Tax planning is an area of growing interest and this paper is an attempt to contribute to the small formal literature on this topic. The paper analyzes the case of tax planning that manipulates the tax system to impose lower effective tax rates on gains than on losses, and proves that such tax planning may provide firms with an incentive to produce more than the social optimum. This inefficiency is different from the general inefficiency entailed by income taxation, captured by the conventional notion of excess burden. A low asymmetric tax may be more distortive than a high symmetric tax rate.
Bibliographical noteFunding Information:
* The authors would like to thank Michael Rabin for his invaluable help with the proof; David Weisbach for his excellent comments on an earlier version presented at a conference at the University of Michigan, and an anonymous referee for very helpful comments and suggestions that significantly improved the paper. Yoram Margalioth would also like to thank the Cegla Center for Interdisciplinary Research of Law for financial support.
ASJC Scopus subject areas
- Economics, Econometrics and Finance (all)