Constructing compliance: Another look at game-playing in international taxation.

Abstract

It is now some 200 years since Adam Smith suggested his four `canons’ of a good tax system: equity, certainty, convenience and economy.1 We are still wrestling with the problems of achieving these ideals. From one point of view it could be said that tax systems have become remarkably effective, at least in OECD countries, where tax revenues amounted on average to some 37% of GDP in 2001. On the other hand, most of those who work with or study tax systems, let alone the general public who are exposed to them, would probably think that Smith’s standards are some way from being met. This paper aims to make a further contribution to some of the recent debates about the improvement of tax systems and the problem of tax compliance. My own interests are in international taxation and tax avoidance, but in discussing the issue of compliance and avoidance in this paper, I will also give some consideration to small business and individual taxpayers. The first part of the paper explores the question of interpretation of rules and the problem of avoidance and game-playing. My starting-point is the issue of lack of clarity or indeterminacy of rules and how they are interpreted, which brings in the question of creativity. Here I discuss in particular the work of Doreen McBarnet, although I take a slightly different approach to the issue of creativity. I explore this in the context of the historical development of international taxation principles. This leads on to the issue of fairness and complexity in tax law, and the relationship between the way tax rules are formulated and taxpayer attitudes, and in turn to the issue of the relationship between detailed rules and broad principles and standards, which has recently been explored by John Braithwaite, following up work by David Weisbach and others, and applied to taxation. My approach gives I think added weight to John Braithwaite’s proposal for the use of broad principles in conjunction with exemplary (but not exhaustive) detailed rules in tax law. However, I suggest that this approach should not be limited to the adoption of a broad anti-avoidance principle (usually referred to, confusingly, as a general antiavoidance rule or GAAR), but should be applied to the tax code more generally. I end by exploring the issue of improving compliance by the general run of individual taxpayers and reducing their propensity to game-playing and avoidance, in relation to those taxpayers’ views about the fairness of the tax code in general, and to the ability of large taxpayers to employ game-playing and avoidance techniques.