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MACROECONOMIC EFFECTS PUBLIC INDEBTEDNESS FIGHTING TAX EVASION PUBLIC CUTS EFFECTS ON EQUITY AND INCOME DISTRIBUTION TAX BURDEN EFFECTS ON RESOURCE ALLOCATION AND EFFICIENCY The main effects of tax evasion on the economy are as follows. MACROECONOMIC EFFECTS: Tax evasion causes serious damage to the state, through the reduction of tax returns and public revenue This translates into a WORSENING of the public debt. The lack of cash will force the policy maker to Reduce services and public spending So as to make up for the missing revenue from tax evaders Increase the tax burden on taxpaying citizens The policy maker obtains the missing resources by issuing More public bonds This short-term solution leads to greater public indebtedness in the long run Interests will have to be paid once they reach maturity. The policy maker increases the tax monitoring to identify tax-evaders. This is a Complex step because Tax assessment entails considerable expenditure for the state and does not allow it to assess all istances of abuse. The policy maker cuts public spending by providing fewer public goods and services. Public cuts can be positive because they enable the state to rationalise its expenditure and reduce waste negative because in other cases they translate into a further economic burden on less affluent citizens Tax evasion interferes with the income distribution, as citizens and companies differ in the degree to which they can evade taxes. Employees have less chance of evading (they are taxed directly in their paychecks) The state imposes higher taxes for the people who are already paying tax When the state is forced to increase the tax burden In order to found public spending the policy maker is forced to Raise the tax rates for honest citizens Tax evasion penalises tax-payers Companies which have paid all their taxes are damaged both By the increase in tax rates By the competition from tax-evading companies Tax-evaders benefit from: Lower costs compared to tax-payers They can operate with more competitive prices In long term, this will distort resource allocation Resources will tend to flow into sectors with higher tax-evasion rates, hampering economic growth and economic development. POWERED BY: LUCIA COBUCCI VC AFM