What have the market forces of supply and demand to do with making the tax system more equitable? John Braithwaite argues that the competition policies that attack monopolies to ensure vigorous price competition and more efficient production of goods also drive more efficient production of “bads”. Tax avoidance, like any good or service, follows market logic: as the supply increases, so does the demand.
Braithwaite makes this argument and explores its implications through a detailed comparative case study of taxation in the United States and Australia. He shows that it is possible to “flip” markets in the vice of tax avoidance to markets in the virtue of tax system integrity.
Braithwaite sets out specific regulatory strategies and gives examples of how these might be applied. The result is a blueprint for restoring the equity of Western tax systems and a breakthrough theory of how regulators can support markets in virtue and curtail markets in vice. Markets in Vice, Markets in Virtue is essential reading for anyone involved in policy, governance and regulation. It has profound implications for business, and is of special interest to those working in taxation.
Part I - Competition policy, efficient vice and tax system integrity
Competition policy and efficient vice
Tax systems in crisis
Part II - Aggressive tax planning in Sydney and Melbourne
The Australian advice market
Australian innovation in regulating aggressive tax planning
Part III - Aggressive tax planning in New York
The New York advice market
IRS enforcement initiatives
Part IV - Controlling aggressive tax planning
Comparing the drivers of and responses to aggressive tax planning in Australia and the US
Reforming the law
Meta risk management using natural systems
Intelligent tax office culture
Reforming enforcement strategy
Part V - Vice to Virtue
Flipping markets in vice to markets in virtue
It is remarkable how many major businesses have locked horns with the Commissioner over their tax arrangements, and not just in recent times. … Conflict is inevitable. John Braithwaite, one of Australia’s most distinguished criminologists, … approaches the issue as a case study in regulation. Basing his insights on interviews with over 100 tax advisors and government officials in Australia and New York, he sees tax avoidance as driven by market forces and he argues that a market in vice can, if the regulators are smart enough, be flipped into a market in virtue.
The techniques suggested are a mixture of targeted penalties (especially for promoters and their A-list clients), law reform (especially redrafted legislation), education (bibles in every brothel, so to speak), disclosure and ‘restorative justice’. … It is certainly true that improving our tax system will have to proceed on a number of fronts, and Braithwaite puts forward some interesting suggestions in his characteristically droll manner. … what he illustrates is that tax enforcement is a multi-skilled, multi-tasked job. For the enforcement agency, psychology and negotiation are as important as law and accounting.
Philip Burgess, Law Society Journal NSW, Vol 43 No 8, September 2005, 82
John Braithwaite was recently awarded the Prix Emile Durkheim for 2006 and indeed was described in the Prize citation as ‘The New Durkheim’. To provide a critical review of his 15th and latest book would therefore be brave. Fortunately such courage is not called for. Markets in Vice, Markets in Virtue is fascinating.
It deals with the challenging topic of tax avoidance in an innovative way, based on original field interviews on a cross-country comparative basis. It uses an economic framework but with lashings of law, public administration, sociology and philosophy. …
To reconstruct Braithwaite’s argument let us start with markets. Markets are a wondrous device. Competitive markets promise to provide what buyers want at least cost. But they may fail to deliver on their promise and they are amoral. …
Aggressive tax planning itself becomes a market with competing advisers seeking to meet the desires of individuals and companies for tax minimisation and promoting the opportunities assiduously. … In part the market may be self-regulating. Braithwaite feels that in the past professional ethics have played a strong regulating role on the supply side and that the reputational effects have played a role on the demand side … But self-regulation is arguably insufficient and Braithwaite’s proposition is that modern pro-competition policy may have enhanced markets in vice (such as ‘aggressive’ tax planning) as much as in virtue (such as, say, in textiles and clothing).
The bulk of the book examines how well two governments (including their tax officials) respond to the challenge. … The governments are Australia and the USA and the judgment is that Australia has made a better fist of the task. … Partly, the Australia-UA difference is cultural lag. … But Braithwaite attributes a greater part of the difference to better public management in Australia. This is the really interesting bit. …
Australian public management has in fact been highly creative … In corporate tax Australian revenue has been increasing sharply for 15 years while that for the US has been falling sharply. Braithwaite attributes this squarely to smarter regulation. … The key point he wishes to make is that smarter regulation in tax compliance is not just tougher enforcement. Rather, it involves understanding the nature of the tax avoidance market itself, recognising that there is a lot of intrinsic and reputational enthusiasm out there for ‘honest low-fuss’ tax compliance, and devising strategies that can use the good competitive forces to minimise the role of what he calls ‘the fiscal and moral termites’. This is the notion of ‘flipping markets in vice to markets in virtue’. …
The creativity and liveliness of the study is very welcome and a lot of originality is to be found … This is a welcome extension of market analysis … John Braithwaite has shown much light on a topic at the core of the legitimacy of the mixed economy.
Glenn Withers, Dialogue 24, March 2005
This outstanding book draws on a wide range of interviews to offer a compelling depiction of the growth of the tax shelter industry in both Australia and the United States, and of the ways it might effectively be combatted by sophisticated regulators. It should be required reading for anybody interested in the tax shelter problem and, more broadly, the problem of how contemporary competition is creating markets in vice and how they may be turned into markets in virtue.
Professor Reuven Avi-Yonah, University of Michigan
With characteristic style and ebullience, John Braithwaite cuts through the complexities of tax avoidance, and drawing on extensive practical knowledge offers four key strategies for flipping 'markets in vice' into 'markets in virtue'. This highly readable book will be of interest both to tax specialists and to those concerned about the effectiveness of regulation, but who never thought that tax could be interesting. In Braithwaite's hands, it is.
Julia Black, London School of Economics
Written in John Braithwaite’s engagingly direct style, this book casts a bright light on some of the arcane practices that underlie one of the most crucial issues of the 21st century: whether tax systems can continue to provide funding for public services in ways that can be accepted as fair and just. Its penetrating analyses and practical proposals should be read not only by tax advisers and officials but by every concerned citizen.
Professor Sol Picciotto, Lancaster University Law School
Professor John Braithwaite, probably Australia's most internationally renowned social scientist has written an original, sparkling, readable analysis that opens our eyes to aggressive tax avoidance behaviour in the United States and Australia, and the only partly successful regulatory attempts to deal with it.
Professor Allan Fels AO, The Australia and New Zealand School of Government
Published 22 April 2005
Co-publisher The Federation Press and Oxford University Press Inc (USA)
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Law - Taxation
Government / Political Studies