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American Law and Economics Review V4 N1 2002 (88-115)
© 2002 American Law and Economics Association

Article

An Economic Analysis of Anti-Tax-Avoidance Doctrines

David A. Weisbach

University of Chicago Law School

Send correspondence to: David A. Weisbach, University of Chicago Law School, 1111 E. 60th Street, Chicago, IL 60637; E-mail: d-weisbach{at}uchicago.edu

Abstract

This article analyzes the effect of tax law doctrines designed to reduce tax shelters, such as the business-purpose doctrine, and the economic-substance doctrine. The article analyzes these doctrines as changes to the marginal elasticity of taxable income. As these doctrines are strengthened, the elasticity of taxable income goes down (in absolute value). By reducing the marginal elasticity of taxable income, the doctrines increase the efficiency of the tax system. Because the doctrines cannot perfectly identify tax avoidance, however, they induce a distortionary response by taxpayers, who may structure shelters to avoid the doctrines. This distortionary effect reduces their efficiency. The net benefit should be set equal on the margin to the marginal administrative cost of the doctrines.


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