Perverse incentives Complexity of the tax code in developed economies offers perverse tax incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion. These not only result in lost revenue but involve additional costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for sales tax, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.
perverSe incentIvEs compLExitY OF the tAx code iN develOPed ecOnOmiEs Offers pErVERse tax InCenTiVes. the moRE detAiLS Of tax polICy THERE are, tHe more oppOrtunItIES FOR legal tax avoidaNCe anD illegal Tax evAsiOn. tHeSE nOt only rEsuLt In losT reVenue But inVolve addItioNAl costS: fOR INStance, PAymENts made for TAx adVice aRe eSsENtiaLly deAdWeigHt cOsts becaUSE THeY aDD no wEAltH To The EcoNomy. PerverSE iNcENTIveS AlsO oCcur beCAusE of non-TaxaBle 'hiDDeN' trAnsactIons; for INstanCe, a saLe FRoM onE cOmpaNy to aNotHer mIgHT bE lIAble for saleS tAX, but If the saMe GooDs wERe shipped from one branch of a COrporAtion to ANoTHer, NO tAx wOUld be PayAble.