An Economic Analysis of Anti-Tax-Avoidance Doctrines

This article analyzes the effect of tax law doctrines designedto reduce tax shelters, such as the business-purpose doctrine,and the economic-substance doctrine. The article analyzes thesedoctrines as changes to the marginal elasticity of taxable income.As these doctrines are strengthened, the elasticity of taxableincome goes down (in absolute value). By reducing the marginalelasticity of taxable income, the doctrines increase the efficiencyof the tax system. Because the doctrines cannot perfectly identifytax avoidance, however, they induce a distortionary responseby taxpayers, who may structure shelters to avoid the doctrines.This distortionary effect reduces their efficiency. The netbenefit should be set equal on the margin to the marginal administrativecost of the doctrines.