Working Paper: NBER ID: w1868
Authors: Joseph E. Stiglitz
Abstract: This paper outlines a general set of principles for tax avoidance. Most of at least the common tax avoidance schemes can be reinterpreted as making use of one or more of these principles. Four such methods are described. In a perfect capital market, these methods would enable the astute taxpayer to eliminate all taxation on capital income. The fact that the tax system raises revenue is attributed to lack of astuteness of the taxpayer and/or lack of perfection of the capital market. Accordingly, models which attempt to analyze the effects of taxation assuming rational, maximizing taxpayers working within a perfect capital market may give misleading results.A full analysis of tax avoidance cannot be conducted within a partial equilibrium model; transactions which reduce one individual's tax liability may at the same time increase another's.We delineate tax avoidance schemes which reduce the aggregate tax liabilities of the participants. Much of the"general equilibrium" gain from tax avoidance arises from differences in tax rates, both across individuals and across classes of income. Our analysis is shown to have implications both for patterns of ownership of assets and the timing of transfers.
Keywords: tax avoidance; capital income; tax reform; general equilibrium
JEL Codes: H21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Perfection of capital markets (D41) | Ability of taxpayers to avoid taxes (H26) |
| Lack of astuteness among taxpayers (H26) | Collection of tax revenues (H26) |
| Imperfections in capital markets (G19) | Collection of tax revenues (H26) |
| Tax avoidance (H26) | Aggregate reductions in tax liabilities (H29) |
| Differences in tax rates across individuals and income classes (H29) | Opportunities for tax arbitrage (H26) |
| Methods of postponing taxes and exploiting differential tax treatments (H26) | Significant tax savings (H26) |