The Economics of

Avoidance and Evasion

Edited by

Dhammika Dharmapala

Julius Kreeger Professor of Law University of Chicago Law School, USA

THE INTERNATIONAL LIBRARY OF CRITICAL WRITINGS IN ECONOMICS

An Elgar Research CoIIection Cheltenham, UK • Northampton, MA, USA Contents

Acknowledgements xi Introduction xv

PART I PIONEERING CONTRIBUTIONS TO THE THEORY OF

1. Michael G. Allingham and Agnar Sandmo (1972), ' Evasion: A Theoretical Analysis', Journal of , 1 (3—4), 323-38 3 2. T.N. Srinivasan (1973), 'Tax Evasion: A Model', Journal of Public Economics, 2 (4), 339—46 19 3. Shlomo Yitzhaki (1974),'A Note on Income Tax Evasion: A Theoretical Analysis', Journal of Public Economics, 3 (2), 201-2 27

PART II PIONEERING EMPIRICAL STUDIES OF TAX EVASION

4. Charles T. Clotfelter (1983), 'Tax Evasion and Tax Rates: An Analysis of Individual Returns', Review of Economics and Statistics, LXV (3), August, 363-73 31 5. Jonathan S. Feinstein (1991), 'An Econometric Analysis of Income Tax Evasion and its Detection', RAND Journal of Economics, 22 (1), Spring, 14-35 42 6. James Alm, Gary H. McClelland and William D. Schulze (1992), 'Why do People Pay ?', Journal of Public Economics, 48(1), June, 21-38 64 7. , Marsha Blumenthal and Charles Christian (2001), 'Taxpayer Response to an Increased Probability of Audit: Evidence from a Controlled Experiment in Minnesota', Journal of Public Economics, 79 (3), March, 455-83 82 8. Marsha Blumenthal, Charles Christian and Joel Slemrod (2001), 'Do Normative Appeals Affect Tax Compliance? Evidence from a Controlled Experiment in Minnesota', National Tax Journal, LIV (1), March, 125-38 111 vi The Economics ofTax Avoidance and Evasion

PART III THEORIES OF TAX AUDITING: PRINCIPAG-AGENT AND GAME-THEORETIC PERSPECTIVES

9. Jennifer F. Reinganum and Louis L. Wilde (1985), 'Income Tax Compliance in a Principal-Agent Framework', Journal of Public Economics, 26 (1), February, 1-18 127 10. Michael J. Graetz, Jennifer F. Reinganum and Louis L. Wilde (1986), 'The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement', Journal ofLaw, Economics and Organization, 2 (1), Spring, 1-32 145 11. Parkash Chander and Louis L. Wilde (1998), A General Characterization of Optimal Income Tax Enforcement', Review of Economic Studies, 65 (1), January, 165-83 177

PART IV TOPICS IN TAX ADMINISTRATION

12. Joel Slemrod and Shlomo Yitzhaki (1987), 'The Optimal Size of a Tax Collection Agency', Scandinavian Journal of Economics, 89(2), June, 183-92 199 13. Parkash Chander and Louis Wilde (1992), 'Corruption in Tax Administration', Journal of Public Economics, 49 (3), December, 333-49 209 14. Dhammika Dharmapala, Joel Slemrod and John Douglas Wilson (2011), ' and the Missing Middle: Remittance with Firm-Level Administrative Costs', Journal of Public Economics, 95 (9-10), October, 1036—47 226 15. Adnan Q. Khan, Asim 1. Khwaja and Benjamin A. Olken (2016), 'Tax Farming Redux: Experimental Evidence on Performance Pay for Tax Collectors', Quarterly Journal of Economics, 131 (1), February, 219-71 238

PART V THE IMPLICATIONS OF TAX EVASION FOR THE THEORY OF OPTIMAL TAXATION

16. Louis Kaplow (1990), 'Optimal Taxation with Costly Enforcement and Evasion', Journal of Public Economics, 43 (2), November, 221-36 293 17. Helmuth Cremer and Firouz Gahvari (1996), 'Tax Evasion and the Optimum General Income Tax', Journal of Public Economics, 60 (2), May, 235-49 309 The Economics ofTaxAvoidance and Evasion vii

PART VI EVASION: THEORETICAL PERSPECTIVES

18. Kong-Pin Chen and C.Y. Cyrus Chu (2005), 'Internal Control versus Extemal Manipulation: A Model of Corporate Income Tax Evasion', RAND Journal of Economics, 36 (1), Spring, 151-64 327 19. Keith J. Crocker and Joel Slemrod (2005), 'Corporate Tax Evasion with Agency Costs', Journal of Public Economics, 89 (9-10), September, 1593-610 341

PART VII INFORMATION REPORTING AND THE ROLE OF INTERMEDIARIES IN TAX COMPLIANCE

20. Henrik Jacobsen Kleven, Martin B. Knudsen, Claus Thustrup Kreiner, Seren Pedersen and Emmanuel Saez (2011), 'Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark', Econometrica, 79 (3), May, 651-92 361 21. Dina Pomeranz (2015), 'No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax', American Economic Review, 105 (8), August, 2539-69 403 22. Henrik Jacobsen Kleven, Claus Thustrup Kreiner and Emmanuel Saez (2016), 'Why Can Modem Govemments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries', Economica, 83 (330), April, 219-46 434

PART VIII CROSS-BORDER TAX EVASION

23. Philippe Bacchetta and Maria Paz Espinosa (1995), 'Information Sharing and among Govemments', Journal of International Economics, 39(1-2), August, 103-21 465 24. (2013), 'The Missing Wealth ofNations: Are Europe and the U.S. Net Debtors or Net Creditors?', Quarterly Journal of Economics, 128 (3), 1321-64 484

PART IX GENERAL PERSPECTIVES ON

25. Joseph E. Stiglitz (1985), 'The General Theory of Tax Avoidance', National Tax Journal, XXXVIII (3), September, 325-37 531 26. Alan J. Auerbach (1991), 'Retrospective Capital Gains Taxation', American Economic Review, 81 (1), March, 167-78 544 27. David A. Weisbach (2002), 'An Economic Analysis of Anti-Tax- Avoidance Doctrines', American Law and Economics Review, 4 (1), Spring, 88-115 556 viii The Economics ofTax Avoidance and Evasion

PART X CORPORATE TAX AVOIDANCE

28. Mihir A. Desai and Dhammika Dharmapala (2006), 'Corporate Tax Avoidance and High-powered Incentives', Journal of Financial Economics, 79 (1), January, 145-79 587 29. Mihir A. Desai and Dhammika Dharmapala (2009), 'Corporate Tax Avoidance and Firm Value', Review of Economics and Statistics, 91 (3), August, 537—46 622 30. Michelle Hanion and Joel Slemrod (2009), 'What does Tax Aggressiveness Signal? Evidence from Stock Price Reactions to News about Involvement', Journal of Public Economics, 93 (1-2), February, 126—41 632

PART XI BASE EROSION AND PROFIT SHIFTING BY MULTINATIONAL FIRMS

31. James R. Hines, Jr. and Eric M. Rice (1994), 'Fiscal Paradise: Foreign Tax Hävens and American Business', Quarterly Journal of Economics, 109 (1), February, 149-82 651 32. Harry Huizinga and Luc Laeven (2008), 'International Profit Shilling within Multinational: A Multi-country Perspective', Journal of Public Economics, 92 (5-6), June, 1164-82 685 33. Dhammika Dharmapala and Nadine Riedel (2013), 'Earnings Shocks and Tax-motivated Income-shifting: Evidence from European Multinationals', Journal of Public Economics, 97, January, 95-107 704

PART XII TAX AVOIDANCE AND THE DEADWEIGHT LOSS OF TAXATION

34. (1999), 'Tax Avoidance and the Deadweight Loss of the Income Tax', Review of Economics and Statistics, 81 (4), November, 674-80 719 35. Joel Slemrod (2001), 'A General Model of the Behavioral Response to Taxation', International Tax and Public Finance, 8 (2), March, 119-28 726 36. Raj Chetty (2009), '1s the Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance', American Economic Journal: Economic Policy, 1 (2), August, 31-52 ' 736 The Economics ofTaxAvoidance and Evasion ix

PART XIII BUNCHING ANALYSIS OF TAX EVASION AND AVOIDANCE: EVIDENCE FROM NOTCHES AND KINKS

37. Joel Slemrod (1985), 'An Empirical Test for Tax Evasion', Review of Economics andStatistics, 67 (2), May, 232-38 761 38. Emmanuel Saez (2010), 'Do Taxpayers Bunch at Kink Points?', American Economic Journal: Economic Policy, 2 (3), August, 180-212 768 39. Michael Carlos Best, Anne Brockmeyer, Henrik Jacobsen Kleven, Johannes Spinnewijn and Mazhar Waseem (2015), 'Production versus Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan', Journal ofPoliticalEconomy, 123 (6), October, 1311-55 801

PART XIV THE CONSEQUENCES OF TAX AMNESTIES AND OF TAX HOLIDAYS FOR MULTINATIONAL FIRMS

40. James Andreoni (1991), 'The Desirability of a Permanent Tax Amnesty', Journal of Public Economics, 45 (2), 143-59 849 41. Dhammika Dharmapala, C. Fritz Foley and Kristin J. Forbes (2011),'Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act', Journal of Finance, LXVI (3), June, 753-87 866

PART XV THE CHARACTERISTICS OF TAX HÄVENS AND THEIR ROLE IN TAX AVOIDANCE AND EVASION

42. Mihir A. Desai, C. Fritz Foley and James R. Hines, Jr. (2006), 'The Demand for Tax Häven Operations', Journal of Public Economics, 90 (3), March, 513-31 903 43. Dhammika Dharmapala and James R. Hines, Jr. (2009), 'Which Countries become Tax Hävens?', Journal of Public Economics, 93 (9-10), October, 1058-68 922 44. Niels Johannesen and Gabriel Zucman (2014), 'The End of Bank Secrecy? An Evaluation of the G20 Tax Häven Crackdown', American Economic Journal: Economic Policy, 6 (1), February, 65-91 933