one’s assets into a tax haven are usually not enough. One must move and live permanently into a tax haven, and for citizens from US renounce their citizenship to avoid taxes (Pasternak & Rico, 2008).

Without changing or revoking citizenship, one can legally avoid personal taxation by creating separate legal entities to which their property is donated. In this case, the separate legal entity is usually a trust, company or foundation. One can also move these to offshore entities like in the case of numerous private foundations. The company transfers its assets to the new firm or foundation for the purposes of realizing gains or earning income, within this legal entity other than earning income and profits by the original or parent company or owner (Riley, 2011). If these assets were later transferred back to the original company, then taxes on capital gains would apply to all profits and gains. In addition to this, income tax would still be imposed on any dividend or salary realized from the legal entity. For the creator of the foundation or trust, avoiding taxes may restrict the purpose, type and beneficiaries of the new legal entity. For instance, a creator of the foundation may find it impossible to be a beneficiary or a trustee and may, therefore, lose control or command of the assets transferred to the trust, and, thus, finds it difficult to benefit from it (Pasternak & Rico, 2008).

Results of taxes are determined by definitions of legal terms, which in most cases are usually vague. For instance, vagueness of the difference between personal expenses and business expenses if of great concern to tax authorities and taxpayers. In more general terms, any term used in taxation law, has a vague entity present, and is usually a possible source or loophole for allowing evasion of taxes (Pasternak & Rico, 2008). The utilization of tax shelters is also another loophole individuals and corporate use to avoid taxes. Tax shelters are investments that are flexible in allowing a reduction in an individual’s liability of income tax. Although in certain individuals might consider certain things like pension plans and home ownership plans as tax shelters, as funds in them are usually never subjected to taxes, so long as they are held within the retirement account for individuals for a specified period. The term tax shelter was traditionally used to mean certain key investments made in the form of restricted partnerships, some of which were thought to be abusive. In the US, the internal rescue service in collaboration with the department of justice is carrying out operations to stop and eliminate abusive tax shelters (Ramb & Weichenrieder, 2005).

Government and Tax Administrators’ Concerns

Tax avoidance and evasion reduces the revenue a government is supposed to collect in a year and results to tax systems that are disreputable, therefore, governments have the challenging responsibility to prevent avoidance of tax or keep it within limits that are manageable. One of the most common and easiest ways of achieving this is by framing tax rules so that there is no open window left or loophole visible for individuals and corporations to avoid tax. In practice, this has proved difficult to achieve and has resulted to an ongoing struggle between governments amending and implementing legislation and advisors of tax finding new means to avoid tax in the newly amended rules (Fox, 2002).

In 2003, the US tax disclosure regulations implied that it would increase or impose more restrictions on its requirement prompter and full disclosure than the ones that were previously required to allow response from prompter to schemes of avoiding taxes. The same tactic was assimilated and implemented in the UK in the following year, 2004 (Crane & Matten, 2006). Some nations like Australia, Canada and New Zealand have also implemented and imposed a statutory GAAR, or a general anti- avoidance rule. Canada also makes use of rules described and indicated in the Foreign Accrual Property Income to obviate or eliminate some types of schemes to avoid taxes. In the UK, there are no GAAR rules, but a lot of provisions and laws of the tax legislation called the anti- avoidance provisions apply to reduce avoidance of tax where the main aim one of the major goals of a transaction is to enable advantages of tax to be achieved (Fox, 2002).

The Internal Revenue Service in the United States differentiate and pinpoints some schemes as abusive, and, hence, illegal. In the United Kingdom, judicial efforts and policies to stop avoidance of tax begun in 1981 with the IRC v Ramsay case. The Furniss v. Dawson case later followed this in 1984. Other commonwealth jurisdictions have not taken well to this approach, and most of them have actually rejected it, even in those jurisdictions were cases from UK are generally viewed as persuasive. After more than two decades, there have been a lot of decisions with approaches that are inconsistent, and both the professional advisors and revenue authorities remain unable to measure, assess and predict outcomes. It is because of this reason that many individuals and especially economists and accountants understand and view this approach as a failure or at its best, only a partial success (Crane & Matten, 2006).

In 2004 in the UK, the labor government indicated that it would make use of retrospective legislation to counteract and limit some schemes meant to avoid tax, and it has eventually done so in a number of occasions, the best example being in the case of the BN66. The initiatives presented in 2010 depict that there is an increasing willingness in HMRC to use retrospective legislation to prevent tax avoidance schemes. According to a number of studies, there is growing concern over charities prioritizing avoidance of tax as the main campaigning issue, with makers of policies all over the world considering changes to make evasion and avoidance of taxes more challenging (Cobham, 2007). In 2001, avoidance of taxes became a serious issue in the UK. UK Uncut, a corporation based in the UK began to motivate citizens to take part in the street demonstrations at local high- street businesses that were indicated as some of the key tax evaders in the UK. Such corporations included Topshop, Vodafone and Arcadia Group (Crane & Matten, 2006).

Businesses’ Concerns

Concerns regarding taxation and jurisprudence are not only limited to governments and citizens but also extend to cover businesses. Businesses owners have for a long time complained and expressed concerns over the heavy taxes their governments impose on them (Archer, 2001). Though some of these concerns are valid, it is essential to note that evading taxes also has numerous negative effects on businesses, individuals and countries. Taxes collected by governments are usually understood as excellent tax systems that drive savings, economic growth, and investment. Economists converging at the organization for economic co- operation and development studied the influences different types and sizes of taxes had on growth in economies of developed countries within the OECD and realized that taxes are some of the least harmful entities to growth (Fox, 2002). Though most business owners consider sales taxes to be oppressive and regressive, that is, they view taxes their governments impose on them are burdens and especially to poor families and small sized businesses, numerous studies and surveys have suggested that any regressive effect of taxes can be mitigate, for instance by exempting necessary items and excluding rent. Generally, these studies indicate that taxes do more good than bad as they fuel growth in economies, which in turn fuels an increase in sales for the same businesses (Boadway, et al., 2007).

However, despite some potential negative effects that can result from evading taxes, some business entities and individuals still continue to evade taxes. Some evaders of taxes believe that they have found new interpretations of the law that indicate that they are not subject to taxes. These groups and individuals are at times referred to as tax protestors. Many of these protestors continue to present courts with the same arguments that the federal courts have over and over again refrained from ruling the arguments to be legally viable. Resistance or avoidance to pay taxes is the refusal to pay taxes reason- because the resister is not willing to support the activities of the government or the government itself (Boadway, et al., 2007). They generally refuse to take stances or positions that the laws on taxes are illegal or simply do not apply to them, and they are usually more worried with not paying for what they do not agree with than they are motivated by the need to keep their money. However, in some cases, individuals simply refuse to pay taxes because they want to keep their money (Archer, 2001).

Tax Avoidance

Tax noncompliance is a term used to describe a wide range of activities that are unfavorable or abusive to the tax system of a state. There are two main activities that are included in tax noncompliance and they include tax avoidance and tax evasion. These two terms are extremely different from each, at least in their meaning, even though there are no clear lines of distinction between which activities make up evasion and which make avoidance. However, tax evasion can be described as efforts by corporations, individuals, trusts and other business and income generating entities to evade tax by means that are illegal (Andreoni, Erard & Feinstein, 1998). Tax evasion in most cases usually involves taxpayers deliberately misrepresenting or hiding their true financial states to the taxation authorities to reduce their liabilities of taxes, in particular, includes tax reporting that is dishonest- such as declaring less profit margins or gains, less income, and overstating deductions. Tax evasion is usually associated with underground economies. One of the main ways to measure the degree to which taxpayers have evaded taxes on the amount of the income reported is by finding out the difference between the actual amount reported and the amount of income that corporation or individual should legally report to the authorities (Fuest & Riedel, 2009).

Tax avoidance, on the other hand, is the utilization of certain tax regimes or schemes that are legal to one’s advantage so as to reduce the amount of tax an individual or a business is payable by meant that are perfectly within the law. The original use of the term tax avoidance was by tax advisors who used the term tax mitigation as a depreciatory term for tax avoidance. As we had previously seen, businesses and individuals can avoid tax through a number of ways. Some of the main ways we described above were through changing country of resident, the use of double taxation, the use of legal entities and transfer of assets to these entities, and the use of legal vagueness to avoid tax, like the use of the words personal and business expenses (Fuest & Riedel, 2009). The utilization of the terms tax evasion and tax avoidance can vary based on the jurisdiction. Generally, the word evasion applies to actions that are illegal meant to evade paying tax, and avoidance is used to refer to actions within the law individuals exploit to minimize their tax burdens. Both tax avoidance and evasion can be seen as types of tax noncompliance because they describe a wide variety of activities that are abusive and unfavorable to the tax systems of states (Andreoni, Erard & Feinstein, 1998).

Current Legislative Factors in the UK

Taxation in the United Kingdom usually involves the payment of tax to a minimum of two different government levels. These two levels of governance include the local government and the central government. The revenues in the central government are generated mainly from national insurance contributions, income tax; value added tax, fuel duty and corporation tax. Revenues in the local government come centrally from grants from the funds in the central government, council tax, business rates in Wales and England and more recently from charges and fees such as those generated from charging on- street parking (Cobham, 2007).

Evolving Frustrations

The issue of tax evasion and avoidance has been around for long, and so has been the frustration it imposes on governments, especially because of the fact that these revenues are what governments use to fuel developments in their countries, and thus economic growth and stability. With the increase of witty tax advisors, the number of individuals avoiding taxes has also increased, resulting to decreased revenues and decreasing economic growths. Many governments, especially the US and the UK have resulted to implementing policies and regulations to limit the number of individuals evading taxes. For instance, the US has made it impossible for individuals to hide their assets, and thus evade taxes through the use of tax havens, by imposing taxes on all financial activities its citizens participating , whether in the US or outside US. The UK also has tightened laws and regulations concerning tax shelters making it difficult for individuals to hide from taxes using tax shelters (Cobham, 2007).

Frustrations and concerns are not only affecting governments but also individuals in the societies. Paying of taxes is considered by many as one way an individual can pay back to the community, and a way of performing their duty to the society, something each individual should do without failure (Wenzel, 2002). There are varying thought on the issue of tax avoidance among individuals in the society varying from neutrality to hostility. Responses to the issue may differ depending on the actions taken to avoid or prevent tax avoidance, or the perceived fairness or unfairness of the system (Archer, 2001). However, one increasing frustration has to do with tax advisors who despite different modifications to taxation law find a loophole to formulate tax avoidance schemes.

Legislative and Social Solutions

For the society to be free of these two vices, that are obviously affecting the growth of numerous nations, numerous solutions have to be created and implemented. These solutions must come in the form of legislative and social solutions for them to be completely effective. Legislative solutions must ensure that governments and policy makers come up with tighter laws and regulations governing taxations that tax advisors will find challenging to go around (Barbie & Hermeling, 2009). On the other hand, social solutions also have to be formulated which relate to complete intolerance to tax evasion and avoidance. Social groups could hold meetings and trainings that educate individuals on the importance of taxes to the society. Incentives can also be created to encourage corporate and individuals to pay taxes.

Recommendations and Conclusion

As we have seen in the discussion above, tax avoidance is a challenging problem that has diverse, negative effects on the society. For the society to witness growth and development, every specified individual and corporate must pay their taxes to increase the revenues governments that drive developmental and growth activities. To reduce instances of avoidance and evasion, governments should come up with more strict rules and regulations governing taxation. The society must also be involved in campaigning against tax evasion and avoidance.

References

Andreoni, J., Erard, B. & Feinstein, J. (1998). Tax Compliance. Journal of Economic Literature, 36(2): 818-860.

Archer, I. W. (2001). The Burden of Taxation on Sixteenth-Century London. The Historical Journal, 44(3): 599-627.

Barbie, M. & Hermeling, C. (2009). The Geometry of Optimal Taxation: A Primal Approach. Economic Theory, 39(1): 129-155.

Boadway, R. et al. (2007). Redistributive Taxation under Ethical Behavior. The Scandinavian Journal of Economics, 109(3): 505-529.

Crane & Matten. (2006). Business Ethics: The European Perspective, Oxford: Oxford University Press.

Cobham, A. (2007). The tax consensus has failed! The Oxford Council on Good Governance. 

Cotterrell, T. (2003). Jurisprudence Politics: Critical Introduction to Tax Philosophy, Oxford: Oxford University Press

Davies, S. L. (2001). The Jurisprudence of Willfulness: An Evolving Theory of Excusable Ignorance. Duke Law Journal, 48(3): 341-427.

Fox, W. (2002). History and Economic Impact: Sales Tax History. University of Tennessee Knoxville.

Fuest, C. & Riedel, N. (2009). Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the literature. Oxford University.

Kanbur, R. et al. (2008). Moral Hazard, Income Taxation and Prospect Theory. The Scandinavian Journal of Economics, 110: (2): 321-337.

Kessler, J. (2011). Taxation of Non-Residents and Foreign Domiciliaries. New York: Key Haven Publications.

Murphy, F. (1977). Introduction to Law, Legal Process, and Procedure. St. Paul: West Publishing.

Pasternak M. & Rico C. (2008). Tax Interpretation, Planning, and Avoidance: Some Linguistic Analysis. Akron Tax Journal, 33.

Ramb, F. & Weichenrieder, A. J. (2005). Taxes and the Financial Structure of German Inward FDI. Review of World Economics / Weltwirtschaftliches Archiv, 141(4): 670-692.

Riley, C. (2011). Many companies pay no income taxes, study finds. CNNMoney.com. 

Smith, A. (1776). Wealth of Nations 498. New York: Prometheus Books.

Sterk, S. E. (2004). The Federalist Dimension of Regulatory Takings Jurisprudence. The Yale Law Journal, 114(2): 203-271

Wacks, R. (2010). Understanding Jurisprudence: Introduction to the Legal Theory, Oxford: Oxford University Press

Wenzel, M. (2002). The Impact of Outcome Orientation and Justice Concerns on Tax Compliance. Journal of Applied Psychology.