Journal
INTERNATIONAL TAX AND PUBLIC FINANCE
Volume 8, Issue 2, Pages 119-128Publisher
KLUWER ACADEMIC PUBL
DOI: 10.1023/A:1011204301325
Keywords
taxation; labor supply; avoidance; evasion; tax reform
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This paper generalizes the standard model of how taxes affect the labor-leisure choice by allowing individuals to change both their labor supply and avoidance effort in response to tax changes. Doing so reveals that the income and substitution effect of taxes depend on both preferences and the avoidance technology. Econometric analysis will not in general allow one to separately identify the two influences, unless one can specify observable determinants of the cost of avoidance. The effective marginal tax rate on working must be modified by the addition of an avoidance-facilitating effect, which measures how the cost of avoidance changes with higher income. This model provides a conceptual structure for evaluating to what extent, and in what situations, the opportunities for tax avoidance mitigate the real substitution response to taxation.
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