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Does an Uncertain Tax System Encourage "Aggressive Tax Planning"?

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  • James Alm

    (Department of Economics, Tulane University)

Abstract

"Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.

Suggested Citation

  • James Alm, 2014. "Does an Uncertain Tax System Encourage "Aggressive Tax Planning"?," Working Papers 1403, Tulane University, Department of Economics.
  • Handle: RePEc:tul:wpaper:1403
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Petimat Muzaeva, 2024. "Impact of the ATAD Directive on corporate tax revenues in the EU [Vliv směrnice ATAD na výnosy korporátní daně v EU]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2024(1), pages 35-46.
    2. Keen, Michael & Slemrod, Joel, 2017. "Optimal tax administration," Journal of Public Economics, Elsevier, vol. 152(C), pages 133-142.
    3. Samreen Malik & Benedikt Mihm & Florian Timme, 2018. "An experimental analysis of tax avoidance policies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 200-239, February.
    4. James Alm, 2021. "Tax evasion, technology, and inequality," Economics of Governance, Springer, vol. 22(4), pages 321-343, December.
    5. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    6. James Alm & Antoine Malézieux, 2021. "40 years of tax evasion games: a meta-analysis," Experimental Economics, Springer;Economic Science Association, vol. 24(3), pages 699-750, September.
    7. Janina Enachescu & Maximilian Zieser & Eva Hofmann & Erich Kirchler, 2019. "Horizontal Monitoring in Austria: subjective representations by tax officials and company employees," Business Research, Springer;German Academic Association for Business Research, vol. 12(1), pages 75-94, April.
    8. Wang, Zhenjie & Yang, Yi & Zhang, Jiewei, 2024. "Are female directors more inclined to avoid risks?," International Review of Financial Analysis, Elsevier, vol. 92(C).
    9. Kühne, Daniela, 2020. "Reaction to ambiguity as a signal for tax reporting aggressiveness: Evidence from German income tax return data," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-44-20, University of Passau, Faculty of Business and Economics.
    10. Ömür Saltık & Wasim ul Rehman & Rıdvan Söyü & Süleyman Değirmen & Ahmet Şengönül, 2023. "Predicting loss aversion behavior with machine-learning methods," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.

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    More about this item

    Keywords

    tax avoidance; tax evasion; uncertainty; risk; behavioral economics; experimental economics;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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