Example Of How Tax Increases Promote Tax Planning

Does higher tax rates really increase tax revenues? At current rates in the United States and most other countries, I would say "probably yes, but not by as much as a static analysis (one that assumes no effect on the tax base) would suggest".

That is in part because it leads to less productive activity which both reduce the tax payments for the individuals who react as well as those that would have benefited from these actions, and in part it is because it will lead to increased tax avoidance activities, both in the form of legal tax planning and illegal tax evasion.

The New York Times now reports of an example of tax planning activities in the form of Wall Street firms moving bonuses that would have otherwise been paid next year to this year, because there is a risk that the Bush tax cuts won't be extended.