TAX EVASION AND ECONOMIC GROWTH: EVIDENCE FROM MAURITIUS

Transcription

1 TAX EVASION AND ECONOMIC GROWTH: EVIDENCE FROM MAURITIUS 1 BHAVISH JUGURNATH, 2 HEMA SOONDRUM, 3 AKSHAY SEEDOYAL, 4 HIMANSHU KISTO 1,2,3,4 Faculty of Law and Management, University of Mauritius, Mauritius 1 b.jugurnath@uom.ac.mu Abstract: Taxation is a very crucial lifeline of a government towards the development of an economy. Tax evasion on the other-hand is the illicit act of not paying taxes which as a consequence impacts government expenditure and ultimately impacts the economic growth. So, eventually the aim of this paper is to analyse the impact of tax evasion on the economic growth of Mauritius given that tax evasion now represents a third of the entire global financial income. Basically, it was found that tax evasion was fuelled by factors such high tax rates, trust in the government, measures and regulations that are too neglectful but most important of all it affects the economy of a country at large. In this study, the determinants were scrutinised through the relationship of different factorsmentioned above with regards to tax evasion. Hypothesis testing and factor analysis were used to determine to what extent each and every determinants were interrelated. As a result it was found that high tax rates, trust in the government and regulations had a direct relationship with respect to tax evasion. It was also tested that more stringent and rigid government measures impacts directly behaviours vis-a-vis tax evasion. It is also worth noting that government along with the Mauritius Revenue Authority should implement awareness campaign through regular seminars about the consequences and sanctions against tax evasion. Keywords: Tax Evasion, Economic growth, Hypothesis testing I. INTRODUCTION We are all much apprised of the fact that taxation is a very crucial lifeline of a government towards the development of an economy. One of the main objective of tax is to ensure income stability. A government also need tax revenue for its macroeconomic endeavours consisting of the social obligations they have towards the general public. Taxation as described by nightingale (1997) is a compulsory undertaking imposed on every individual by the government so that they can finance public expenditure. M.G. Allingham and A. Sandmo became the first to produce, in 1972, an economic model of tax evasion following Nobel laureate economist Gary Becker s theory in This model stipulated that the magnitude of tax evasion is dependent on the ability to be detected and the degree of legal sanctions prevailing. However, alternative specifications, have come up with diverging outcomes regarding both the indications and weights of variables believed to have an impact on tax evasion. Additionally, income tax evasion appears to have a direct relationship with the rate of tax, level of unemployment, the level of income and disappointment with respect to the government. The collection of tax in Mauritius is regulated by the Income Tax Act 1995 and VAT is charged since Mauritius has adopted selfexamination principle based on the important aspect of residence. The two main principles that we should be aware of is that a person residing in Mauritius is subject to Mauritian tax laws but it is also worth noting that he will also be taxed on any income derived outside Mauritius. On the other hand, nonresidents are taxed on their income derived in Mauritius (Barett). Mauritius Revenue Authority being the main regulatory body of taxation issues have published information about the collection on taxes. Initially, for the year ended 2013, The MRA gathered Rs 61.8 billion from taxes representing a 6.4% increase compared to the previous year. Literally, the increase in collections has been mainly in conformity with the growth rate for the year % was derived from three major tools, and these are mainly income tax, excise duties and Value Added Tax. II. LITERATURE REVIEW Before going forward with the effect of tax evasion it is important to know the tax rate and the reasons behind non-tax compliance. By definition, tax compliance is known as the reporting of tax payable to the concerned authority in adherence to the present tax rules and legislations (Jackson & Milliron, 1986). Moreover, taxpayers are also required to declare all income accurately in order to pay the required tax liability pertaining to present tax rules and regulations (Palil & Mustapha, 2011b). Tax compliance can be divided into administrative and judicious compliance. Administrative compliance is the abiding by the regulations of the stipulated laws while judicious compliance is the action to accurately filling the forms of tax return (Chow, 2004). Tax compliance can either be enforced or it can be through the voluntary willingness of the taxpayer. In the same line of thought, it was found that the first ever theories of tax compliance have been set up through the effort of Allingham & Sandmo (1972) and Srinivasan (1973) which were used on economic of crime models. The models had put forward tax compliance as a function of three deterrent variable; tax rate, tax audit and probability of detection. 1

2 Although it sets the foundation to figure out the compliance attitude, it has been duly condemned for the exclusion of psychological and sociological determinants having the intrinsic motivation of taxpayer s compliance without legislation (Alm, 1999). In consonance with the criticism of the conventional model, (Yitzhaki, 1974) expanded the Allingham and Sandmo model by equipping it with sanction in case of underestimated and distorted tax payment, as compared to income underreporting. Consequently, the expansion of the conventional model by Yitzhaki could not explain the fact as to why individuals paid tax even when there was not any sanctions and very low prospect of detection. (Sour, 2004) further extended the conventional model by adding individual morality and group conformity to the model. Nevertheless, the fundamental concern is that tax rate is still a crucial element of compliance as explained by the theory.to further have an understanding about how tax evasion affected the economic growth it is very important to find the main causes of tax evasion. The causes are explained below: Another factor that contributes towards tax evasion is the high compliance cost. Additionally, Haig and Ecker-R (1935) stipulated in a report that most countries have higher compliance cost of VAT compared to taxation. He further mentioned that SMEs are faced with greater compliance cost compared to well-established firms. Furthermore, a survey conducted by the World Bank from the period 2006 to 2011 on developing economies on the VAT compliance cost, found that the compliance costs are regressive. Knowing the human nature, it is therefore obvious that tax payers prefer to evade tax because no one would like to have to pay more than what they used to pay. Slemrod (2007) concluded that as long as tax rates are high people will continue to have recourse to tax evasion. Moreover, Sousa et al. (2008) calculated the effect of import tariffs on tax evasion and concluded that an increase in the tariff ultimately results in an increase in tax evasion. Alligham and Sandmon (1972) also specified that an individual will move forward to adopt tax evasion only after having weighted the cost of noncompliance and benefits to have resolved to tax evasion in case they are caught. In other words, if through tax evasion a person is making a profit of let us assume of $ 500,000 while the amount to be paid as fine is $100,000, then the latter will undeniable choose to evade tax. However, Siqueira and Ramos (2006) stated that if the possibility of detecting tax evasion increases alongside the implementation of penalty fees, this will ultimately lead to reduction in tax evasion. Nevertheless, the MRA came with a counter measure through Tax Arrears Settlement Scheme (TASS).TASS has to ability to sanction as high as 100% of penalty and interest due on tax be it on individuals or corporations. It forces debtors to clear all their dues on tax payable. III. METHODOLOGY Under this chapter, we are going to talk about the methods that were used to conduct our study. This chapter will further include the design of the research, sample size, different sampling techniques and the methods of data collection. For instance for this study, primary data had to be collected and ultimately this was done through surveys, more precisely online surveys. Initially online survey was used because of its wide reach of respondents, low cost and rapid data collection and most important of all it is a time saving method. IV. RESULTS AND DISCUSSIONS Factor analysis was carried out to find out the factors affecting tax evasion and payment of taxes. Factor1 actually measures the how and why an individual pays tax. Initially factor1 had a mean of , but the fact that the mean of obligation towards state and avoiding sanctions is 4.31 and 4.18 respectively shows that this 2 factors are significantly related. But when considering the total variance explained only the obligation factor is considered as related. Thus implying that a person pays taxes because of the sense of obligation they have towards the state. In this particular case, the 1 st question seems to have a relationship with the opinion people have on tax related opinions as its mean is greater than factor2 mean (2.24 > ). Effectively as explained and found in the literature review and analysis it was proved that high tax rate had a direct relationship with tax evasion. To further simplify it we can venture to say that if tax rates are higher the occurrence of tax evasion are even higher. The analysis further showed that if an individual is prosecuted in court this will obviously impact his attitude with respect to tax evasion. So there is a significant relationship.finally, the factor analysis was run on how efficiently the government used the taxpayers money on public services.here we can conclude that there is no significant relationship between the factors and how efficiently the tax money was used that is irrespective of how and where the government is using the tax payer s money, it does not bring about any change in the behavior of taxpayer s vis-à-vis tax evasion or paying taxes. 4.1 Chi-square Test: A Chi-Square Test was initiated to further determine the extent to which factors were interrelated. Initially the first two factors that were tested was paying tax as 2

3 an obligation towards the state with respect to gender that is if being a male or female impacted paying taxes differently and eventually tax evasion. We found that a total of 42 out of 49 males and 46 out of 51 females confirm that they pay taxes as an obligation to the state. This was then analysed with chi-square test. Basically the rule for Chi- square is: If Pearson Chi-Square is greater 0.5 and significance level less than 0.05, then reject H o and accept H 1. So from the data set we can find that Chi-square value is implying it is > 0.5 and significance level.033 implying it is <0.05. As a conclusion since the Pearson value is less than significance level (0.05), we cannot accept the null hypothesis, H 0. As a result we are going to accept H 1. This further implies that there is ultimately a relationship between gender and obligation to pay tax thus further strengthening the evidence put forward in literature review about women having higher tax morale compared to men. In this case can see that 43 male and 38 female strongly feel that they pay taxes in order to avoid sanctions. But when comparing, we find that Pearson Chi-Square is which is greater than 0.05, hence we should accept H 0, thereby concluding that there is no relationship between sanctions and gender. Further stipulating that the respondent feel that they do not pay tax principally to avoid sanctions but rather as explained in first place because of their obligation toward the state. Hence the relationship between employment status and obligation to pay tax. Table 3: Chi-Square Tests employment status and payment of taxes As can be seen in table 3, Since Pearson Chi square is < than 0.05, we can conclude that even in this case we will accept H 1 implying there is a relationship between employment status and payment of taxes to avoid sanctions. Employment status and sanctions are interrelated because they respondents are now accountable to the society so if they are faced with sanctions because of tax evasion their image and status are in jeopardy. Table 4: Chi-Square tests employment status and opportunity to evade Table 1: Chi-Square Tests gender and tax evasion From the cross tabulation in table 1 we can venture to say that male would evade taxes if given the opportunity compared to female as the majority of them tend to adopt a defensive approach against tax evasion. Since Pearson value is less than 0.05, H 1 is accepted implying that there exist a relationship between opportunity to evade tax and gender. With regard to employment status in table 2, given that Pearson value is < 0.05, we must accept H 1 as there is enough evidence to show that there is a relationship between employment status and the obligation to pay taxes. From the cross tabulation it is very clear that out of 13 employed respondents 8 feel that they have an obligation towards the state by paying their taxes. Additionally, from a total of 10 respondents of the unemployed status, 8 are of the opinion they have an obligation while for the students who are the next target of taxation, ¾ of them consider that they have an obligation to pay tax. From above table 4, It can be clearly seen that Pearson chi-square (.502) is > the So we should not accept H 1 but instead we should accept H 0 as there is no relationship between opportunity to evade tax and employment status. As explained above, these people are accountable to the society so they would not want to be faced with criticism from the society whereby their integrity will be questioned. As such they would not want to take the risk if the opportunity of evading tax would be presented to them hence no interrelation. Table 5: Chi-Square Tests substantial fine and evading tax Through cross tabulation table we can see that from a total of 45 respondents who think taxes are collected efficient, 28 think that a substantial fine would affect people behavior concerning tax evasion. Similarly, 3

4 from the remaining total of 55 participants who think tax collection is not efficient, nevertheless 23 of them are of the opinion that a substantial fine would deter people behavior about tax evasion. Talking about the Pearson value (0.162) we find that it is higher than the significance level concluding that we should accept H 0 and that there is no relationship between efficient tax collection and if a fine would change people attitude towards tax evasion. Table 6 : Chi-Square Tests tax money government expenditure As per table 6, person value (.461) is greater than 0.05, we should accept H 0 implying that there is no relationship between efficient use of taxpayer money vis-à-vis government wasting the taxpayer s money. Table 7: Chi-Square Tests for taxes and public services Refererring to table 7, pearson Chi-Square (0.001) is greater than significance level, we need to accept H 1 as there is enough evidence to show that there is a relation between heavy tax rates and willing to pay more in case of improvement of services. It is but obvious that if tax rates are heavy it would imply a fall in revenue for tax payers. So in order to enjoy higher revenues, they would prefer to evade the taxes, hence a reduction in government revenue and ultimately a decrease in government expenditure which indirectly stipulates no better public infrastructure. In this case tax payer s would prefer to evade tax by the government is not respecting its share of obligation. However, if there is improvement in the services offered and infrastructures only then the taxpayers can opt to pay more taxes, thus the positive relationship V. CONCLUSION Tax evasion has wreaked havoc in my economies and Mauritius is no exception. A quick glimpse over the global tax evasion indicates 26,000 billion euros 4 portraying up to a third of the financial resources of the globe (Business mega). From the arguments put forward and tests carried out we found that tax evasion directly affects the economic growth of Mauritius. We found in the study that one of the main reason why people evaded tax was because of the high rate of taxation (Slemrod, 2007) which was obviously very high in 2006 at 30%. But we can see that the government has tried to reduce the impact of tax evasion by decreasing the tax rate to 15% till date. We also tested that a prosecution in court can deter an individual s mind-set against tax evasion so the government make use of this argument to decrease the level of tax evasion and consequently experience an increase in economic growth and here the example of TASS can be taken. Ultimately we can find that the MRA came up with different schemes bearing high penalty fess and sanctions. Throughout the survey, we found an ever growing desire from the participants to get to know where the government uses the taxpayer s money. If known to the population in general about how the money is being spent, it can motivate them to pay their taxes willingly as they now know that they can trust the government (Udiale et al, 2010). VI. RECOMMENDATIONS It is obvious that tax evasion will continue to prevail no matter how many incentives the MRA come up with. Instead why not motivate them instead of coming up with preventive measures. So it can be in the form of prizes and gift for the first 100 or 200 individuals to fill in their tax returns. But in order to motivate them the gifts or prizes need to be consequent. Nevertheless, we will be obliged to also adopt very rigid structures and measures to counter tax evasion. Additionally the MRA must organise regular seminars about what, how and why individuals must do to fill in their tax liability. The government can also give a helping hand in promoting willingness to pay taxes through the improvement of available infrastructures, public services or even coming up with new services. REFERENCES [1] Abdulsalam Mas ud, Almustapha Alhaji Aliyu and El- Maude Jibreel Gambo (May 2014) 'Tax rate and tax compliance in Africa', 2(3), pp [2] Ali, M. M., Cecil, H. W., & Knoblett, J. A. (2001). The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers. Atlantic Economic Journal, 29(2), [3] Allingham M, Sandmo A (1972). Income tax evasion: a theoretical analysis. J. Public. Econ. 1(3-4): [4] Alm J, Torgler B (2006). Culture differences and tax morale in the United States and in Europe. J. Econ. Psychol. 27(2): [5] Alm, J., Jackson, B. R., & McKee, M. (1992). Estimating the determinants of taxpayer compliance with experimental data. National Tax Journal, 45(1), [6] Andreoni J, Erard B, Feinstein J (1998). Tax compliance. J. Econ. Lit. 36(2):

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