Ethics at work: Tax amnesty

Anyone driving through our capital lately can hardly fail to miss the prominent signs proclaiming a limited tax amnesty for city property taxes.

February 1, 2007 21:56
4 minute read.
Ethics at work: Tax amnesty

taxes generic 88. (photo credit: )

Anyone driving through our capital lately can hardly fail to miss the prominent signs proclaiming a limited tax amnesty for city property taxes. "Sof chov, hakol tov" - "All's well that's paid up." The discounts being offered are quite substantial - 50 percent on debts only two years old. Such tax amnesties are a common tactic used by local governments (rarely by national ones), and they involve complex ethical and economic considerations. I think that most people would view the trade-off as follows: There is a monetary payoff because the government collects a lot of old debts, but there is an ethical cost because the honest taxpayer feels like his honesty is being cynically exploited and that cheating pays. Examining the extensive research done on tax amnesties shows that this analysis is highly superficial. Both the financial and the ethical considerations are far more subtle. As I examined the various studies done on tax amnesties, I was most surprised by one fact: Tax amnesties generally raise very little money. Most US states have offered various forms of amnesties in the last few decades; one of the most successful was the recent Illinois program, which took in over $500 million. At first that sounds like a lot of money, but recall that annual revenues for Illinois are around $25 billion, so the entire take was only about 2% of the revenues for a single year. Studies were done to try and determine how much of the amnesty take is really new revenue, as opposed to taxpayers who were already expected to pay eventually; the conclusion was that most of the revenue was not actually new. Recall also that those who did pay, paid less due to the fine and interest waivers. The upshot is that generally a negligible amount is actually saved. Furthermore, most tax amnesties involve a carrot and a stick - unusually lenient conditions for those who take advantage, followed by a crackdown afterwards. But some of the increased revenue is due to the stick alone, suggesting that merely increasing collection actions could do as well or better. The Jerusalem program is actually quite exceptional in the "carrot and stick" category. The carrot is much bigger than typical, and there is no stick. Most tax amnesties forgive only fines and interest, and criminal charges, whereas Jerusalem's gives a substantial discount on the actual principal amount. And the notice announces the continuation of normal collection activities - not an impending crackdown. I think that the complete assessment of the ethical and financial considerations is quite different from the knee-jerk one. The financial benefit is not so much in increasing revenue as in advancing revenue. Localities are tempted to offer amnesties when they are in a temporary liquidity crunch, and they need the money now even if they well know they could get the same money with interest in a few years. Another consideration is a structural one. It is tempting to view a government as a single entity, but this is quite misleading. Even if it is in the interest of "the government" to do something, it may be quite impossible for the existing web of institutions and relationships to go about it. It may well be true that doubling the budget of the collection arm of the city would bring in additional revenue equal to ten or a hundred times the added payroll, but often the policy is that when money is tight, hiring is frozen across the board. So treasuries are constrained to make more money with the staff they already have, which makes the voluntary disclosure and avoidance of litigation of an amnesty very attractive. The ethical considerations are also more complex. It is true that the honest payer of property tax may now be scandalized to realize that his crooked neighbor, who evaded taxes for years, is not going to pay the price for his nefarious behavior and in fact is going to garner a significant reward. On the other hand, he may be relieved to know that this neighbor is not going to keep on evading taxes entirely, and is now going to pay at least part of his debt. Another consideration is that many "evaders" are actually people of limited means. We mentioned above that a crackdown alone would likely be more effective than an amnesty, but crackdowns often arouse resistance even among honest taxpayers. People are always wary of altering the delicate status quo of the cat and mouse game between taxpayers and collectors. Many people would not look at the amnesty as a break for the dishonest, but rather as a break for the disadvantaged. My personal judgment is that the financial and ethical aspects that make occasional tax amnesties attractive are mainly the result of structural problems in the tax system itself. If the underlying tax system is sensible and equitable, there will be little incentive to tamper with it from time-to-time. Jerusalem's property tax system is a perfect example. In my opinion the system is grossly inequitable. There is an immensely complicated patchwork of discounts; over 30 different categories appear on the municipality's Web site, and some of the discounts are huge. There is definitely not a feeling of "horizontal equity," that like taxpayers pay like amounts. As a long-time resident of the Jerusalem area, I also have the distinct impression that collection actions are likewise inequitable; some residents are better able than others to arouse the sympathy of the municipality. I wish the City of Jerusalem luck with the new amnesty program, and I hope that it will inspire a little bit of introspection. Maybe it will make them examine the structural flaws that led to a situation where giving late payers a 50% discount on fairly recent property tax bills suddenly looks like an attractive proposition to the municipality. The writer is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.

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