TAX ARBITRAGE: Concluding remarks

Income redistribution in the welfare state

A final observation is that our analysis casts strong doubt on the common use of tax return data in applied work on income distribution. According to several studies Sweden ranks, together with some other high-tax countries, as one of the most egalitarian countries in the western industrialized world (see e.g. Gottschalk and Smeeding (1997)). The Gini coefficient for reported disposable income is much smaller in Sweden than in the USA, a finding that often is attributed to the equalizing impact of progressive income taxes and transfers.

But for reasons discussed in section 5.1, the reliability of tax return data as an indicator of true economic income is likely to be a decreasing function of the tax rate. We would expect disposable income of the affluent, computed from the income tax returns, to underestimate actual disposable income. Because Swedish high-income earners are confronted with much higher tax rates than their U.S. counterparts, this bias is likely to be larger in the Swedish than in the U.S. data, thereby creating an impression of a much higher degree of equality in Sweden.

Concluding remarks

Our analysis rests on a number of strong assumptions. The analysis in section 3 relies on the existence of a perfect asset market, and the analysis of capital market imperfections in section 4 is specific rather than general. There are other ways of introducing assumptions that soften the stark prediction of equal taxable income, the most obvious one being perhaps to introduce uncertainty and risk aversion, which induces individuals not to exploit possible tax arbitrage technologies to a full extent. Electronic Payday Loans Online