Tax arbitrage and labor supply

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the basic labor supply model. We show that models that integrate tax arbitrage and labor supply decisions may shed light on a number of positive and normative questions concerning modern systems of income taxation. Such models also appear to have striking implications for empirical research. Studies that ignore tax avoidance may easily come up with biased estimates of the tax responsiveness of the labor supply of high-wage individuals. Also, because of tax avoidance, international comparisons of income inequality will exaggerate the redistributive achievements of high-tax countries like Sweden. (C) 2000 Elsevier Science S.A. All rights reserved.