Abstract
Tax avoidance disputes present a conflict between preventing tax schemes that frustrate public policy and the rule of law. When considering the connection between taxation and the rule of law, it is helpful to distinguish between two aspects of the rule of law. The narrow-scope rule of law concerns whether disputes are decided according to legal norms that are general, prospective and impartial. The wide-scope rule of law concerns whether the government rules through law or through some extra-legal method and whether the government respects existing legal entitlements. Although closely connected, the two aspects of the rule of law are distinct: a violation of the rule of law in one sense does not necessarily have significant implications for the aspect of the rule of law. Tax disputes implicate both aspects of the rule of law. Tax adjudication violates narrow-scope rule of law when it ignores established law, appeals to legal norms that are not known in advance or renders judgments on grounds of personal partiality. Taxation violates wide-scope rule of law when used to expropriate politically unfavoured parties, confer benefits on politically favoured parties, or regularly shift tax burdens in arbitrary and unpredictable ways. This understanding of the rule of law does not yield any straightforward argument in favour of more formal methodologies of statutory interpretation or against anti-abuse rules. If the applicable legal norms are known in advance, it is not a violation of the narrow-scope rule of law to decide cases according to principles rather than rules or economic substance rather than legal form. Less formal, more purposive forms of adjudication tend to rely more on sound judgment by judges. In a legal system with a skilled and impartial judiciary, anti-abuse rules are not inherently threatening to the rule of law. They are less desirable in polities with wide-scope rule of law deficits. When tax disputes are highly politicised and the impartiality of the tax authorities and judiciary is open to question, it may be preferable to adopt more formal methods of adjudication that rely less on abstract reasoning about tax policy and that are easier to monitor for signs of bias. Tax law methodology should be calibrated to political context. Approaches that might be best suited for politically stable polities with highly skilled impartial judiciaries might be ill-suited for other contexts.