The difference between tax avoidance and tax evasion and the different instruments government might use to combat these

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The difference between tax avoidance and tax evasion and the different instruments government might use to combat these

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Abstract

Taxation is everywhere in our daily life. People cannot always evade taxes. For instance, we pay tax when we buy goods therefore it is impossible to escape this kind of ‘included tax”.
Tax avoidance and tax evasion are determinant for tax burden because they are one of the factors that fix the burden for taxpayer.

Individuals who work have to declare their income. Hereby they are confronted with their future taxes they have to pay. Tax avoidance and tax evasion are different by their legality. Taxpayers are free to be honest in their tax return and contribute to the revenue of the Government. That is why it is interesting to define tax evasion and tax avoidance in the first part. It will lead the essay to the analysis how an individual decides to avoid income or to reduce taxes. The last part will shed some light on the instruments used by the Government to combat that.

Introduction
Tax evasion
1. What is tax evasion?
2. Why does the tax evasion exist?
3. How to evade taxation
Tax avoidance
1. What is tax avoidance?
2. Why does tax avoidance exist?
3. How to avoid taxation
Decision to avoid taxation
Instruments used by the government to combat tax evasion and tax avoidance
Conclusion
Bibliography

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[...] Moreover, the environment and the experiences of people are determinant as well in order to avoid taxation. evasion is easy: it involves breaking the law. By tax avoidance OECD means unacceptable tax planning. What is critical is transparency.” Donald Johnston, Secretary-General of the OCED.[25] Bibliography 1. Cullis, J., Jones, P., Public Finance and Public Choice, (New York, 1998) 2. Fortin, B., Lacroix G., Villeval, M.-C., Tax Evasion and Social Intereaction, (Montréal, December 2004) 3. Kirkpatrick, J., Le régime fiscal des sociétés en Belgique, (Bruxelles, 1995) 4. [...]

[...] It is a king of cheating.[6] According to Andreoni et al (1998), the tax evasion might be affected by social norms and social interactions. Erard and Feinstein (1994) claim the role of the guilt and shame in tax compliance behavior. Gordon (1989) and Myles and Naylor (1996) present the importance of the influence of a group of people on psychic payoff; it is the social conformity effect. The social learning effect points out that the taxpayer may think that it is cheaper to underreport income owing to the experience of his peers.[7] Conclusively individuals are influenced by these ideas, therefore their tax evasion decisions as well. [...]

[...] Browning and Browning (1983) argues that the tax benefits go only to those who are well informed, in particular to loopholes those who have their tax affairs handled by specialist legal and accountancy firm.[15] Figure: Effect of good or service X being untaxed[16] The line 12 shows the budget constraint when there is no tax. Then the line 34 illustrates the budget under tax. If the good X is exempted, the substitution effect leads to an increase in this good. [...]

[...] The equation is: N=Y-tD, where Y is the income, t the tax rate and D the level of income that the individual declares. It means that the evasion is successful. However if the individual is caught, the equation becomes: where F represents the rate of fine. Henceforth the level of income is the income minus the fine. Indeed the fine is taken from the undeclared income multiplied by the fine rate. In the case where F is superior as the individual will pay more if he is caught than if he was honest. [...]

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