TAX ARBITRAGE: Concluding remarks 3

Fourth, models that allow for tax arbitrage and asset trade have important implications for the econometric analysis of labor supply, and for applied work on income distribution. Studies that ignore the effect of tax arbitrage and asset trade on labor supply incentives will come up with biased estimates of important elasticities, and international comparisons of income inequality will exaggerate the redistributive achievements of high-tax countries like Sweden.

Fifth, how does tax avoidance affect estimates of the deadweight burden of the income tax? Feldstein (1995) argues that models that account for tax avoidance will produce calculations of excess burdens that are many times larger than those implied by standard Harberger-calculations. A contrary view, from the perspective of a high-tax country, is that tax avoidance may be seen .. as a means of blowing off some steam in order to save the engine from exploding” (Lindencrona (1993), p. 166).

Our analysis shows that it is indeed easy to develop examples where asset trade reduces the efficiency cost of income taxation. In the end, whether tax avoidance leads to smaller or greater excess burdens is an empirical question, that depends on country-specifics, like the structure of the tax system, the type of available arbitrage technologies, etc.

Sixth, from a public choice perspective tax arbitrage and a highly progressive tax system can be viewed as an ingenious way of reconciling incompatible political ambitions. High marginal tax rates convey the message that politicians care about the less well off, while a generous attitude towards tax avoidance prevents the very same tax system from destroying the incentives of the rich and the highly educated. The political economy of tax design seems like an important research topic for the future. payday loan lender