Income tax remains one of the major sources of Government revenue in nations across the world. This type of tax is specifically levied on income and not on transactions within the economy. Currently in several developed countries such as the USA, UK, Ireland and Canada, the taxation of income streamed from illegal activities is a possible recourse for regulators to recoup state income and curb tax evasion. Some economists and scholars argue that though this form of taxation does reduce tax evasion, to some extent, there is the perception that the state is complicit in the illegal activity as soon as it starts ‘benefiting’ in the form of taxes. This argument seems even more plausible in countries with less democracy where the state is perceived as enriching its officials and regulators and not caring for the overall benefit of society.
Paying taxes is not a naturally occurring phenomenon in human societal activity especially in developing countries. Scores of citizens in low-income economies, go through incredibly complex feats to avoid the ‘taxman’ and consolidate whatever income they feel entitled to. Contrary to OECD countries which collect as much as 33% of their GDP in taxes, low-income economies collect only about 12%. Several perception-based surveys have been conducted in these countries and the most common explanation for an individual’s motivation to evade taxes is the level of corruption in their current economic and political environment. Corrupt economies usually have more corrupt institutions and prevalent criminal or underground market activities. As a direct result, the rent-seeking regulator becomes the most sought after middleman in all-illegal or unofficial transactions. In many low-income economies, there is no direct or specific provision on the taxation of income from illegal proceeds.
The notion of taxing income from criminal activity naturally raises a few other questions if not eyebrows. Firstly, there is the issue of self-incrimination where the criminal would wonder why he would disclose any form of income stemming from an activity that is clearly illegal. Proponents for the taxation of income from illegal activity argue that, as it is the case with several developed countries, secrecy clauses and the use of automated software could go a long way to compile just essential data needed to enforce income tax deductibles and yet exclude the qualitative data that could identify criminal activity. The argument emphasizes that the purpose of Income Tax is to ‘tax income’ and should be completely separate from criminal law. This approach could encourage individuals of low-income economies to freely declare income without the fear of repercussions thereby ensuring a significant increase in tax revenues and overall social welfare.
A second issue that could arise from the taxing of income from illegal activities is the reality that a taxpayer taxed for illegal gains could make a formal and legitimate claim for a tax refund under the same legal rules in place. This move could become more complex if one or two overzealous rent-seeking regulators were involved at any point in the auditing process. Could a criminal legally sue a taxation regulator for discriminatory or predatory practices? These are important questions that need to be answered should low-income economies choose to go this route and tax illegal income. Proponents argue by mentioning the US approach to taxing illegal income. According to the US federal tax law, individual earners must report all illegal gains since those fall under taxable income. As such, this ensures that an individual’s taxable income is liable to federal tax law whether earned legally or illegally. The US federal tax law specifically mentions that even the cost or expenses of illegal business practices can be a deductible from the income. However, fines and penalties levied as well as payments to government officials and employees, bribes or kickbacks cannot be considered deductible expenses. Consequently, such a broad clause in the tax law for illegal income could go a long way to deter criminals from making absurd refund claims.
In the case of Africa, the taxation of income is even direr in cases where giant multi-national firms employ dubious and illegal accounting schemes to evade taxation. These developing countries are hit hard as the recovery of over $100billion annually in taxes remains almost impossible given the current tax laws. Activists and economists agree that enforcing laws that help African nations recapture what is lost in taxes can go a long way to stem the outflow of much needed income from the continent. This lost income could have been employed in social schemes and welfare programs thereby reducing the burden on national budgets and the demand for foreign aid and loans. It is no secret that developing countries, like most developed countries, rely heavily on the corporate tax and capital gains tax receipts that Multinational Corporations owe in conducting business and FDI projects in these regions. A tax on income could thus be a viable solution in ensuring that tax revenues are recouped even though a multinational might be less willing to admit illegal activity than an individual criminal as a result of international law, fear of host country judicial reprisals or reputation.
In view of the opinions pointed out above, it would make economic sense to conclude that tax legislation in low-income economies could ensure tax laws have as primary function to generate income for the respective state coffers. Regulation of the ‘manner’ in which taxpayers earn income should not be a subject of tax law but criminal law and this could, arguable, go a long way to improve transparency and reduce the amount of corrupt tax officials in income auditing and in the process of the implementation of these tax laws. The lessons low-income economies can learn from the USA, UK, Canada and Australia is in approving the use of the enforcement of affirmative notices with the declaration of certain illegal activities. These notices, often labeled as ‘other’ and usually provided on most tax return forms or websites, allow for the listing of illegal gains or income. Illegal activities that plague most developing countries include trafficking in subsidized fuel, illegal gambling, illegal logging, the sale of narcotics and prostitution. Though generally seen as moral ills that should be outlawed, the reality is that most governments spend billions of tax-payer money fighting these seemingly never-ending crimes.
If you can’t beat them, tax them! Do you agree?
“The Taxation Of Illegal Proceeds | Business Magazine”. Businessmag.mu. N.p., 2016. Web. 18 May 2016
“How Corporations Are Costing Africa Billions Through Tax Schemes | VICE News”. VICE News. N.p., 2016. Web. 8 May 2016
“Nigeria’s Booming Illegal Oil Refineries – BBC News”. BBC News. N.p., 2016. Web. 10 May 2016.