There has been some challenging commentary recently about the morality of tax avoidance and investors not paying their "fair share" of tax. While this is an interesting debate there is a rather more troublesome side that may have serious implications for the economy.

Not only is the Government seeking to grab the moral high ground on the tax avoidance issue but it is also resorting to what some would consider extreme measures to "protect the public purse".

The needlessly aggressive way this is being done could be seen to be abandoning "the rule of law" for "the rule of caprice".

Tax is not just a moral issue. It is one of the most important factors in every commercial decision. Our efforts to earn money and, the easier part, spend it trigger tax liabilities. Some choose to pay less tax; others do not.

Furthermore, a lot of tax avoidance revolves around Government-sponsored incentives (property, films, the Business Expansion Scheme etc).

All tax avoidance flows from an interpretation of the tax code, where the rules are laid out. Politicians and civil servants refer to interpretations of these rules that they did not intend as "unacceptable tax avoidance" or "abuses".

Tax evasion is another matter altogether, being illegal and immoral, and there is no debate about that.

As stated above, a great effort is now being made by the authorities to crack down on "unacceptable tax avoidance". While one might concede that they are quite entitled to do this, the way that they have set about doing this may result in less tax avoidance in the short-term but could result in less prosperity for us all, and thus less tax for the Exchequer, in the long run.

When the Celtic Tiger was in full roar many reasons were given for our success.

One, often overlooked, reason was the strength of the rule of law in Ireland. It is one of the clearest signals that a country is free and that an investment can be made without fear of arbitrary coercive powers of the state; that is, without fear of the "rule of caprice".

If we look at the current situation in Russia, we find a country where everyone is reluctant to invest because of a perceived lack of respect for the rule of law. The Irish authorities are a world away from that but there is no clear line here; every step in the wrong direction, particularly for a small state, sends a signal and has a price.

What does the rule of law mean in the context of tax? If it means anything it means that taxpayers should be certain as to the taxation treatment of a course of action when they enter into it. This is not a new idea; Adam Smith, in 1776, said: "The tax which each individual is bound to pay ought to be certain" (The Wealth of Nations).

Recently the authorities have tended to change the tax treatment of actions for taxpayers after the taxpayers have entered into them. A straightforward example was the increase last January in the VAT rate on building work.

New-home buyers, almost by definition on the tightest of tight budgets, having entered into building contracts in 2002 found, when they came to complete the purchase in 2003, that the after-VAT price of the house had increased by 1 per cent. This approach was justified on the basis that the builders would "pick up the tab" - the principle involved was ignored.

Another attack on "unacceptable" tax avoidance earlier this year, with implications for the rule of law, concerned an office building in the IFSC.

It may have looked to many people like a bunch of high-earning fat-cats making the most of a loophole in a well-intentioned piece of legislation designed, originally, to help renew one of the country's most run-down areas. Delving a little deeper reveals another side to this story altogether.

The original investors in that office building had taken, 10 or more years ago, a huge leap of faith in the IFSC and in the Irish economy; the very slow progress of building in the IFSC in those years is testament to how much of a leap of faith that was.

Over the past 10 years, however, unexpectedly, the difference between the corporate tax rate and the marginal income tax rate has widened considerable (from 40 per cent versus an income tax rate of 58 per cent to 12½ per cent versus 42 per cent today). Also, with the dramatic increase in property values, an office building down in the IFSC has become the best investment since Mr Alex Ferguson acquired Rock of Gibraltar.

The original investors, not unreasonably, wish to cash in on their investment but the Minister and his officials decided that allowing new purchasers the benefit of the original relief is "unacceptable" tax planning on the basis that it would not have been what they intended had they known how the future would unfold.

The Minister has to "protect the public purse" and must often act quickly to prevent large-scale leakage of tax receipts. While, the tax relief involved in this IFSC building was finite and known at the outset; the cost to the economy of the Minister's actions, in limiting the investors' ability to realise their investment, is not quantifiable.

Changing the tax treatment of a course of action after a taxpayer has entered into it by means of retrospective or retroactive legislation offends against the rule of law.

People often talk about retrospective tax being bad, many people think that this means new taxes on last year's income; it does mean that but it also means changing the rules for people who have committed to a course of action in the past based on the rules then in place.

This year's Finance Act contained an unprecedented number of clauses that denied tax deductions and tax reliefs to taxpayers that had undertaken transactions based on the clear rules then in place. This makes the tax treatment of every investment made in the State in the future a little more uncertain.

If this was what was meant to be achieved - "mission accomplished" - but the costs of undermining the rule of law will accrue for many years into the future.

In summary, attacking investors for "unintended" or "unacceptable" use of the rules set out clearly in the tax code could cause investors or potential investors, and particularly foreign investors, to consider the State's attitude to the rule of law ... and pause.

PJ Henehan is a senior tax partner in Ernst & Young. A longer version of this article can be found at www.ey.com/global/content.nsf/Ireland /tax_ overview. The opinions expressed in this article are the writer's own.