Building a Better GAAR

Posted: 12 Sep 2007

Date Written: September 10, 2007


The paper uses a consequential perspective to explore the design features of a target-effective general anti-avoidance rule ("GAAR"). As emphasized by David Weisbach, this perspective frames tax-avoidance activity in terms of its allocative and distributional effects. Most importantly, it supports the proposition that there is nothing in the consequential attributes of tax avoidance that justify its acceptance by tax policymakers. Instead, tax avoidance should be viewed as a negative externality, and externality theory suggests appropriate policy instruments that can be used to eliminate the consequential attributes of avoidance behavior. Different types of tax avoidance present, however, different identification issues that, in fact, lie at the core of the different concepts of tax avoidance that are the focus of economics and law.

It is suggested that a target-effective behavioral prohibition can only be realistically realized in the form of a GAAR. In assessing the content of a GAAR, the paper makes four separate, but related, points. First, the distinction between GAARs, as currently conceived, and judicially-created anti-avoidance doctrines is an overly sharp one, with both forms of behavioral prohibition suffering from problems of under-inclusiveness, albeit for different reasons. Second, the relevance of the statutory interpretation exercise in the identification of prohibited behavior should be much more limited than is currently the case. Third, two different concepts of economic substance provide the basis for a legislative response tailored to apply differently to different types of tax-avoidance transactions. Fourth, the judiciary has the institutional competence to apply and enforce a GAAR, or articulate anti-avoidance doctrines, as a response to tax-attribute creation and tax-attribute trading transactions; but such competence is much more limited with instances of transactional substitution. This type of tax-avoidance activity presents many of the same identification difficulties presented by real behavioral adjustments to taxation, which are the focus of the concept of tax avoidance in economics. Except for a limited range of transactional substitutions that are equivalent to synthetic replication, the associated informational requirements are not amenable to the application and enforcement of a purpose-based behavioral prohibition. Transactional substitutions beyond this limited range should be addressed by the legislative and executive branches of government in discharging their policymaking function.

Keywords: tax avoidance, general anti-avoidance rule

JEL Classification: H20

Suggested Citation

Edgar, Timothy, Building a Better GAAR (September 10, 2007). Virginia Tax Review, Vol. 27, No. 4, 2008, Available at SSRN:

Timothy Edgar (Contact Author)

Osgoode Hall Law School ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

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