- Eric Le Borgne, and Katherine Baer
- Published Date:
- July 2008
© 2008 International Monetary Fund
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Typesetting: Alicia Etchebarne-Bourdin
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Tax amnesties : theory, trends, and some alternatives / Katherine Baer and Eric Le Borgne – Washington, D.C. : International Monetary Fund, 2008.
Includes bibliographical references.
1. Tax amnesty. 2. Tax collection. 3. Taxpayer compliance. I. Le Borgne, Eric. II. International Monetary Fund.
HJ2319 .B347 2008
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Abbreviations and AcronymsBIR
Bureau of Internal Revenue (Philippines)CPBO
Congressional Planning and Budget Office (Philippines)DIAN
Dirección General de Impuestos Nacionales (General Directorate of National Taxes, Colombia)FTA
Federation of Tax AdministratorsFY
Gross domestic productGF
Gross national productIR
Inland Revenue Authority of SingaporeIRPF
Impuesto sobre la renta de personas físicas (personal income tax, Spain)P
Parcelamento Especial (Special Installment program, Brazil)TL
Voluntary Abatement and Assessment Program (Philippines)VAT
Tax amnesty programs have a long history and remain as popular as ever, across both countries and states. Policymakers often view such programs as an efficient tool that produces both short- and medium-term benefits. In the short term, amnesties yield additional revenue, although often not as much as expected. This “extra” revenue can be most desirable in times of recession or financial crisis when revenues are under pressure and expenditures are growing quickly. In the medium term, a successful tax amnesty is expected to increase the tax base, and therefore future revenue collection, as tax evaders are brought into the tax net. In other words, the amnesty is expected to improve tax compliance. Some policymakers view tax amnesties as an efficient measure, as they immediately raise the yield of a given tax without changing its structure (its tax rate and base), and also as an equitable one, as the revenue collected from tax evaders reduces the disparity in the effective tax rate of previously evading citizens and tax-law-abiding ones.
International experience, however, shows that the perceived benefits of tax amnesty programs are at best overstated and often unlikely to exceed the programs’ costs—of administration and of reduced taxpayer compliance—which are rarely measured. The benchmark that policymakers often use to assess the revenue impact of a tax amnesty is the short-term gross revenue gain, and not the net revenue gain—not only in the short term, but also over a medium-term horizon. Over the medium term, potentially the largest and most significant cost of a tax amnesty can be a reduction in future tax compliance.
This paper provides an overview of the advantages and disadvantages of tax amnesties as a tool for raising revenue and increasing tax compliance. Drawing on results from the theoretical literature, econometric evidence, and selected country and U.S. state case studies, it concludes that (1) “successful” tax amnesties are the exception rather than the norm as, over time, net revenue collection and compliance are often negatively affected by amnesties; (2) the main problems that tax amnesties set out to address, namely, weak revenue performance and high delinquency and noncompliance rates, are unlikely to be resolved without an improvement in the tax administration’s detection and enforcement powers; and (3) the most “successful” amnesty programs have relied on improving the tax administration’s enforcement capacity. Finally, given the potential drawbacks of tax amnesties, a few alternative measures are discussed.
The authors gratefully acknowledge the contributions to this paper by several colleagues, including Peter Barrand, John Brondolo, Dale Hart, Allan Jensen, and Geremia Palomba, and the valuable comments provided by Michael Keen, Andrea Lemgruber, Victoria Perry, and Carlos Silvani. The authors would also like to thank Graciela Kaminsky for the insightful comments she provided on the paper during the IMF Fiscal Affairs Department’s 2007 annual Policy Development and Research Seminar. Rebecca Obstler of the External Relations Department coordinated the production of the publication.