Working Paper: NBER ID: w8909
Authors: James R. Hines Jr.
Abstract: This paper analyzes efficient reactions of policy makers to unanticipated tax avoidance. The strategy of many governments is to reform their tax laws and regulations to reduce the effectiveness of elaborate tax avoidance techniques as soon as they are identified. This tax reform process can successfully prevent the widespread use of new tax avoidance strategies, and in that way prevents erosion of the tax base. But it also encourages the rapid development of new tax avoidance techniques by innovators whose competitors are thereby unable to copy their methods -- as a consequence of which, there can be a great premium on being the first to develop and use a new tax avoidance method. An activist reform agenda may therefore divert greater resources into tax avoidance activity, and lead to a faster rate of tax base erosion, than would a less reactive government strategy. Efficient government policy therefore often entails a slow and deliberate pace of tax reform in response to taxpayer innovation.
Keywords: tax reform; tax avoidance; government policy; economic efficiency
JEL Codes: H21; H25; K34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government actions (H11) | Taxpayer innovation (H29) |
| Government actions (H11) | Aggregate tax avoidance (H26) |
| Less reactive approach (C99) | Efficient resource allocation (D61) |