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© 2023 International Monetary Fund
WP/23/6
IMF Working Paper
Fiscal Affairs Department
Coming Clean on Your Taxes
Prepared by Sebastian Beer and Ruud de Mooij
Authorized for distribution by Ruud de Mooij
January 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper develops a simple model to explore whether a higher detection probability for offshore tax evaders—e.g. because of improved exchange of information between countries and/or due to digitalization of tax administrations—renders it optimal for governments to introduce a voluntary disclosure program (VDP) and, if so, under what terms. We find that if the VDP is unanticipated, it is likely to be optimal for a revenue-maximizing government to introduce a VDP with relatively generous terms, i.e. a low or even negative penalty. When anticipated, however, the VDP is neither incentive compatible nor optimal, as it induces otherwise compliant taxpayers to evade tax. A VDP can then only be beneficial if tax evasion induces an external social cost beyond the direct revenue foregone, e.g., due to adverse effects on overall tax morale. In contrast to the common view that VDPs should come along with additional enforcement effort, we find that governments should relax enforcement if the VDP itself provides more powerful incentives to come clean.
RECOMMENDED CITATION: Beer, Sebastian and Ruud de Mooij. 2023. “Coming Clean on Your Taxes.” IMF Working Paper No. 23/6. International Monetary Fund. Washington D.C.
| JEL Classification Numbers: | H26 |
| Keywords: | Tax evasion; Voluntary disclosure program; Tax amnesty |
| Author’s E-Mail Address: | SBeer@imf.org; RDeMooij@imf.org |
| JEL Classification Numbers: | H26 |
| Keywords: | Tax evasion; Voluntary disclosure program; Tax amnesty |
| Author’s E-Mail Address: | SBeer@imf.org; RDeMooij@imf.org |
Contents
I. Introduction
II. Basic Model
A. Tax Evasion
B. Optimal Tax Administration
C. Improvement in Detection Efficiency
D. Simulations
III. Unanticipated Voluntary Disclosure Program
A. Tax Evasion and VDP Participation
B. Optimal Policy Under Constant Detection Efficiency
C. Optimal Policy Under Increasing Detection Efficiency
D. Simulations
IV. Anticipated Voluntary Disclosure Program
A. Tax Evasion and VDP Participation
B. Optimal VDP
C. Optimal Administration
D. Simulations
V. Conclusion
Appendix I. Optimal VDP penalty if detected evaders are forced to comply in period 2
A. Unanticipated VDP
B. Anticipated VDP
Appendix II. Impact of higher detection efficiency on detection probability with unanticipated VDP
Appendix III. Revenue effect of an unanticipated constrained VDP
Appendix IV. Linear approximation of the optimal detection probability with anticipated VDP
Appendix V. Extension – Anticipated VDP over T periods
References
FIGURES
1. Utility from Evasion Versus Compliance
2. Utility in period 2 if p2 = p1 = p
3. Utility in Period 2 if p2 > p1
4. Payoffs from Entering an Anticipated VDP
TABLES
1. Optimal Detection Probability and Share of Tax Evaders in Steady State
2. Optimal Unanticipated VPD and Enforcement Under Alternative Parameters
3. Optimal Anticipated VPD and Enforcement Under Alternative Parameters
The author(s) would like to thank Frank van Brunschot, Elena D’Agosto, Vitor Gaspar, Tamas Kulcsar, Stoyan Markov, Rose Nyongesa, Rebecca Sparkman, Jean-Francois Wen, and seminar participants at the IMF for useful comments.
The author(s) would like to thank Frank van Brunschot, Elena D’Agosto, Vitor Gaspar, Tamas Kulcsar, Stoyan Markov, Rose Nyongesa, Rebecca Sparkman, Jean-Francois Wen, and seminar participants at the IMF for useful comments.