SHOULD WE INTRODUCE A TAX AMNESTY IN AUSTRALIA

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SHOULD WE INTRODUCE A TAX AMNESTY IN AUSTRALIA?
School of Economics and Finance Policy Discussion
Group
May 31, 2007
School of Economics and Finance
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Intro

• General thoughts
• Mark is going to argue against the tax amnesty
  and Joseph is going to argue in favor of a tax
  amnesty.

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Political Process

• Tax amnesties are a major issue of the political
  agenda these days.

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Fiscal Strategy

• In times when many governments are confronted
  with budget deficits, tax reforms gain
  importance.
• One strategy is to turn to a tax amnesty as part
  of a fiscal reform.
• A main purpose of a tax amnesty is to increase
  governments revenues.

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Examples

• It offers tax evaders the possibility to return
  into the tax system without the normal procedures
  of charging penalties and fines.
• CT Tax Amnesty(video link)

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Tax Compliance

• Therewith, an amnesty is seen as a possibility to
  increase not only present but also future
  voluntary compliance, hoping that tax evaders are
  ready to take the chance to become honest in the
  future, and assuming that the delinquents will
  less likely fall back into non-compliance.

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Historical Overview

• All in all, tax amnesties as a fiscal program
  have already been conducted in many countries and
  are not new in history.
• The Rosetta Stone, the first tax-oriented
  documentation reports of a amnesty around 200
  B.C. in Egypt, where tax rebels were released
  from prison, tax debts were forgiven. Tax
  amnesties are also known in the Roman Empire
  (A.D. 401, 411, 434, 445, 450, and 458).
• During the last 30 years national amnesty
  programs haven taken place virtually all over the
  world.

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Tax Morale

• However, the final success of a tax amnesty
  depends on the long-run revenue effects.
• It is debated whether in the long run tax
  amnesties undermine tax morale.
• For example, honest taxpayers may feel upset by
  an amnesty.
• If most taxpayers voluntarily comply with tax
  laws, the option of an amnesty given to a small
  group of tax evaders can be understood as a
  violation of equity by a majority of taxpayers.

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Source Torgler and Schaltegger (2005a)
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Domestic Evidence

• Australia
• 1988 Together with New Zealand conducted.
• Net return of 20 million represented 0.37 of
  annual income tax revenue.
• Some studies report that the amnesty had no
  immediate impact upon taxpayer compliance, with
  the detected non-compliance rate actually
  climbing after the tax amnesty in NZ (see Devos
  2004)

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International Evidence

• For example, Argentina (1987) has not been
  successful in terms of additionally collected
  money.
• But even though the Argentinean government
  promised not to prosecute the delinquents, the
  amnesty program failed to reach the intended
  goal.
• There has never been a serious effort to
  eliminate the source of the problem of tax
  evasion in Argentina, namely the huge size of the
  shadow economy, the highly regulated economy, and
  the uncertainty of governments economic policy
• Numerous tax amnesties offered previously that
  were very similar.
• No change in the enforcement strategies.

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International Evidence

• On the other hand, Indias amnesty in 1997 can be
  seen as a financial success.
• During the 214 days of the amnesty, the Indian
  government collected 100 billion rupees
  additionally (2.5 billion dollars) from over
  350000 individuals, covering one half of the sum
  collected through income tax.
• This specific amnesty started with the slogan
  30 percent taxes, 100 percent peace of mind and
  was accompanied by intensive media activities.
• For example, the federal tax administration
  engaged a private marketing company in order to
  launch a Voluntary Disclosure of Income Scheme
  campaign.

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International Evidence

• Even well-known celebrities as sport and film
  stars promoted publicly the participation in the
  amnesty program.
• Another successful tax amnesty was implemented in
  Ireland in 1988. The collected revenues reached
  15 times the amount expected.
• Presumably, increased post-amnesty enforcement
  and the fact that the Irish government previously
  never had enacted an amnesty might have been the
  reason for the relative success.
• However, collections for the subsequent tax
  amnesty in 1993 were reported to be significantly
  lower.

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USA

• From India to the Indiana tax amnesty.
• Virginia tax amnesty.

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CANADA

• Call us before Revenue Canada calls you.
  DioGuardi Company negotiates more tax amnesty
  settlements than any other law firm in Canada!

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US STATES

• Interestingly, most US states have made
  experiences with tax amnesties
• From November 29, 1982 till the present day, a
  considerable number of more than 60 amnesty
  programs have been conducted in US states
• Strong variation of the repatriated revenues
  among the states. A minimal amount has been
  reported by the Louisiana tax authorities with a
  0.008 percent collection rate.
• On the other hand, New Jersey collected 2.6
  percent of total tax revenues which is the
  highest repatriation rate for US states. An
  increase in the number of tax amnesties has a
  negative effect on the efficiency of the tax
  amnesty.

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US STATES

• In general, most collected revenues involve small
  payments (often less than 100).

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Empirical evidence

• See Alm, McKee and Beck (1990), Alm and Beck
  (1991, 1993), Dubin, Graetz and Wilde (1992),
  Posner (2000), Torgler, Schaltegger and Schaffner
  (2003), Torgler and Schaltegger (2005b).
• No long-run effects on the level of tax revenues
  despite increased enforcement efforts.
• Combination of tax amnesty with increased
  enforcement efforts increases amnesty revenues.

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Empirical evidence

• An increase of audit rates leads states (US
  evidence) to wait longer before initiating a tax
  amnesty.
• Only a limited number of amnesties induced a
  significantly positive effect on tax revenues.
• Expectations of an amnesty reduce compliance.
  Multiple tax amnesties in a short interval reduce
  the efficiency of such a program.
• Tax compliance increases significantly when
  people have the opportunity to vote on a tax
  amnesty (even if the tax amnesty is rejected).

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TAX AMNESTY IN AUSTRALIA

• NO Australia Does Not Require a Tax Amnesty
• Mark Doolan

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Amnesties in Australia

• Some Examples
• 1986 Illegal Immigrant Amnesty
• 1987 Fitzgerald Inquiry
• Jack Herbert and others were given amnesties so
  that corrupt police (all the way to the then
  police commission) could be prosecuted
• 1996 Gun Amnesty
• Following the Port Arthur Massacre, the Howard
  Government changed gun laws and allowed people to
  hand in illegal weapons.
• Whats the Link
• There is a significant problem (Illegal
  Immigrants, Corrupt Police and Banned Weapons)
  that needs to remedied for the betterment of
  society.
• Tax evasion in Australia cannot possibly sit in
  this group

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Compliance in Australia

• ATO report into compliance tax compliance in
  Australia
• http//www.ato.gov.au/content/downloads/ARL_77362_
  n7769-8-2006_w.pdf

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Who Evades Tax

• Those in the Cash Economy
• The Fraudulent
• Individual
• Company
• The Criminal

Accountants
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Benefits and CostsWhere are the incentives for
non-compliers to come forward?

• Sawyer (2006)
• Benefits of an Amnesty
• Increased Revenues
• Reduced Administrative Costs
• Knowledge of more tax payers
• Improved compliancy if amnesty is part of a
  broader crack down
• Costs of an Amnesty
• Small revenues
• Reduced post-amnesty compliance
• The honest feel ripped-off
• Less motivation to pay
• More awareness of non-compliance
• Relisation that government cant control the
  payment of taxes
• Sawyer, A., 2006, Industry Partnerships and
  Targeted Amnesties at Ingrained Evasion A new
  approach to an old problem. Revenue Law Journal,
  16, pp.25-57.

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A Possible Solution

• Accountant Amnesty
• Provide amnesty for accountants who come forward
  and advise of clients who have been evading tax
• We still get the revenues
• Identify sophisticated avoidance schemes
• Still prosecute the act of tax evasion, and
• Creates uncertainty in tax evaders mind of who/m
  to trust

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A Recipe for a Successful Tax Amnesty in Australia

• Joseph Jeisman

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Need some tax evaders

• ABS puts upper bound on underground economy of
  about 2 of GDP (ABS Discussion Paper The
  Underground Economy and Australias GDP). Most
  estimates in academic papers are considerably
  higher (up to 15 of GDP).
• 2005-06 GDP roughly 922 billion
• (source ABS Publication 1350 Australian
  Economic Indicators)
• 2 of GDP - 18.5 billion.
• 10 of GDP - 92.2 billion.
• For comparative purposes - the Tax Office
  collected net tax of 214 billion in 200405

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Need some tax evaders
Source ATO 2006-07 Compliance Program
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Once a generation

• Tax amnesties should only be offered infrequently
  to avoid problems arising from evaders expecting
  amnesties
• Australia flirted with tax amnesties in the 80s,
  but does not have a history of repeatedly
  offering them.

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Increased Punishment

• Should be accompanied by increased attempts to
  detect and punish evaders after the amnesty.
• Some evidence that this is occurring already
• Increasingly, convictions for tax offences are
  resulting in prison sentences. This year over 60
  of convictions received prison sentences.
  Source The Commissioner of Taxation Annual
  Report 2004-05
• The year before less than 50 received prison
  sentences
• It is conduct that is difficult to detect,
  fundamentally destructive of the taxation revenue
  system, contrary to the public interest and
  requires a sentence which will act as a deterrent
  to others who might choose to act in a similar
  manner.
• Judge Wisbey, District Court of Western
  Australia (11 May 2005)
• This may be a rationale for an amnesty maybe a
  group of people that cheated in the past (perhaps
  even by mistake), when potential consequences
  were lower, now face jail time if caught and
  would like to repent and join the law abiding.

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Attitude

• Like music piracy, many Australians dont see tax
  evasion as a bad crime. Many would like to get
  one over the ATO (see Devos 2006).
• If we plan to get harsh on tax evaders public
  sentiment would suggest that we need to give the
  evaders a chance to come clean.
• Unlikely (in my opinion) that many of those that
  are currently honest are going to be swayed into
  evading in future by an amnesty - provided it is
  accompanied by an increase in detection and
  punishment.

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Why needed?

• Australia has a strong federal budget surplus at
  the moment.
• Government is committed to keeping budget in
  surplus so an efficiently operating tax system
  is very important.
• In the interest of equality we want to ensure
  that everyone pays their fair share of tax.
• If we want to increase detection and punishment
  of tax evasion it may be important to offer those
  who cheated when punishment was lower and social
  acceptance was higher a chance to come clean.