Coming Clean on Your Taxes

IMF Working Papers, January 13, 2023

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Develops a simple model to explore whether a higher detection probability for offshore tax evaders—e.g. because of improved exchange of information between countries and/or due to digitalization of tax administrations—renders it optimal for governments to introduce a voluntary disclosure program (VDP) and, if so, under what terms.

If the VDP is unanticipated, it is likely to be optimal for a revenue-maximizing government to introduce a VDP with relatively generous terms, i.e. a low or even negative penalty.
When anticipated, the VDP is neither incentive compatible nor optimal, as it induces otherwise compliant taxpayers to evade tax.
A VDP can then only be beneficial if tax evasion induces an external social cost beyond the direct revenue foregone, e.g., due to adverse effects on overall tax morale.
Contrary to the common view that VDPs should come along with additional enforcement effort, the model finds that governments should relax enforcement if the VDP itself provides more powerful incentives to come clean.

Introduce a VDP only when it is unanticipated by taxpayers to avoid creating perverse incentives for future evasion.
Consider setting relatively generous VDP terms (including a low or even negative penalty) when a VDP is unanticipated to maximize revenue.
Where a VDP is anticipated, assess whether external social costs from evasion (for example, damage to tax morale) justify a VDP despite its incentive problems.
Re-evaluate the common policy combination of VDPs plus intensified enforcement; if the VDP sufficiently motivates disclosure, relaxing enforcement can be optimal.

Subjects: Revenue administration, Tax administration core functions, Tax evasion, Tax return filing compliance
Keywords: A. tax evasion, appendix I. Optimal VDP penalty, detection probability, Global, Tax administration core functions, Tax amnesty, Tax evasion, Tax return filing compliance, VDP participation, VDP penalty, Voluntary disclosure program

Source: IMF Working Papers — "Coming Clean on Your Taxes" by Sebastian Beer and Ruud A. de Mooij (January 13, 2023).