Tax Uncertainty and Welfare-Improving Tax Disputes

Tax law is often uncertain. In particular, the use of tax shelters tends to be in the “grey area” between illegal tax evasion and legal tax avoidance. In this paper I show that uncertainty in tax law can help achieve higher efficiency than allowing or disallowing a tax shelter with certainty. Furthermore, a tax dispute can lead to a net welfare gain despite the litigation costs. Thus, tax uncertainty and tax disputes can be socially desirable.