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A General Model of the Behavioral Response to Taxation

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  • Joel Slemrod

Abstract

This paper generalizes the standard model of how taxes affect the labor-leisure choice by allowing individuals to change both their labor supply and avoidance effort in response to tax changes. Doing so reveals that both the income and substitution effect of taxes depend on both preferences and the avoidance technology, and econometric analysis will not in general allow one to separately identify the two influences, unless one can specify observable determinants of the cost of avoidance. The effective marginal tax rate on working must be modified by the addition of an avoidance-facilitating effect, which measures how much the cost of avoidance declines with higher true income. In an extreme case in which the cost of avoidance depends only on reported income, taxation has no compensated effect on labor supply regardless of preferences. This model provides a conceptual structure for evaluating to what extent, and in what situations, the opportunities for avoidance mitigate the real substitution response to tax reform.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6582.

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Date of creation: May 1998
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Publication status: published as Slemrod, Joel. "A General Model Of The Behavioral Response To Taxation," International Tax and Public Finance, 2001, v8(2,Mar), 119-128.
Handle: RePEc:nbr:nberwo:6582

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  1. Shlomo Yitzhaki, 1987. "On the Excess Burden of Tax Evasion," Public Finance Review, , vol. 15(2), pages 123-137, April.
  2. Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 93(1), pages 75-88.
  3. Dan Usher, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Working Papers, Queen's University, Department of Economics 637, Queen's University, Department of Economics.
  4. Slemrod, Joel, 1994. "Fixing the leak in Okun's bucket optimal tax progressivity when avoidance can be controlled," Journal of Public Economics, Elsevier, Elsevier, vol. 55(1), pages 41-51, September.
  5. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 50(2), pages 261-275, February.
  6. Harry Grubert & Joel Slemrod, 1994. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico," NBER Working Papers 4869, National Bureau of Economic Research, Inc.
  7. Louis Kaplow, 1989. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
  8. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  9. Cowell, Frank A., 1985. "Tax evasion with labour income," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 19-34, February.
  10. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 3(2), pages 201-202, May.
  11. Sandmo, Agnar, 1981. "Income tax evasion, labour supply, and the equity--efficiency tradeoff," Journal of Public Economics, Elsevier, Elsevier, vol. 16(3), pages 265-288, December.
  12. Rosen, Harvey S, 1976. "Tax Illusion and the Labor Supply of Married Women," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 167-72, May.
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