Thursday, September 20, 2007
The paper uses a consequential perspective to explore the design features of a target-effective general anti-avoidance rule (“GAAR”). As emphasized by David Weisbach, this perspective frames tax-avoidance activity in terms of its allocative and distributional effects. Most importantly, it supports the proposition that there is nothing in the consequential attributes of tax avoidance that justify its acceptance by tax policymakers. Instead, tax avoidance should be viewed as any other market activity generating negative externalities, and externality theory suggests appropriate policy instruments that can be used to eliminate the consequential attributes of avoidance behavior. Different types of tax avoidance present, however, different identification issues that, in fact, lie at the core of the different concepts of tax avoidance that are the focus of economics and law.
In assessing the content of a GAAR, the paper makes five separate, but related, points. First, the distinction between GAARs, as currently conceived, and judicial anti-avoidance doctrines is an overly sharp one, with both forms of behavioral prohibition suffering from problems of under-inclusiveness, albeit for different reasons. Second, the relevance of the statutory interpretation exercise in the identification of prohibited behavior should be much more limited than is currently the case. Third, two different concepts of economic substance provide the basis for a legislative response tailored to apply differently to different types of tax-avoidance transactions. Fourth, the judiciary has the institutional competence to apply and enforce a GAAR or articulate anti-avoidance doctrines as a response to tax-attribute creation and tax-attribute trading transactions; but such competence is much more limited with instances of transactional substitution. This type of tax-avoidance activity presents many of the same identification difficulties presented by real behavioral adjustments to taxation, which are the focus of the concept of tax avoidance in economics. Except for a limited range of transactional substitutions, the associated informational requirements are not amenable to the application and enforcement of a purpose-based behavioral prohibition. Fifth, a target-effective behavioral prohibition, which requires the incorporation of each of these design features, can only be realistically realized in the form of a GAAR.