CRIEFF Discussion Paper
Number 0908
Avoidance Policies – A New Conceptual Framework
David Ulph
Abstract
This paper develops a general theoretical
framework within which a heterogeneous group taxpayers confront a market that
supplies a variety of schemes for reducing tax liability, and uses this
framework to explore the impact of a wide range of anti-avoidance policies. Schemes
differ in their legal effectiveness and hence in the risks to which they expose
taxpayers - risks which go beyond the risk of audit considered in the
conventional literature on evasion. Given the individual taxpayer’s
circumstances, the prices charged for the schemes and the policy environment, the
model predicts (i) whether or not any given taxpayer
will acquire a scheme, and (ii) if they do so, which type of scheme they will
acquire.
The paper then analyses how these decisions, and
hence the tax gap, are influenced by four generic types of policy:
- Disclosure – earlier information leading
to faster closure of loopholes;
- Penalties
– introduction of penalties for failed avoidance;
- Policy
Design – fundamental policy changes that design out opportunities for
avoidance;
- Product
Register - the introduction of GAARs or mini-GAARs that give greater clarity about how different
types of scheme will be treated.
The paper shows that when considering the
indirect/behavioural effects of policies on the tax gap
it is important to recognise that these operate on
two different margins. First policies will have deterrence effects – their
impact on the quantum of taxpayers choosing to acquire different types schemes as distinct to acquiring no scheme at all. There
will be a range of such deterrence effects reflecting the range of schemes
available in the market. But secondly, since different schemes generate
different tax gaps, policies will also have switching effects as they induce taxpayers who previously acquired
one type of scheme to acquire another. The first three types of policy generate
positive deterrence effects but differ in the switching effects they produce. The
fourth type of policy produces mixed deterrence effects.
JEL
Classifications: H26; H30.
Keywords: Tax Avoidance; Supply Side;
Risks; Tax Schemes; Disclosure; Guidance; Penalties; Tax Policy
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