Strict Tax Laws May Backfire

Posted on August 13, 2022

Strict Tax Laws May Backfire

It is not always strict tax laws that improves compliance or increases revenue. There are unexpected and often unpredictable results of stricter tax laws. When the IRS increases its efforts to improve tax compliance among Americans living outside the country, it led to many wealthy citizens renouncing their U.S. citizenship. Many wealthy people consider taxes when choosing to continue to reside in a country. Higher taxes have often led people to move to countries with less taxes and simpler tax laws.

The case of international company Apple Inc. also revealed that high taxes might not always lead to more revenue. The U.S. has the world’s highest corporate tax rate, which has led many multi-national companies seeking refuge overseas using loopholes within the tax code to evade taxes legally. When the government questioned Apple, the company suggested lowering the U.S. corporate tax rate.

Higher taxes and stricter enforcement can have adverse side-effects as is seen with the tax increases on cigarettes. Although no one aggressively challenges that smoking can be bad for people’s health, increasing taxes is not known to curb the habit. After the increase on cigarettes, it was reported that there was an expansion of black market, where smugglers brought cigarettes from low-tax states and sold them in high-tax states.

Generating revenue at the expense of damaging side-effects cannot provide healthy long-term tax solutions. Taxes affect people and when they begin to find the tax system suffocating, adjustments will be made.

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