Tax Shelters, Dutch Books, and the Fundamental Theorem of Asset Pricing
- Author(s): Terrence Chorvat
- Date Posted: 2007
- Law & Economics #: 07-21
Because the tax law makes many distinctions not based on fundamental economic differences, taxpayers can exploit these inconsistencies to create opportunities for tax arbitrage. This article argues that any interpretative system which requires consistency in the application of rules where the system itself is based on fundamental inconsistencies will always allow for arbitrage. This result applies equally to purposive interpretations of the tax law as well as to more formal or literal systems of interpretation. That is, the problem of tax arbitrage is concomitant with the existence of non-economic principles of tax law embedded in a system that interprets these rules in a consistent manner. While this idea has been applied to questions of whether a tax system can impede the ability of the economy to reach equilibrium, it has not been applied to the legal analysis of tax shelters themselves. The result of this line of reasoning is that tax shelters are the inevitable result of any tax system with inherent inconsistencies which attempts to bring an artificial consistency to these non-economic based distinctions. The article goes on to argue that one of the methods by which tax shelters are addressed by the courts is the use of inconsistent methods of applying the law to these transactions.