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Tax Avoidance, Evasion, and Administration
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2000
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Tax structure changes trigger a range of behavioral responses beyond consumption shifts, including adjustments to accounting instructions, reporting, transaction timing, and other actions. The survey contends that recognizing diverse behavioral responses to tax changes alters conclusions about incidence, progressivity, and optimal structure, and introduces new policy questions about administration and enforcement resource allocation. The study finds that for marginal cost of funds only the magnitude of behavioral response matters, that labor supply responses are largely preference‑driven, and that avoidance and evasion responses can be shaped by policy instruments, making elasticity itself a policy lever.
When tax structure changes, people may alter their consumption basket, but they also may call and give new instructions to their accountant, change their reports to the IRS, change the timing of transactions, and undertake a range of other actions that do not directly involve a change in their consumption basket. This survey argues that acknowledging the variety of behavioral responses to taxation changes the answers to traditional subjects of inquiry such an incidence, optimal progressivity, and optimal tax structure, and also raises a whole new set of policy questions, such as the appropriate level of resources to devote to administration and enforcement, and how these resources should be deployed. For some purposes, such as estimating the marginal cost of funds, and subject to some qualifications, the nature of the behavioral response does not matter, and only the total magnitude of response does. However, with respect to real behavioral responses such as labor supply, it is natural to presume that the response is an immutable function of preferences. With respect to avoidance and evasion, though, this is not appropriate because there are a variety of policy instruments that can affect the magnitude of responses, implying that the elasticity of response is itself a policy instrument.