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Tax Avoidance and Value-Added vs. Income Taxation in an Open Economy

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  • Roger H. Gordon
  • Soren Bo Nielsen

Abstract

Ignoring tax avoidance possibilities, a value-added tax and a cash-flow income tax have identical behavioral and distributional consequences. Yet the available means of tax avoidance under each are very different. Under a VAT, avoidance occurs through cross-border shopping, whereas under an income tax it occurs through shifting taxable income abroad. Given avoidance, we show that a country would make use of both taxes in order to minimize the efficiency costs of avoidance activity, relying relatively more on that tax that is harder to avoid. We then make use of aggregate Danish tax and accounting data from 1992 to measure the amount of avoidance that occurred under the two taxes. While the estimates of avoidance activity are small, the figures imply that Denmark could reduce the real costs of avoidance activity by putting more weight on income rather than value- added taxes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5527.

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Date of creation: Apr 1996
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Publication status: published as Gordon, Roger H. and Soren Bo Nielsen. "Tax Evasion In An Open Economy: Value-Added Vs. Income Taxation," Journal of Public Economics, 1997, v66(2,Nov), 173-197.
Handle: RePEc:nbr:nberwo:5527

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  1. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers, National Bureau of Economic Research, Inc 2931, National Bureau of Economic Research, Inc.
  2. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 706-32, August.
  3. Alan J. Auerbach & Laurence J. Kotlikoff, 1983. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Chapters, National Bureau of Economic Research, Inc, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 459-498 National Bureau of Economic Research, Inc.
  4. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 877-92, September.
  5. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 64(4), pages 701-06, September.
  6. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  7. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, Elsevier, vol. 31(1-2), pages 171-181, August.
  8. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 373-399, June.
  9. Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, Elsevier, vol. 1(1), pages 25-43, April.
  10. Roger H. Gordon & James A. Levinsohn, 1990. "The Linkage between Domestic Taxes and Border Taxes," NBER Chapters, National Bureau of Economic Research, Inc, in: Taxation in the Global Economy, pages 357-396 National Bureau of Economic Research, Inc.
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Cited by:
  1. Stéphanie Guichard & Claire Lefebvre, 1997. "Pour ou contre le système commun de TVA ?," Working Papers, CEPII research center 1997-13, CEPII research center.

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