Question

In your own words, briefly explain the difference between tax avoidance and tax evasion. Give an example of each. (Do not use the examples in the lecture slides, think of your own.)

Then, think of one way that you personally avoid paying tax. Tell us about your method of tax avoidance. （150 words）

Answer 1

The government requires funds to be able to spend them on developmental activities such as increasing the infrastructure in a country, health care and for maintaining facilities such as defines and police personnel. This expenditure by the government is sourced through various forms of taxation wherein these may be charged on income of public or profits which producers make at large.

In the case, we analyse the meaning of avoidance and evasion in detail. Tax avoidance is a strategy which is used by numerous producers as well as consumers to lower their taxable income and thus pay lesser taxes to the government at large. This is done by investing into government allowed schemes which reduce tax liability such as investments in mutual funds, bonds or other investment techniques.

On the other hand, tax evasion takes place, when we do not voluntarily pay our taxes and make an illicit transaction either in cash or in kind so as to avoid paying higher tax rates in the country respectively. This money may then be held in cash or deposited into the banking system of countries such as Switzerland which do not inquire about the source of money.

Thus, tax evasion is an illegal activity in the sense that it reduces tax liability but through illegal means, whereas tax avoidance is a government permitted way of investing money in the economy to reduce liability.

As far as personal taxation is concerned, we can choose to invest in various mutual funds or government back bonds which yield interest on one hand and reduce our tax income and liability on the other and are an attractive method for reducing taxation. These have largely been used across the globe as a management strategy by consumers.

If we were a producer on the other hand, we could choose to invest our money into various sectors and this investment would then be reduced from our total income and the taxes which we would pay would be much lesser.

Please feel free to ask your doubts in the comments section.