Tax Amnesties: The Case of Sticks and Carrots

Abstract

Abstract- Tax amnesties are an invitation to tax evaders to join the ranks of people who pay the due taxes. The popularity of amnesty programs over time and across countries is understandable as it produces both shortand medium-term benefits. However, cost benefit analysis shows that the costs exceed the benefits of the program. This paper weighs the advantages and disadvantages of tax amnesties, drawing on results from the theoretical literature, econometric evidence, and using Sri Lanka as a case study. The focal point of this research is to determine if a ‘successful’ tax amnesty is a norm or an exception to the norm. It is evident that tax amnesties have been devised to increase tax compliance. However, the low levels of tax compliance can be better addressed via improvements to the tax administration system. Thus, it leads to the question whether tax amnesties are only a plaster on a broken bone where an extensive surgery is required for full reparation i.e. an enhanced tax administration system. It must be understood that tax amnesties alone cannot increase tax compliance, as it is only an incentivizing mechanism and not the solution to the larger problem at hand. Most successful amnesty programs rely on improving the tax administration’s enforcement capacity. Furthermore, given the potential drawbacks of tax amnesties, a few alternative measures are discussed which can be implemented to improve the enforcement capacity of tax administration system.