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109 | 2010
Annuaire du Collège de France 2008-2009
Résumé des cours et travaux 109e année
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Tax avoidance

Henry Ohlsson
p. 1055-1057

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  • 1  Origins to the proverb can be found in Daniel Defoe, 1726, The Political History of the Devil, and (...)

1The proverb: “Nothing is certain but death and taxes” is often cited. The inevitability of death is used to stress how difficult it is to avoid the taxes 1. Taxes have two main effects. First, they transfer purchasing power from households and firms to the public sector.

2Second, taxes create incentives to move from taxed activities to non taxed activities and from high tax activities to low tax activities. These changes in behavior might involve actions that are illegal; it is then a question of tax evasion.

3But the moves may very well be legal. Instead of tax evasion we might classify this as tax avoidance. But is it really reasonable to regard all changes in behavior to reduce tax payments that are legal as tax avoidance? In some cases the behavioral changes are the desired effects of the design of tax policy.

4An example of this is the more frequent use of environmental taxes. The primary objective of these taxes is to reduce activities of households and firms that are bad for the environment, not to raise tax revenue. If the taxes succeed in achieving this a policy objective if fulfilled and it would be strange to talk about tax avoidance. Another example is home production. It may seem farfetched to talk about avoidance when people, for example, produce agricultural products for own use in their gardens instead of buying on the market or when prepare food themselves rather than going to restaurants.

5Slemrod and Yitzhaki (2002) suggest a more narrow definition: tax avoidance is a set of actions that do not change the individual’s consumption basket (including leisure).

6Sometimes it is impossible to avoid taxes. These instances are loved by economists because taxes then do not distort behavior. Tax revenue can be raised without creating inefficiencies. Property taxes are an example of this. And for the very same reason that economists love this taxes – that they cannot be avoided – the very same taxes are hated by the general public.

7Taxes on actual transactions – purchases of goods and services or wage payments – receive much less opposition from the general public taxes based on some kind of imputed values. And this even if the VAT is much higher than the property tax. This may be because people might believe, rightly or wrongly, that the actual burden of the tax falls on the other party in the transaction. Or it might be because that the VAT might be possible to avoid.

8In his seminal work on tax avoidance, Stiglitz (1985) discusses the three basic principles of avoiding taxes:

  1. postponement of taxes;

  2. tax arbitrage across individuals facing different tax brackets, for example within a family;

  3. tax arbitrage across income streams facing different tax treatment.

9Corporations that operate in several countries might use transfer pricing to have profits appearing in the countries with the lowest corporate taxation.

10I have studied tax avoidance in some of my research papers. Nordblom and Ohlsson (2006) gives theoretical examples of tax avoidance according to Stiglitz’ third principle within the area of inheritance and gifts taxation. The empirical literature on who avoids taxes and to what extent they do it is rather limited. Ohlsson (2007) is an empirical study of Stiglitz’ second principle. It uses data on how Swedes have tried to avoid inheritance taxes by ceding their inheritance to their own children.

11It seems that older people are less likely to avoid taxes than younger people. It is, however, not clear in the literature if this is an age effect or a cohort effect. There is also empirical evidence that people do not minimize their tax payments. Tax arbitrage within the family might involve giving up control over economic resources and, therefore, losing power.

12How is avoiding taxes regarded by the general public? There are empirical studies suggesting that tax avoidance is perceived rather positively whereas tax evasion is perceived rather negatively. Social norms and tax morale are important determinants of tax compliance.

13It is very likely that tax avoidance decreases the efficiency of the economy although it is difficult to determine to what extent. Avoidance might involve the use of real resources that have alternative productive use. Avoidance may also force the government to increase tax rates in order to secure necessary revenue, this might increase excess burden of taxation.

14How then should the tax system be designed to avoid avoidance? Stiglitz’ three principles give some guidance. Tax avoidance will decrease if there are fewer opportunities to postpone taxes, if tax savings from arbitrage within the family are reduced, and if tax savings from arbitrage between different income streams are reduced.

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Burman L.E., Clausing K.A. and O’Hare J.F., 1994, “Tax Reform and Realizations of Capital Gains in 1986”, National Tax Journal, 47, no. 1, 1-18.

Kaplow L., 2007, “Taxation,”, Handbook of Law and Economics. Volume 1, 647-755.

Kay J.A., 1990, “Tax Policy: A Survey”, Economic Journal, 100, no. 399, 18-75.

Kirchler E., Maciejovsky B. and Schneider F., 2003, “Everyday Representations of Tax Avoidance, Tax Evasion, and Tax Flight: Do Legal Differences Matter?”, Journal of Economic Psychology, 24, no. 4, 535-553.

Nordblom K. and Ohlsson H., 2006, “Tax Avoidance and Intra-Family Transfers”, Journal of Public Economics, 90, no. 8-9, 1669-1680.

Ohlsson H., 2007, “Tax Avoidance – A Natural Experiment”, Working Paper, 2007,13, Department of Economics, Uppsala University.

Sandmo A., 2005, “The Theory of Tax Evasion: A Retrospective View”, National Tax Journal, 58, no. 4, 643-663.

Schmalbeck R., 2001, “Avoiding Federal Wealth Transfer Taxes”, In Rethinking estate and gift taxation, Washington, D.C., 113-158

Slemrod J. and Yitzhaki S., 2002, “Tax Avoidance, Evasion, and Administration”, In Handbook of Public Economics, Volume 3, 1423-1470.

Stiglitz J.E., 1985, “The General Theory of Tax Avoidance”, National Tax Journal, 38, no. 3, 325-337

Thurow L.C., 1975, Generating Inequality. New York, Basic Books.

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1  Origins to the proverb can be found in Daniel Defoe, 1726, The Political History of the Devil, and in a letter from Benjamin Franklin to Jean-Baptiste Leroy in 1789.

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Référence papier

Cours et travaux du Collège de France. Annuaire 109e année, Collège de France, Paris, mars 2010, p. 1055-1057. ISBN 978-2-7226-0083-6

Référence électronique

Henry Ohlsson, « Tax avoidance », L’annuaire du Collège de France [En ligne], 109 | 2010, mis en ligne le 25 juin 2010, consulté le 31 octobre 2014. URL :

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Henry Ohlsson

Professeur, université d’Uppsala (Suède)

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Droits d’auteur

Collège de France

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