NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The General Theory of Tax Avoidance

Joseph E. Stiglitz

NBER Working Paper No. 1868 (Also Reprint No. r0987)
Issued in March 1986
NBER Program(s):   PE

This paper outlines a general set of principles for tax avoidance. Most of at least the common tax avoidance schemes can be reinterpreted as making use of one or more of these principles. Four such methods are described. In a perfect capital market, these methods would enable the astute taxpayer to eliminate all taxation on capital income. The fact that the tax system raises revenue is attributed to lack of astuteness of the taxpayer and/or lack of perfection of the capital market. Accordingly, models which attempt to analyze the effects of taxation assuming rational, maximizing taxpayers working within a perfect capital market may give misleading results.A full analysis of tax avoidance cannot be conducted within a partial equilibrium model; transactions which reduce one individual's tax liability may at the same time increase another's.We delineate tax avoidance schemes which reduce the aggregate tax liabilities of the participants. Much of the"general equilibrium" gain from tax avoidance arises from differences in tax rates, both across individuals and across classes of income. Our analysis is shown to have implications both for patterns of ownership of assets and the timing of transfers.

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Document Object Identifier (DOI): 10.3386/w1868

Published: Stiglitz, Joseph E. "The General Theory of Tax Avoidance," National Tax Journal, Volume XXXVIII, No. 3, September 1985, pp. 325-338.

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