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

  • Roger H. Gordon
  • Soren Bo Nielsen

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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File URL: http://www.nber.org/papers/w5527.pdf
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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
Note: PE
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  1. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
  2. le Blanc, B., 1991. "Economies in Transition," Discussion Paper 1991-56, Tilburg University, Center for Economic Research.
  3. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  4. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  5. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  6. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, vol. 60(3), pages 373-399, June.
  7. James R. Hines, Jr. & R. Glenn Hubbard, 1989. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc.
  8. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, vol. 31(1-2), pages 171-181, August.
  9. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, vol. 64(4), pages 701-06, September.
  10. Gordon, R.H. & Levisohn, J., 1989. "The Linkage Between Domestic Taxes And Borber Taxes," Working Papers 244, Research Seminar in International Economics, University of Michigan.
  11. Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, vol. 1(1), pages 25-43, April.
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