Embracing Tax Avoidance

Tax avoidance attracts a great deal of attention from both academics and policymakers. To combat the phenomenon, Congress has enacted numerous statutory provisions that either deny beneficial treatment when one of the taxpayer’s principal purposes was tax avoidance or attempt to dissuade taxpayers from engaging in tax avoidance by making it more difficult, more inconvenient, or riskier to do so. Courts have developed a series of overlapping doctrines to police and limit tax avoidance. The regulations expound on both the judicial and statutory themes, creating an elaborate network of rules that clarify in often excruciating detail when taxpayers are viewed as having engaged in tax avoidance and that attempt to deny such taxpayers the benefits they seek.<br><br>This article argues that the traditional response to tax avoidance has prevented us from appreciating the gifts that it has to offer. Rather than devoting our limited legislative, administrative, judicial, and academic resources to waging what is likely an unwinnable war, we should instead embrace tax avoidance for the invaluable insight it affords into the innermost workings of the tax system.<br><br>A careful and dispassionate analysis of tax planning maneuvers can provide us with difficult-to-obtain information that is crucial for fundamental and deep-rooted reform. This reform is not the introduction of more effective anti-avoidance measures: it would make little sense to view tax avoidance as a gift if the only insight it offers is how to prevent tax avoidance. The incongruities in the tax system that permit tax avoidance are problematic in their own right. They are always horizontally inequitable. They are often vertically inequitable. They are usually distortionary. By reverse engineering tax avoidance schemes we can uncover these fissures. True, some fissures are so deep that even with the guiding light of tax planning maneuver uncovering them can present a challenge. However, the deeper the fissures are buried, the more difficult it is to discover them by any other means and the more far-reaching their detrimental effects are likely to be as their fault lines radiate out to the surface. Consequently, the deeper the fissures are located the more indispensable the insight offered by tax avoidance. In other cases, we may be aware of the fissure, but not fully aware of all its consequences. Here, too, procuring the information provided by tax avoidance is an invaluable first step to remedying the incongruity.<br><br>If the tax community’s collective response to tax avoidance were reasoned self-reflection rather than visceral condemnation, the value that it could extract from tax avoidance would be immeasurable. Current practice is to leave the underlying fissures intact and to focus attention on preventing taxpayers from exploiting the opportunities that those fissures present. Such an approach is not only likely to prove ineffective, but it risks squandering the gift that tax avoidance provides: a roadmap to a more equitable, efficient, and coherent tax system.