On Double-Distortion Arguments, Distribution Policy, and the Optimal Choice of Tax Instruments

There are both administrative and political constraints on the extent to which real-world tax systems might plausibly be reformed. No one seriously suggests that tax avoidance and evasion could be completely eliminated in real-world contexts. To better cope with tax avoidance and evasion, and to complement attempts to reform existing tax systems, this research project argues that governments should also raise revenues and promote distribution through a number of supplementary policy instruments. Among other applications, this research project argues that governments should probably: (a) levy both personal labor-income taxes and value-added consumption taxes, (b) tax both capital income and wealth, and (c) make use of a number of other tax and non-tax legal rules for distributive purposes.This research project's policy prescriptions thus run counter to an influential set of arguments drawn from modern public-finance theory — sometimes called "double-distortion" arguments within the legal literature. This research project analyzes how the models underlying double-distortion arguments can be generalized to account for taxpayers engaging in a diverse variety of tax-gaming responses. This research project argues that generalizing double-distortion models in this fashion implies that governments should make use of a number of policy instruments in order to raise revenues and to promote distribution, contrary to the prescriptions typically drawn from double-distortion models. Consequently, this research project's analysis implies that governments may have much greater capacity to raise revenues and to promote distribution, at lower efficiency costs, than is generally recognized