Tax dodging increases regressive taxation in the Global South
The reduction of tax from corporations, combined with weak tax collection systems (which are themselves further weakened by inadequate revenue) means that southern countries have limited options with which to raise revenue. One of the only methods left is therefore to tax ordinary people. Due to the nature of many southern societies in which the informal sector is large & the rural populations also tend to be significant, hindering smooth collection of tax, governments implement regressive taxes on the population via VAT in order to ensure maximum revenue-generation. A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. These generally have a regressive effect on income equality. This is despite the rural populations & those in the informal sector being those least able to afford to pay VAT. It is those populations that end up spending a much higher percentage of their minimal incomes on essential goods & services that carry VAT than those with much larger disposable incomes. Compounding this is the fact that progressive property & other wealth taxes are difficult to implement for political reasons, and progressive income & capital gains taxes are relatively easy to avoid or evade.
Tax dodging reduces revenue predictability
In countries that don’t have a stable tax base, tax revenue is diminished & unpredictable, making it difficult to carry out the functions mentioned in part one, as well as having the revenue required to spend on infrastructure & public services. Without this predictability of revenue into the future, the capacity to plan for the future development of their country is somewhat eroded. For example, issues such as tackling HIV, responding to malaria, & addressing high maternal & infant mortality rates all require reliable long-term funding from governments. This principle has been displayed in Bolivia since 2005, where since 2005 the Bolivian government has been reversing a privatisation policy contained within an IMF-imposed structural adjustment programme (loans with conditions). The government sought to change the royalties & tax structure applied to multinational corporations (MNCs), a move which generated increased government revenue from oil & gas extraction. This gave the government increased fiscal space & allowed it to increase spending on social services including pensions, healthcare & education.
Tax dodging affects domestic compliance on tax
Tax dodging can also influence tax compliance. This is because the perception that the taxes of citizens are being put to good use & that other economic actors aren’t unfairly dodging their tax responsibilities is crucial to ensuring tax-paying compliance.
Classic studies on tax compliance found that compliance depends positively on (i) the perceived or expected level of redistribution, & (ii) individuals’ expectation of others’ compliance levels. It has already been shown that tax dodging reduces available revenue in Global South countries, reducing the capacity for redistribution, & then likely influencing the tax compliance in affected countries. Additionally, levels of compliance are dramatically weakened by the absence of international measures to tackle evasion through tax havens & by multinational firms. This highlights a flaw in the existing tax consensus that does not allow for direct redistribution of wealth, & so promotes a self-reinforcing cycle of diminished tax compliance. Indeed, evidence exists to show that the size of the shadow economy depends directly on the level of ‘tax morale’ – that is, the belief in contributing to society by paying taxes.
