Most people have been brought up to think of tax avoidance as an illegal act. But it is only now since 2000 that a government tax offices such as the IRS, claim that tax avoidance as a crime, calling it a “scam” in its recently published “Dirty Dozen” tax scams. It even highlighted the hiding of income through offshoring as a concrete example of tax avoidance and scam, so to say.
This whole issue was brought about by the increasing popularity of offshore transactions of numerous US-based citizens and corporations. More developed countries followed resulting to a global awareness on offshoring and how it saves on taxes. In effect, a good number of less-developed countries began competing with each other through competitive offshore regulations and perks for their target clients. But are tax avoidance and offshoring really crimes?
Let’s look at the facts:
Evasion vs avoidance
To quote, the IRS stated that “US taxpayers are avoiding taxes by hiding money or assets offshore”. Does avoiding automatically mean evading? The two terms are often used interchangeably but there must be a gray area between the two. Clearly put, evasion is illegal while avoidance is not. In his article “What is the Difference between Tax Avoidance and Tax Evasion”, Jean Murray from biztaxlaw, defined the two as:
“Tax avoidance is the legitimate minimizing of taxes using methods approved by the IRS. Tax evasion, on the other hand, is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed.”
Former Supreme Court Justice Felix Frankfurter even stated that ’The very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it’ and ‘nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions.’
The published figures
The allegedly amount of loss the IRS had been using started was $70 billion of offshore taxes. This figure was released by Jack Blum in 2000. There was never a concrete basis to back how he came up with the said amount, though. Over the years, it grew to $150 billion in 2012 and up to $184 billion in 2014, without a real thorough computation of how these amounts came about. According to Jack Blum, he simply guessed that $70 billion offshore taxes were lost to the IRS.
So the IRS is relying on a complete guess for its statistics!
Now, suppose the 2014’s $184 billion tax bill is correct and assuming that there’s a 35% tax rate for corporate offshore accounts and that these are running at a conservative rate, then the total unreported annual income offshore should be at around $525 billion. If we compute how much capital was placed for the said income, the total should be at about $13 trillion. In a global perspective, assuming this rate goes the same with the other countries, there must be around $56 trillion worth of untraceable assets all over the world. In a given $78 trillion GDP worldwide, $56 trillion is 72% of the world’s GDP.
The percentage seems impossible at all. The IRS could not even differentiate avoidance from evasion. The whole fiasco about the so-called scam sounds more ridiculous than true.
The facts are that tax avoidance is completely legal and encouraged. Tax evasion is illegal.
The whole slant of the IRS document is simple government propaganda – written to confuse the majority to stop them taking legal advantage of running their business and personal financial affairs is countries other than their home country.