Kathleen DeLaney Thomas (North Carolina), How Should We Think About Wealth Tax Avoidance? (JOTWELL) (reviewing Diana Onu (Exeter), Lynne Oats (Exeter), Erich Kirchler (WU Vienna), & Andre Julian Hartmann (Vienna), Gaming the System: An Investigation of Small Business Owners' Attitudes to Tax Avoidance, Tax Planning, and Tax Evasion, 10 Games 46 (2019)):
A recently published empirical study by Diana Onu, Lynne Oats, Erich Kirchler, and Andre Julian Hartmann compares taxpayer attitudes towards acceptable tax planning, aggressive (yet legal) tax avoidance, and illegal tax evasion. While the study itself examines small business owners subject to income tax in the U.K., its implications should be of great interest to policymakers concerned about legal avoidance strategies with respect to any tax base. For example, aggressive but legal tax avoidance might be an important concern under recent wealth tax proposals in the United States.
As noted by the study’s authors, tax compliance literature has traditionally focused on the binary choice between compliance and evasion. That literature explores the various underpinnings of the decision to evade, from deterrence theory, to social norms, to attitudes that evasion is a victimless crime. But largely absent from this literature on individual taxpayers are studies of the motivations underlying aggressive, yet legal, tax avoidance strategies.
In thinking about the U.S. tax system, this makes sense. Aggressive avoidance strategies are typically attributed to firms, where individual attitudes and other psychological factors are arguably less relevant. Evasion, on the other hand, is typically attributed to individual taxpayers (most often, sole proprietors), who often lack the resources to employ aggressive yet legal avoidance strategies. But if the U.S. were to adopt a wealth tax like the one proposed by Elizabeth Warren, the stakes or potential payoffs from avoidance might grow. If so, individual level avoidance strategies would presumably become much more commonplace.
So what do we know about the psychological factors that motivate legal tax avoidance, as distinct from evasion? It turns out, not much, but the study by Onu, Oats, Kirchler, and Hartmann sheds some light on this question. ...
It may be that the high marginal rates throughout much of the 20th century were possible because beliefs about the tax system were much different than they are today. For example, if today’s taxpayers have low tax morale and perceive that they are being treated unfairly by the tax system, we may in fact see more legal avoidance than in years past. The study by Onu, Oats, Kirchler, and Hartmann suggests that taxpayer beliefs may be one of the most important drivers of avoidance behavior. Policymakers would be well advised, therefore, to take such beliefs into account in designing taxes and take steps to combat low tax morale and perceptions of unfairness.