Policies to reduce aggressive tax avoidance are increasingly being implemented or discussed in many countries around the world. Tax authorities hope that such policies will generate new tax revenue by increasing overall tax compliance. We present an experimental design to investigate the effect of a stylized anti-avoidance tax policy on tax compliance behavior. We highlight that anti-avoidance tax policies that reduce tax avoidance can also induce an increase in tax evasion (“substitution effect”), which limits the additional tax revenue these policies will generate. We show that the degree of substitution depends crucially on behavioral factors such as tax morale. Policymakers therefore also need to consider behavioral features while designing such policies and estimating their potential effects.
We would like to thank the participants at the New York University (AD) Global Network Experimental Social Sciences Workshop. We would also like to extend special thanks to Dan Benjamin, David Cesarini, Chetan Dave, Guillaume Frechette, Max Mihm, Rebecca Morton, Nikos Nikiforakis, Jonathan Rogers, Andrew Schotter, Simon Siegenthaler, Joachim Weimann and the anonymous reviewers for their suggestions and comments.
- Anti-avoidance tax rules (AAR)
- Aggressive tax avoidance
- Tax evasion