Question 1-Answers.

a).
Tax evasion can be defined as paying less than you are legally obliged to, on the other hand tax
avoidance can be summed as doing everything possible within the law to reduce your tax bill. "
The difference between tax evasion and tax avoidance is thickness of a prison wall".The courts
recognize the fact that no tax payer is obliged to arrange his/her affairs so as to maximize the tax
the government receives, individuals and business are entitled to take all lawful steps to
minimize their taxes.
However there is a clear cut difference between tax evasion and tax avoidance, one is an offense
by law and the other is legally acceptable.

b).
Basically, all tax evasion arises from personal greed which is an essential ingredient of
human nature and is universal. Whether the individual concerned is a trader, an industrialist, a
professional, or a director of a company, and no matter in what way he effects his manipulations,
the prime motive is of personal gain, or material advantage to an individual or his family.

An enabling factor responsible for tax evasion is the secrecy shrouding personal finances
and the department's (Uganda Revenue Authority) virtual inability to determine true income. As
one scholar McCulloch (1789-1864), observed as follows:

"... it neither has been, and, we are bold to say, never will be, possible to determine the incomes
of farmers, manufacturers, dealers of all sorts, and professional men, with anything like even the
crudest approximation to accuracy ... The investigations would be worthless; and the
Commissioners of income tax would in the end have nothing to trust to but the declarations of
the parties. Hence the tax would fall with full weight on men of integrity, while the millionaires
of 'easy virtue' would well nigh escape it altogether".

Our honourable law makers, who legislate taxes for the nation, exempt themselves on the
major sources of their own incomes. They do not even care to pay whatever little they are liable
to pay. The recent income tax directory of taxpayers in this regard is painfully revealing. In such
an environment, the rulers lack the necessary moral authority and the political will to enforce tax
compliance. Tax thieves feel morally justified to emulate the example set by the rulers.

Huge amounts of black money, and large cash hoards of drug barons have compounded
the problem by giving rise to large scale unlawful business activity, monstrous corruption,
degeneration of values, and erosion of governmental authority, all leading to non-compliance.

There is no accountability or fear of punishment for tax thieves especially the big and the
powerful, some of the examples are the individuals who have appeared in Public Account
Committee of Parliament. Absence of deterrent punishment breeds widespread tax evasion, even
by those who are not so big.

Lack of documentation in the economy due to general preference for cash transactions is
both a cause and an effect of tax pilferage. Business men neither like to receive payment by
cheque nor do they make any payments by cheque.In the absence of such documentary evidence,
it becomes extremely difficult to investigate tax evasion.

Erosion of moral values and domination of materialistic culture result in excessive greed,
dishonest practices and boundless lust for worldly comforts and pleasures. Tax pilferage
provides the wherewithal to satisfy this lust.

Although in the financial years government budgets passed some taxes are scraped or
rates have been lowered from time to time, tax evasion remains unabated. The reason seems to
be that the Government's demand for more and more revenues from a limited number of assesses
leads to their being squeezed more and more by tax officials who are given higher and higher
collection targets. This compels the harassed assesses to resort to various form of tax evasion.

Poor public services, e.g. hospitals without medicines, schools without furniture more
especially those UPE school in rural areas, power breakdowns, poor roads with potholes more
evident in the city of Uganda, law and order breakdown and similar other miseries breed
contempt for the government and its tax collection efforts. Also, when taxpayers see their taxes
being used to provide privileges and perks to the rich and the powerful, their resistance against
taxation, and their temptation to evade taxes increases.

Uncontrolled inflation and high cost of living, low government salaries and unfettered
discretionary powers of tax officers provide a conducive setting for corruption and tax pilferage.

Low level of literacy among taxpayers who are unaware of their civic responsibilities and
who are incapable of keeping reliable accounts may be another reason for the low level of tax
compliance.

An anti-tax culture prevails in the country. Tax pilferage has become the rule, and
compliance an exception. There is no social stigma attached to tax pilferage. In fact, it has
become a privilege of the high and the mighty to not to pay any tax. On top of it, they interfere in
tax administration to help even others to evade taxes.

Complexity of the tax system, the tax structure and the tax laws with frequent changes
create tax loopholes, inconsistencies, uncertainty, and confusion which promote tax avoidance
and tax evasion.

Tax officials of "easy virtue" often play a negative role. Instead of apprehending the tax
thieves, they help them get away after reaching a "compromise" for mutual benefit. Tax
consultants too are often a party to this unholy alliance. Scrutiny of tax returns is often too
superficial and hurried to unearth tax evasion. In fact, there is little incentive to do so after the
'compromise'.

When a taxpayer exploits loopholes in the tax law to 'minimise his taxes, he lowers the
general level of tax morality. Some of the country's best lawyers, accountants and tax consultants
are engaged in the battle of tax avoidance. And tax avoidance leads to increased tax evasion as
those who have little opportunity to practice tax avoidance and see others using legal means to
reduce their tax liability are tempted to use illegal means to achieve the same result.

When a taxpayer exploits loopholes in the tax law to 'minimise his taxes, he lowers the
general level of tax morality. Some of the country's best lawyers, accountants and tax consultants
are engaged in the battle of tax avoidance. And tax avoidance leads to increased tax evasion as
those who have little opportunity to practice tax avoidance and see others using legal means to
reduce their tax liability are tempted to use illegal means to achieve the same result.

However the Most Important Causes

- Absence of deterrent punishment for tax thieves;

-Lack of documentation in the economy;

- Political interference in investigation work and lack of political will for stricter tax
enforcement;

-Negative role of tax officials and 'facilitating' role of tax consultants; and

-Slow processing of tax returns and lack of swift follow up action

c).
Since the set up of Uganda Revenue Authority, it has been aware of the problem of tax pilferage.
Many recommendations have been made and quite a few implemented. What needs to be done,
Is to continue strengthen implementation of these measures to check tax pilferage include the
following:

(i) Setting up of a Survey and Registration organisation.

(ii) Installation of computers for processing, collation and cross-checking of information.

(iii) Introduction of the self assessment scheme to enable the department to devote more man-
hours to the detection and investigation of concealment cases.

(iv) Introduction of withholding tax regime with its network having been extended from time to
time.

(v) Strengthening of the department by providing additional personnel, and training.

(vi) Reduction of tax rates, and

(vii) Introduction of NTNs and other documentation.

(viii).Continue sensitizing the public about the importance of remiting their tax obligation

Microeconomics - Effect of Taxes on Supply and Demand

Actual and Statutory Incidence of Tax

Tax authorities usually require either the buyer or the seller to be legally responsible for
payment of the tax. Tax incidence is the way in which the burden of a tax is shared among the
market participants ("who bears the cost?"). Taxes will typically constitute a greater burden for
whichever party has a more inelastic curve – e.g., if supply is inelastic and demand is elastic, the
burden will be greater on the producers.

Suppose that a state government imposes a tax upon milk producers of $1 per gallon.

Figure 3.7: Incidence of Tax

Suppose that a state government imposes a tax upon milk producers of $1 per gallon.

Figure 3.7: Incidence of Tax

The triangle ABC above represents the deadweight loss due to taxation, which occurs because
now there are fewer mutually beneficial exchanges between buyers and sellers. Deadweight loss
stems from foregone economic activity and is a loss that does not lead to an offsetting gain for
other market participants; it is a permanent decrease to consumer and/or producer surplus.

Elasticity of Supply and Demand and the Incidence of Tax

If buyers have many alternatives to a good with a new tax, they will tend to respond to a rise in
price by buying other things and will, therefore, not accept a much higher price. If sellers easily
can switch to producing other goods, or if they will respond to even a small reduction in
payments by going out of business, then they will not accept a much lower price. The incidence
of the tax will tend to fall on the side of the market that has the least attractive alternatives and,
therefore, has a lower elasticity.

Cigarettes are one example where buyers have relatively few options; we would therefore expect
the primary burden of cigarette taxes to fall upon the buyers.

A subsidy shifts either the demand or supply curve to the right, depending upon whether the
buyer or seller receives the subsidy. If it is the buyer receiving the subsidy, the demand curve
shifts right, leading to an increase in the quantity demanded and the equilibrium price. If the
seller receives the subsidy, the supply curve shifts right and the quantity demanded will increase,
while the equilibrium price decreases.
A quota limits the amounts of a good that can be produced. If the quota is greater than what
would be produced under normal market conditions, then it will have no effect. If the amount is
less, than the market equilibrium that is achieved will be at a higher price than what would occur
without the quota, as consumers will be willing to pay more.

Making a good or service illegally impacts demand, supply and market equilibrium by imposing
a cost (prosecution and punishment) on the buyer or seller (or both) of the good/service.
Quantities of illegal goods will always be less than if they were legal, but the impact on price is
determined by whether the buyer or seller (or both) is punished. If the only the buyer is
penalized, the equilibrium price will be lower; the risk of punishment is regarded by buyers as a
cost, and reduces the price they will pay to the seller. If the seller is penalized, the equilibrium
price will be higher as the cost of punishment is factored into the seller's cost. Prices will remain
relatively unchanged if the risk and cost of punishment is shared equally.