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Fighting tax evasion

Oct 15,2017 - Last updated at Oct 15,2017

King Abdullah’s directives to combat tax evasion were welcomed by Jordanians, not only because it would shelter households from new tax burdens, but also because it boldly addressed a longstanding source of inequality and discontent.

Salaried employees and compliant tax payers have always complained about the dual adverse impact of tax evasion: on their disposable incomes and on the quality of public services.

Intuitive estimates put the annual tax evasion figure at around JD300 million to JD500 million.

The estimated figure highlights the expensive toll paid annually by compliant citizens on behalf of notorious tax evaders, and underscores the significant lost opportunity to fund public services and infrastructure projects.

Activists have reiterated calls for harsher punitive penalties on evaders, stricter auditing on independent professions and more transparent billing practices.

The government has also started to cite legislative impediments encountering tax evasion fighting efforts.

In an unprecedented escalation of government’s rhetoric on tax evasion, one official recently cited the authorities’ inability to access bank accounts of tax payers as an impediment to endeavours to combat tax evasion.

The overwhelming consensus on fighting tax evasion notwithstanding, it is essential to emphasise the fact that the demanded reforms are subject to various constraints, and are associated with economic costs that cannot be neglected.

Just like the imposition of new taxes, fighting tax evasion will eventually be responsible for withdrawal of liquidity from the market, weigh on certain economic activities, increase prices on customers and promote a shadow economy.

Exposing tax payers bank accounts may also trigger capital outflow and distort monetary policy targets, something barely needed in such critical times.

New measures to combat tax evasion can be expected to be endlessly countered by new, creative, tactics by evaders.

Frequent tax amnesty campaigns in developed economies are shining evidence of this.

The lack of reliable tax evasion estimates is another hurdle that may convert noble efforts to combat tax evasion into a curse if the outcome fails to meet public expectations, or if the unpopular argument that most evaders are middle-income households proves true.

By being aware of the aforementioned obstacles and constraints, one can understand the government’s longstanding reluctance to address tax evasion, despite reiterated public calls and persistent harsh criticism.

As in other cases, the King’s vision proves more insightful and his approach entails more wisdom.

By declaring war on tax evaders, an unprecedented public support and consensus was attained on this issue as well as on other crucial reforms, notably flour subsidies.

The directives neither neglect the underscored obstacles nor call for adopting reckless measures.

Instead, the government should understand that it needs to face the challenge of tax evasion rationally, rather than escape behind a wall of denial that leads nowhere.

Even if the outcome is poor, a rational plan to combat tax evasion will pay off by narrowing the confidence gap between government and public, thus paving the way for bold reforms on other fronts.

The government should designate gradual but precise anti-tax evasion measures that do not entail uncalculated risks or unpredictable economic costs.

At the same time, an outreaching communication campaign should be launched in order to get the public opinion aboard and adjust public expectations to become more realistic through transparent reporting of achievements and challenges.

One successful example to recall here is the national campaign against water theft.

In few years, a good amount of water was saved, the rule of law was emphasised, and public support grew, even though theft did not completely vanish and regardless of many unresolved water challenges.

It would be great to replicate the experience and achieve similar outcomes through the national campaign to fight tax evasion.



The writer, an economist and columnist, contributed this article to The Jordan Times.

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