CHAPTER 6. Conclusions

Eric Le Borgne, and Katherine Baer
Published Date:
July 2008
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Countries and states have introduced tax amnesties for a variety of reasons. Among the most common ones are (1) an immediate revenue need (e.g., during an economic downturn), (2) a desire to improve tax compliance so as to improve revenue over the medium term, (3) a new government wanting to distance itself from a previous government’s policy, (4) signaling a regime change and “drawing a line in the sand” (e.g., former Soviet Union transition economies moving to more market-based tax systems), and (5) repatriating offshore capital so as to boost domestic investment and growth (e.g., in Italy).

There are some fundamental difficulties in assessing the effectiveness of tax amnesty programs, not least because many other factors affect taxpayer compliance and tax revenue performance. These factors include, for example, overall macroeconomic performance, the structure of the tax system, and the effectiveness of the tax administration. In addition, few developing and transition countries systematically compile and analyze statistics relating to tax amnesty programs, including their impact on tax compliance. In an assessment of the effectiveness of tax amnesty programs, it is important to distinguish programs that were combined with other structural reform measures (e.g., revenue administration, tax policy) with stand-alone tax amnesty programs. Theory suggests that, on its own, a tax amnesty program is unlikely to significantly affect the cost-benefit trade-off of tax evasion and therefore the equilibrium level of compliance in the economy. Significant improvements in compliance levels can be achieved only through increasing the cost and reducing the benefits of tax evasion. The cost side (the expected probability of detection times the financial and nonfinancial costs of tax evasion if detected, itself weighed by the expected probability of enforcement) is most effectively addressed through revenue administration and legal reforms (e.g., increasing evasion detection capacity, enforcement powers, and fines) while the benefit side is often best addressed through tax policy reforms (e.g., lower marginal tax rates; a simpler, less complex tax code so as to limit compliance costs; and a progressive tax system that is more conducive to “fairness” and equity). Moreover, significant administrative costs may be associated with introducing a tax amnesty and interrupting or canceling ongoing audit and enforcement measures.

Evidence shows that stand-alone tax amnesty programs have produced mixed results as far as gross revenue collection (the easiest, though inadequate, benchmark for assessing the success of an amnesty) is concerned, as predicted theoretically. First, although there are some exceptions, many programs have generated very little extra revenue, both in absolute amounts and in proportion to the overall revenue collected from the tax covered by the amnesty. Second, even though some amnesties have indeed significantly affected tax evaders’ incentives and actions, this has not necessarily translated into large increases in tax revenue for the treasury (e.g., Italy’s Scudo Fiscale was deemed highly successful because it did generate large-scale repatriation of offshore capital, at least in the short term, but it failed to generate significant revenue for the treasury because of the large financial incentives provided).

The effectiveness of stand-alone tax amnesties in generating net revenue gains is difficult to assess, but evidence points toward small positive gains in the short term, at best. However, close inspection often reveals that (1) a large share of the “new” revenue would have been collected anyway (e.g., when known delinquent taxpayers are allowed to participate in the program) and (2) the costs of collecting the gross revenue (both static and dynamic ones) can be so large that the net revenue gain is limited, or even negative.

Evidence shows, and theory also predicts, that repeated stand-alone tax amnesties can lead to an erosion of the gross revenue collected from each successive amnesty, and may also negatively affect overall tax compliance. Whenever a tax administration’s weaknesses are not addressed as part of a tax amnesty program, the use of amnesties as a regular tool to collect revenue is likely to have serious consequences both for future compliance and for the long-term effectiveness of the tax administration. This has been demonstrated time and again in various countries (Argentina, the Philippines, Turkey), where repeated amnesties appear to have contributed to a reduction of revenues over time, or to a relatively undynamic tax revenue performance. In such cases, the authorities’ statements to the effect that each amnesty will be the “last one” are not credible. Only an accompanying program of measures to strengthen the legal framework, core systems and procedures, and the management of the tax administration would help increase the effectiveness of enforcement measures, and thus the credibility of the tax administration. Thus, in these cases, tax amnesties have proved to be a poor substitute for fundamental tax administration reform.

Tax amnesties create other problems for the tax administration besides reducing compliance. They create additional workflow (to manage the amnesty program) and divert resources from regular audit, collection enforcement, and taxpayer services activities. Collection enforcement cases that may be at the end of the enforcement process (e.g., cases that are before the tax courts awaiting a judicial decision) are often interrupted in cases in which identified delinquent taxpayers (“accounts receivable”) are eligible for the tax amnesty. This interruption results in a major waste of time and resources for the tax administration and in revenue losses for the treasury.

A tax amnesty program, if combined with a credible closing of the sources of noncompliance (e.g., weak administrative capacity, highly distortionary or a complex tax system) and a fundamental change in way the tax administration operates (e.g., the introduction of self-assessment), may be appropriate (although there have been many more failures than successes in this regard). This can be so for several reasons, such as for the sake of “fairness” after a change in political regime: in a situation where tax noncompliance reflected a political statement of opposition groups to, say, an illegitimate regime, once that regime has been replaced by a legitimate one, an (appropriately designed) tax amnesty could be introduced in recognition of the political nature of past tax evasion. It can also be an expedient and effective way to break with a culture of noncompliance and prepare citizens for a regime of strong tax enforcement. The case of the 1988 tax amnesty in Ireland, in which the amnesty was accompanied by a major revamping of the tax administration’s tax arrears collection procedures, is a good example, as is the 1999 Irish amnesty, which was used as a last opportunity for tax evaders to come clean knowing that the tax administration had received extensive new legal and enforcement powers (which immediately and significantly increased its evasion detection and enforcement capacities).

To maintain the authorities’ credibility and to ensure fairness and comparability of treatment of tax evaders with law-abiding taxpayers, tax amnesty programs should not reduce the net present value of the basic tax liability and accrued interest owed (the time value of forgone tax revenue). Tax evaders should not be rewarded by, ex post, being offered a lower effective tax rate than law-abiding citizens, because this could lead to reduced compliance from currently compliant taxpayers.53

Before thinking of introducing a tax amnesty—which is unambiguously a second-best option—governments should consider several alternatives. These include, in the short term, introducing various forms of (time-limited) payment installment agreements (with strict eligibility criteria) and establishing a permanent voluntary tax evasion disclosure program. In the medium to long term, efforts should focus on strengthening the legal framework for tax administration and basic tax administration procedures, such that the cost of tax evasion is significantly increased. On the tax policy side, a simplification of the tax system coupled with a broadening of the tax base and a reduction in tax rates could noticeably reduce the gains from tax evasion.54 The combination of these effects would structurally and significantly reduce the equilibrium level of tax evasion. Moreover, it would do so in a more equitable way for law-abiding taxpayers, and in a more cost-effective way for the government because (1) the administrative costs linked to a tax amnesty program are avoided and instead limited administrative resources are concentrated on immediately improving administrative capacity and (2) financial incentives offered by a tax amnesty program can be dispensed with and used, say, to finance the reform of the revenue administration.

Finally, if a government is committed to introducing a tax amnesty, certain principles should be adhered to so as to limit the drawbacks of the program. First, the authorities should identify the sources of the noncompliance problem they seek to reduce. These are likely to fall into one of two categories: an ineffective revenue administration (the source of the ineffectiveness should be identified: e.g., lack of evasion detection capacity, lack of enforcement powers) or an inappropriate tax policy system (distortionary, complex, etc.). Second, once the source of the noncompliance has been identified and before a tax amnesty is introduced (or at least concomitant with such an introduction), a reform program that targets the source of the problem should be put in place; this program should be credible (e.g., sufficient resources, in terms of financing or staff, should be dedicated to the reforms; these reforms should be widely disseminated to the public to signal a regime change). Third, the tax amnesty itself should contain the following elements:

  • 1. It should be limited to a short time period (a few months only).
  • 2. Participation should contain a very strict cut-off date (which predates the announcement of the amnesty program, to avoid a decline in tax compliance).
  • 3. Participation should be limited to unregistered taxpayers, nonfilers, and tax evaders.55 Participation should specifically not be allowed for identified delinquent taxpayers.
  • 4. The amnesty should not reduce the net present value of the tax owed and the accrued interest rates on that principal (the interest rate applied should be appropriate).56
  • 5. Finally, tax amnesty programs should not include measures that would go against the overall reform’s objectives (of the administration, of the tax policy regime) that directly address the noncompliance problem. For example, granting anonymity to taxpayers who participate in an amnesty undermines the tax administration’s capacity to identify noncompliant taxpayers correctly and monitor them effectively in the future.

In the end, tax amnesties are a poor alternative to the hard work of improving the structure of the tax system and strengthening the legal framework and the capacity of the tax administration. Strengthening the latter two, in particular, takes time, an enormous effort, and resources. Policymakers should not be tempted with perceived “easy fixes” through tax amnesties that might produce some short-term revenue gains at the expense of longer-term efforts to reform tax policy and modernize tax administration. At the same time, every effort should be made to analyze the core policy and administrative problems that have led to proposing a tax amnesty, to design strategies that will address these core problems, and to identify alternative policies that could lead to sustainable improvements in taxpayer compliance and tax revenue performance.


An amnesty program that is consistent with this principle could consist of a reduction, potentially up to 100 percent, in penalties for late payment, nonfiling of tax returns, and other violations of the tax laws. However, the actual tax and the accrued interest are still owed (“fairness” argument). This would allow tax evaders who want to return to the tax net to do so at a reduced financial cost thanks to the reduced penalties offered under the amnesty.


For an analysis of the effect of reduced personal income tax rates on tax compliance in the Russian Federation, see Ivanova, Keen, and Klemm (2005).


This includes taxpayers who either do not report their tax liabilities or underreport them.


That is, it should not be concessionary (certainly not below the government’s cost of borrowing, and preferably not below the consumer’s cost of borrowing; otherwise the nonpayment of taxes becomes a cheap financing source for delinquent taxpayers who are offered an amnesty), but neither should it be so punitive as to become a substitute for the penalty structure (e.g., not significantly above the maximum commercial bank interest rates).

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