This Article analyzes the meaning of probability statements in tax law and in scholarship addressing civil tax penalties. Specifically, the Article draws on economics and the philosophy of mathematics to argue that because tax law is substantively uncertain, some probability statements in tax law are best understood as a reflection of the speaker's belief, rather than as a description of the number of times a given event will occur over the long run out of the number of times that it could occur. That is, these tax probability statements are best understood using a subjectivist interpretation of probability, rather than frequentist interpretation. Prior work in tax law scholarship in particular, and law and economics in general, has glossed over or misunderstood this crucial distinction.
Understanding that probability statements in tax law should be given a subjectivist interpretation changes both the theory and the practice of tax compliance. First, because tax probabilities represent beliefs, different parties--for example, Congress (the penalty-setter) on the one hand, and taxpayers on the other--may have different perceptions of the chances that a given transaction is permissible, and economic models should reflect these possibly disparate beliefs. Second, a subjectivist interpretation of tax probabilities provides additional support for stringent and much-criticized laws that regulate the substance of tax advisors' written opinions, as these strict rules may actually help tax advisors arrive at more accurate, less biased estimates of the chance that a tax position would be upheld by a court. And finally, a subjectivist interpretation suggests that lawmakers should be cautious of reducing tax law's uncertainty. If, as empirical work suggests, some taxpayers have an aversion to uncertainty, the uncertainty associated with whether certain questionable transactions are permitted (aside from any penalties imposed if transactions do turn out to be forbidden) may itself reduce the number of taxpayers who engage in these transactions.