Tax avoidance by companies: an empirical test of hypothesis

Abstract

It is often argued that the marginal (and average) income tax rates directly related with the degree of tax avoidance and evasion by the individual tax payers. The basic idea underlying this proposition is that as the income tax rates raises, the taxpayers so try to adjust their economic affairs as to reduce their taxable incomes and hence their tax liability. The attempt (a) to substitute non-taxable incomes for the taxable ones, (b) to claim as large a sum as possible by way of tax free deductions and allowances, and (c) even to conceal certain parts of their incomes from the income tax authorities. The former two are the tax avoidance devices and the latter tax evasion. While the scope of the tax avoidance devices would depend on the provisions and structure of income taxation, the frequency with which latter will be resorted to would also depend upon the penalties in case concealed incomes are brought to light.