The paradox of tax amnesties for tax administrations

Tax amnesties are popular in many countries because they are often viewed as a policy tool that benefits the taxpayer and the tax administration. Countries like Brazil and Argentina have made extensive use of tax amnesties. However, a closer look shows its paradox. While tax amnesties are expected to increase revenues and tax compliance, they may have the opposite effect.

 

What characterizes a tax amnesty?

Tax amnesties are generally associated with weak tax administrations, where resources are scarce and tax authorities struggle to adequately monitor and enforce tax compliance. [1] They are expected to encourage taxpayers to come forward and voluntarily pay their taxes freeing tax administration’s limited resources from engaging in lengthy and resource-consuming audits.

The first documented tax amnesty dates back to ancient times. The famous Rosetta stone, which was key to deciphering Egypt’s hieroglyphics, reportedly released tax offenders from prison in what can be viewed as a type of tax amnesty. [2]  Over time, tax amnesty programs became very popular in many parts of the world.

There is no uniform approach for tax amnesties. Generally, countries that implemented tax amnesties offered taxpayers one of the following benefits: (1) a partial or total reduction in the amount of the tax liability, which includes the amount of the tax itself, as well as interests and penalties; (2) waiver from criminal charges; and (3) instalment payment programs.

Conceptually, tax amnesties are different from instalment payment programs. However, they have some aspects in common. Both instruments allow taxpayers to reschedule payment of their tax liabilities over a period of time. Their difference lies in that tax amnesties reduce the net present value of taxpayers’ tax liability whereas installment payment programs do not. [3]

The scope of tax amnesties varies. They normally cover non-declared and non-assessed taxes. However, in certain circumstances, it can also cover assessed taxes. Including assessed taxes in tax amnesties is questionable as it may only bring forward tax collection at the expense of a loss of tax revenue in terms of waived interests and penalties.

 

Potential benefits of tax amnesties

Tax amnesties generally benefit taxpayers by reducing their tax liabilities and giving them criminal immunity. But amnesties also allegedly provide benefits for the tax administration, particularly in terms of tax revenue they bring in and future compliance. In that sense, tax amnesties could be described as a “win-win situation”.

In the short-term, tax amnesties are expected to bring in additional tax revenue as taxpayers come forward to report and pay taxes that may never enter the treasury otherwise. In the medium-term, they are expected to improve tax compliance as tax administrations learn from taxpayers’ previous behaviors, thereby allowing them to better allocate their resources.

The revenue-raising function of tax amnesties may be overrated, especially when policymakers allow already detected delinquent taxpayers to participate in the amnesty. Future tax compliance may also be adversely affected for a feeling from currently tax-abiding citizens that a tax amnesty is unfair and the perception that the tax administration is not efficient.

Another factor that possibly undermines the potential advantages of tax amnesties is the frequency in which they are implemented in some countries. That is because if tax amnesties are frequently repeated, taxpayers tend not to comply with their tax obligations in anticipation for the benefits of the next tax amnesty. [4]

 

Costs to be considered when implementing tax amnesties and other alternatives

In order to assess whether a tax amnesty is actually beneficial for the tax administration, potential benefits have to be weighed against the costs related to such programs. Tax amnesty costs are somehow difficult to assess and are often overlooked by policymakers and politicians eager to implement tax amnesties to raise short-term revenues.

Costs associated with tax amnesties that should be taken into account in a cost-benefit analysis include the following elements: (1) potential decrease in taxpayers’ voluntary compliance; (2) costs of administering the tax amnesty program (e.g. administrative resources); and (3) forgone tax revenues (e.g. amount of penalties waived and favorable interest rates). [5]

Having said that, tax administrations should avoid upfront reductions in tax liabilities for their potential adverse effect. Adopting tax amnesties is not always a sound tax policy nor is it the only solution to increase short-term revenues and improve tax compliance. Alternative policies exist including improving tax administration and “true” installment payment programs.

 

Conclusion

In sum, tax amnesties are expected to benefit taxpayers and tax administrations: taxpayers benefit from the forgiveness of a tax liability and immunity from criminal prosecution; in contrast, tax administrations are expected to increase their tax revenues and improve future compliance. To what extent they actually do is debatable. In any case, tax administrations should be cautious of tax amnesties and consider other alternative policies.

 

Phelippe Toledo Pires de Oliveira is a Ph.D in tax law, a tax attorney at the Office of the Attorney General for the National Treasury in Brazil (PGFN) and a lecturer at IBMEC-Brasília.

[1]  J. Malherbe (ed.), Tax Amnesties (Kluwer Law International 2011), p. 4.

[2]  For other tax-related issues contained in the Rosetta Stone, see M. Keen & J. Slemrod, Rebellions, Rascals and Revenue: tax follies and wisdom through the ages (Princeton University Press 2021), p. 3.

[3] Note that schedule payments coupled with a reduction in penalties or the use of a below market interest rate is considered a tax amnesty. In this regard, see K. Baer & E. Le Borgne, Tax amnesties: theory, trends, and some alternatives (IMF 2008), p. 6

[4] R. Bird, Improving Tax Administration in Developing Countries, 1 J. Tax Administration (2015), p. 33.

[5] K. Baer & E. Le Borgne, Tax amnesties: theory, trends, and some alternatives (IMF 2008), p. 3.

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