Labour Supply Prediction When Tax Avoidance Matters

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the empirical study of labor supply. We discuss the implications for tax policy analysis, and we show that a failure to account for avoidance re-sponses may lead to huge errors when predicting how tax reform affects labor supply, tax revenue, and the welfare cost of taxation. In conclusion we argue that our model may explain a number of otherwise hard to understand dimen-sions of tax payer response.