Tax Evasion and Tax Avoidance

Exploiting rich administrative data and salient policy variation, we study the substitution between illegal tax evasion and legal tax avoidance. By increasing its enforcementeffort, the Norwegian government pushed many wealthy individuals to disclose assets previously hidden abroad. We find that the taxes paid by these individuals rise 30% at thetime of disclosure and that the rise is sustained over time. After stopping to evade, taxpayers do not start avoiding more. Our results suggest that cracking down on evasion bythe wealthy can be an effective way to raise tax revenue, increase tax progressivity, andultimately reduce inequality.