Price Discrimination in Income Taxation

Governments throughout the developed world claim to worry incessantly about the implications of sophisticated tax planning for their tax revenues. And yet the same governments routinely stop short of doing all that they can legally do to combat tax avoidance. Why? One response is that a thick conception of the rule of law constrains governments to adopt only certain kinds of responses to tax avoidance. Another response is that inherent structural limitations in tax administrative capacity or features of the political economy environment constrain the available responses to a subset of those that are possible de jure. Even considered jointly, however, the rule of law and the straightforward political economy explanations do not provide an adequate account of the observed behavior of governments in the context of anti-avoidance. The main inadequacy is that the accounts do not provide an explanation of the circumstances that give rise to prolonged periods of inaction with respect to tax avoidance nor do they identify the circumstances that yield aggressive measures. This paper introduces an integrated price discrimination account of anti-avoidance. An advantage of the integrated price discrimination account is that it better explains the observed practice of most developed countries with respect to anti-avoidance. Another advantage of the price discrimination account is that it does not require that governments adopt this approach consciously; it could simply be an unintentional byproduct of uncoordinated decisions taken by many government actors for disparate reasons. Several policy implications of the integrated price discrimination account are addressed