Tax Amnesty --A Win-Win for Everybody

Now that President Bush has pushed his tax-cut proposal through both houses of Congress, it's time to seriously consider a federal, state and local tax amnesty program. The result would be lots of money raised in quick fashion and a supply-side jump-start to the economy.

One very real difficulty with such programs is that they create an expectation that there will be more such programs in the future. Suppose a person has a tax debt the IRS doesn't know about and might never discover; if reported today, the person would owe $100 in taxes and $500 in penalties. If a person in such a situation perceives that there's any significant likelihood of a tax amnesty in the future, they'll hold off on reporting the debt until then.

Aside from the fact that it would be difficult to prevent illicit use of insider information, I wonder what would happen if a government were to announce the following rules for a tax amnesty [or parking ticket amnesty, or other such program]:

Those who pay their debts within the amnesty window will receive a substantial discount on the penalties that would otherwise be due, but not complete elimination thereof.
Those who had voluntarily come forward in the six months prior to the announcement of the amnesty would receive a retroactive discount on penalties, pro-rated according to when they had come forward, with the greatest discount given if they had come forward six months before.
Those who had voluntarily come forward in the 12 months before that six-month window would receive a pro-rated discount on penalties, with the greatest discount given at six months.

The exact details probably aren't great, but the idea would be that those who wait for the amnesty aren't the ones who get the best deal.

Actually, a tax amnesty would have little noticeable effect and the reason should be quite clear. Consider these facts:

Even according to the not to be sufficiently damned IRS, the percentage of voluntary noncompliance is between 16.9% and 18.8%. Furthermore, the IRS had stated many times that records show that cheating is fairly equally spread among all income brackets.
Since the top 10% of income earners pay over two-thirds of all of the income tax that is collected, if a tax amnesty is to have any effect, it is this group who must respond to it. But, the wealthy are the least likely to do so. Poor and middle class tax cheats are motivated primarily by money, while wealthier tax cheats do so primarily for privacy reasons. For them to turn themselves in would mean giving up all those years of privacy - something that is not likely to happen.
Since federal taxes are much higher than state taxes, it is much less likely that a federal tax amnesty would have any success at all. Even 10 to 20 years in back state taxes would be trivial in comparison to only a few years in back federal taxes. Even without fines and penalties, repaying only a few years of back federal taxes could easily present a burden that would make a federal tax amnesty an unacceptable alternative.
No state taxing authority comes anywhere close to being as intrusive into the individual's private affairs, as does the IRS. So turning oneself in to the state would not mean exposing nearly as much of an individual's private finances, as turning oneself in to the IRS. So, yet again, there is much stronger reason for the privacy concerned wealthy to turn themselves in the state, than the IRS.

You see, numerous studies have shown that the wealthy are much more concerned with financial privacy, than taxes. The wealthy are the people who least need to cheat on their taxes and when they do, it is often not so much to save on taxes, as to protect their financial privacy. Therefore, if they turn themselves in, they are giving up the financial privacy, that was the primary reason for their tax evasion, for only a few bucks that they already have and don't need anyway.

Furthermore, a large percentage of wealthy taxpayers have already proven that they value their privacy so much, that they are willing to expatriate to another country to protect that privacy. According to an April 2, 2003 Financial Times article, roughly 250,000 Americans expatriated last year. Both logic and statistics tell us that most of that number were wealthy. If they value their privacy so much that they will permanently leave the US, the country of their birth, then why should we think that they would so casually give up that privacy for something as trivial as a tax amnesty?

Although a federal tax amnesty might entice a few errant taxpayers from the lower income brackets to come forward, the excessive cost of repayment of years of federal taxes, as opposed to state taxes and the fact that the wealthiest taxpayers are much less likely to come forward, at all, would suggest that a federal tax amnesty would probably cost almost as much in management and related costs, as it might net in recovered taxes.

A federal tax amnesty sounds great, until you consider the motivations of the various groups of taxpayers and look at the difference in potential delinquent tax liability, between the state and federal taxes. Then the whole idea falls apart.

The best effect that a federal tax amnesty might have, is a nominal profit in recovered taxes. But, it has a very negative side that nobody seems to be addressing. It detracts from efforts at a real workable solution to our tax problem - replacing the convoluted income tax and the abusive IRS. It seems to me, that just may be that's what federal tax amnesty proponents want.

After all, the National Retail Sales Tax (NRST) is gaining momentum and lot's of news about a federal tax amnesty would certainly take some of the wind out of the NRST sail.

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