Tax Policy

Bartlett: Tax Amnesty Might Encourage Cheating

Last year, House Republicans were very keen on the idea of tax amnesty -- allowing taxpayers who owe unpaid taxes an opportunity to clear the books without penalty. However, it now appears tax amnesty is a dead issue.

A key reason interest has waned may be a recent report from Congress's Joint Committee on Taxation (JCT) that threw cold water on the idea.

  • The report concludes that in the long run amnesty reduces taxpayer compliance and federal revenues.

  • Although revenues would rise by $4.2 billion in the first year of an amnesty, as taxpayers paid up previously evaded taxes, in future years they pay less (see figure).

  • Over a 9-year period, the Treasury would collect $8 billion less than it would otherwise.

The reason for the decline in taxpayer compliance is that once the government has an amnesty taxpayers may come to expect further amnesties in future years.

However, it does not necessarily follow that the net effect on federal revenues will be negative. Economist James Andreoni points out that even if there is a modest increase in tax evasion, the government may still increase its revenue in the long-run. To the extent additional cheating results from the prospect of future amnesties, the government will recoup much of the lost revenue when such amnesties in fact occur.

Another effect of tax amnesty is the IRS may be able to identify tax cheaters previously unsuspected, making it unlikely that the same taxpayers would be able to game the system continually.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), March 9, 1998.

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