The Tax Shelter Problem

This article offers a definition and examples of the modern tax shelter and summarizes the anti-tax shelter weapons in the government's arsenal. Particular attention is given to the economic substance doctrine, which allows the government to attack transactions that comply with the literal language of the law. The battle between taxpayers and the government is described as a multi-player, multi-period game. Recent moves by the government have greatly reduced the payoff to shelters set up by high net-worth individuals. The corporate shelter market is more robust, as taxpayers have been able to exploit flaws in the economic substance doctrine. One attractive policy option is to follow the lead of California and increase the cost of shelters by increasing the penalties.