The Economics of Tax Amnesty Schemes

Governments all over the world are feeling with the problem of a shortfall in tax revenue. In most countries around the world, the tax revenues generated by the government are not enough to meet the liabilities that the government had undertaken. This problem becomes more pronounced during an economic downturn where the tax revenues earned by the government are reduced even further. In order to overcome the shortfall of cash, many governments provide tax amnesty schemes to their citizens. The most recent example of this is the Pakistan government which offered a tax amnesty to its citizens so that it is able to generate more revenue and hence take less loan from the International Monetary Fund (IMF)

In this article, we will have a closer look at what tax amnesty schemes are as well as how do they affect the economy in general.

What is Tax Amnesty?

A tax amnesty is a temporary scheme undertaken by the government in order to increase their tax revenues. As per this scheme, the government encourages its citizens who have evaded tax in the past to come clean and pay forward their dues. Many times, the tax charged during these amnesty schemes is at a concessional rate. Also, citizens and corporations declaring their money are offered some sort of legal amnesty as well. Therefore, since the financial and legal impact of disclosing previously undisclosed income are limited, citizens find it viable to come clean instead of hiding from the law.

Types of Tax Amnesty

As mentioned above, tax amnesty schemes basically have two main features viz. financial as well as legal amnesty. Hence, it logically follows that these schemes be classified on the basis of the same criterion. This the reason why all over the world tax amnesty schemes are divided into two types.

Firstly, there are schemes wherein the government provides financial relief to tax evaders. Under such schemes, the government decides to waive off all or part of the financial penalties which become due as a result of tax evasion. In some cases, the government only allows taxpayers to pay back the full sum in easy instalments over a longer time frame. Hence, investors gain because they can earn interest on the unpaid tax as well. However, in such cases, legal immunity is not provided. This would mean that if the taxable income was generated by undertaking some questionable activity like drug smuggling or other criminal endeavours, the government could still prosecute the taxpayer.

On the other hand, there are some tax amnesty schemes which provide legal amnesty as well. This means that these schemes basically promise that the government will simply close their eyes to the source of the taxable income as well. The government promises to not conduct any investigation or disclose any information after they receive the tax revenue, which is due to them.

Rationale behind Tax Amnesty Schemes

Tax amnesty schemes have been very controversial. There are some economists who argue that this scheme helps raise money in the short term. However, there are other economists who argue that these schemes promote lower rates of tax compliance.

The main reason that governments decide to use tax amnesty schemes is convenience. Ideally, if the government is sure that tax evasion is happening, it should be able to stop the same by asking its tax authorities to conduct more raids and increase compliance. However, in many countries, the government are aware that there is a lack of political will or even data from third parties, which will help zero down on the tax evaders. As a result, these governments choose a simpler way out. They allow tax evaders to disclose their income and simply avoid the entire crackdown.

Tax amnesty schemes are one of the easiest ways for the government to raise money during a crisis. In developing countries, there are always plenty of people who are more than willing to disclose their ill-gotten gains and pay tax on them if that means they get to keep the rest of it.

Pitfalls of Tax Amnesty Schemes

There are obviously several problems associated with tax amnesty schemes as well. Some of them have been listed below.

  • Encourages Tax Evasion: Tax amnesty schemes encourage tax evasion. Taxpayers become more than comfortable evading taxes when they are due. This is because they are aware that later they will get a chance to pay taxes on their ill-gotten wealth. Recurrent tax amnesty schemes are one of the reasons that countries like India and Pakistan have a very low rate of tax compliance.
  • Encourage Illegal Activities: Some tax amnesty schemes offer legal immunity as well. Hence, people are encouraged to become gangsters, accumulate huge sums of money, and then turn over a new leaf, and live a normal life. This increases the crime rate in general, which negatively affects the economy of any country.

  • Weakens Tax Administration: The real reason why tax evaders are able to evade taxes is that the government’s revenue officers are not doing their job properly. Hence, instead of punishing the tax officers for poor performance, the government simply ignores them. As a result, over time, tax officers become complacent, and this ends up weakening the entire tax administration.

The bottom line is that amnesty schemes are nothing but a quick fix. They do help the government generate some urgent cash in the short run. However, in the long run, such schemes mar the economic progress of any nation.

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