The Economics of Corporate Tax Selfishness

TLDR

This paper offers an economics perspective on corporate tax evasion and abusive avoidance. The study examines how the Allingham‑Sandmo model of tax evasion must be adapted for public corporations and proposes increased disclosure of corporate tax activities to the IRS and the public. The authors review evidence on corporate tax noncompliance, analyze the supply and demand of aggressive tax planning, and assess how a supply‑and‑demand framework informs the incidence, efficiency cost, and justification of corporate income tax. They find that a supply‑and‑demand perspective reveals substantial incidence and efficiency costs, supporting the case for a distinct corporate income tax.

Abstract

This paper offers an economics perspective on tax evasion and abusive avoidance done by corporations. It first reviews what is known about the extent and nature of corporate tax noncompliance and the resources devoted to enforcement. It then addresses the supply side of aggressive corporate tax planning—the industrial organization of the tax shelter industry—as well as the demand for corporate tax evasion and abusive avoidance, focusing on how the standard Allingham-Sandmo approach to tax evasion needs to be modified when applied to public corporations. It then discusses the implications of a supply-and-demand approach for the analysis of the incidence and efficiency cost of corporate income taxation, and the very justification for a separate tax on corporation income. Along the way it addresses policy proposals aimed at increased disclosure of corporate tax activities to both the IRS and to the public.