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.
WP 09/22 David Ulph, Avoidance Policies – A New Conceptual Framework
Research Highlight 2009
What are the effects of alternative anti-avoidance policies?
This research develops a general framework to analyse how taxpayers are likely to respond to a market that supplies a variety of schemes for reducing tax liabilities. These schemes differ in their legal effectiveness and hence in the risks to which they expose taxpayers. The framework is used to explore the impact of a range of four generic anti-avoidance policies: disclosure, penalties, policy design, and the introduction of GAARs or mini-GAARs that give greater clarity about how different types of scheme will be treated. The theoretical model shows how these different policies affect both the use of schemes overall, and how taxpayers choose between different types of scheme. The first three policies deter taxpayers from using schemes generally, but differ in how they induce tax payers to switch between different types of scheme. The fourth produces mixed deterrence effects.