Price Discrimination in Income Taxation

Abstract

Governments throughout the developed world 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 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 fail to provide an explanation of the circumstances that will give rise to aggressive measures countering tax avoidance.

This paper introduces the “integrated price discrimination” account of income taxation. The integrated price discrimination account provides an original and superior explanation of lax anti-avoidance. An advantage of the integrated price discrimination account is that it better explains the observed practice of most developed countries. Another advantage of the price discrimination account is that it does not require that governments adopt this counter-intuitive approach consciously; it could simply be an unintentional byproduct of decisions taken for different reasons. Several policy implications of the integrated price discrimination account are addressed.

Keywords: tax avoidance, GAAR, tax expenditures, rule of law, political economy, price discrimination, optimal tax theory

JEL Classification: H21, L0, L10, D11, D21