Tax has received a lot of media attention this month, with the leaking of the “Panama Papers” causing an uproar which climaxed with Iceland’s prime minister stepping aside for “an unspecified amount of time.” In economies struggling with a tight fiscal climate and austerity measures, the public are outraged that their politicians and elites could potentially be avoiding paying their taxes.
The “Panama Papers” consist of internal documents from Mossack Fonseca, a Panama-based law firm, anonymously leaked to Germany’s Süddeutsche Zeitung newspaper. Among the leaked documents are details of an offshore fund co-founded by the UK Prime Minister David Cameron’s late father, in which the prime minister also previously owned shares.
IZA World of Labor author James Alm states an important distinction in his article on tax evasion, labor market effects, and income distribution. He writes that “[individuals] can take a variety of actions to reduce their tax liabilities.” Some are legal “tax avoidance” measures—and although questions as to their morality definitely remain, funds like those detailed in the Panama Papers coverage do appear to fall under this banner—whilst “tax evasion,” on the other hand, refers to intentional actions taken by individuals or firms to illegally reduce their tax obligations.
Since the "Panama Papers" revelations, the prime minister has announced a new law to make companies criminally liable if their employees aid tax evasion. He stated that: “This government has done more than any other to take action against corruption in all its forms, but we will go further. That is why we will legislate this year to hold companies who fail to stop their employees facilitating tax evasion criminally liable.”
Alm also notes that: “Designing appropriate tax policies requires understanding the impact of tax evasion and its true effects on income distribution.”
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