Tax Avoidance: Rational Ignorance of Law

Past decade has witnessed growing interest to tax avoidance across disciplines, outside the traditional law and accounting. This was at least partly stimulated by politicians, mass media, and public focussing on tax avoidance, often conflated with tax evasion, in many countries in the wake of the global financial and economic crisis. Changing definitions, controversies in the interpretation of concepts, rules, and policies appear to have led to inconsistency in the assessment of legality of various tax avoidance schemes by legislators, tax authorities, tax advisors, and taxpayers. These controversies and inconsistencies suggest that either parties sometimes are not fully aware of tax law, or the law is ambiguous, or both. The paper presents a game-theoretic model of tax avoidance under uncertainty in the tax law. This framework is used to address the following questions: (1) What influences the ruling of a tax authority on the legality of a tax avoidance scheme and the decision of a taxpayer on the involvement in a scheme? (2) Does more uncertainty in tax law encourage more avoidance? Some results are analysed and avenues for the future research are discussed.