Avoiding the taxman
Posted March 9, 2008on:
Talking to Agnitio today, he mentioned that the result of having a top personal tax rate above the company tax rate is tax avoidance and evasion. The idea being that people with wealth will try to pipe income through businesses to avoid paying the top tax rate. Well, it seems he’s empirically justified in that view (kinda). According to a study of the Russian flat tax reported on VoxEU, the greatest gains to be made through a flat tax are in reduction of tax evasion:
The adoption of a flat rate income tax is not generally expected to lead to significant increases in tax revenues because labour supplies are believed to be fairly inelastic. However, if an economy is plagued by ubiquitous tax evasion, as was the case in Russia, then a flat rate income tax reform may lead to substantial revenue gains via increased voluntary compliance. At the same time, a strong evasion response suggests that the efficiency gains from the Russian tax reform perhaps are smaller than previously thought.
I don’t think that NZ has tax evasion problems like Russia does, so maybe the revenue gains aren’t there to be made and the efficiency gains are minimal at best. However, there are surely efficiency gains from re-allocating resources away from tax avoidance to be made by reducing the top tax rate.
Note that this doesn’t show that flat taxes or a lowering of the top tax rate is a good idea. To do that one would have to take in to account the social cost of reduced redistribution of income, and the cost of reduced government revenues (if you think they exist).