Creating Failures in the Market for Tax Planning

Abstract:     
In this paper we consider the role of governments in designing their policy for tax planning strategies. We consider two distinct types of social costs: the cost associated with lost tax revenue, and the cost that arises from taxpayers' search for new methods to reduce their tax burden. Inevitably, reducing one of these costs comes at the expense of increasing the other; the government faces a tradeoff. By recognizing these costs and the tradeoff the government faces, we can better understand current tax policy. Moreover, a wider recognition of the tradeoff described above, and a systematic consideration of how to disrupt markets in tax planning activities, should lead to better tax policy.

Keywords: tax planning, tax enforcement policy, dissipation

JEL Classifications: K34, H26, H29

Accepted Paper Series