Pakistani governments are fond of pardoning corrupt behavior, and since 1958, time and again, several amnesty schemes have been introduced repeatedly and unsuccessfully aimed to bring more citizens, businesses, investors and traders into the tax net and increase tax revenue. In the short term, these schemes may have filled the kitty with funds (in many cases, they didnt garner any substantial sums) but compared to the mid- to long term repercussions, the temporary one-time revenue inflows are simply not worth it.
Latest news reports now suggest the government may introduce another amnesty scheme. One would wonder why the administration would once again go down a road they have travelled before with no positive outcomes. Amnesties are considered to be a source of income and in the medium-term, a successful tax amnesty program is expected to expand the tax base and improve tax compliance. Interestingly, Pakistan has not seen these desired outcomes with any form of amnesty scheme, but continue to rally around these ideas.
These schemes arent a local phenomenon, but have historically been a favorite policy reform for governments across the world including the United States. Others include India, South Korea, Thailand, Brazil, Malaysia and Russia. Some of these countries are currently conducting an offshore voluntary disclosure program (OVDP), focused on asset disclosures, without repatriation. Indonesia recently launched a program and with a handsome payoff for tax evaders is very confident it would cleanse the underground economy.
India also has introduced countless forms of amnesty schemes (mostly voluntary disclosure schemes) and in 1997 after one such scheme was introduced, a Public Interest Litigation was filed in the Supreme Court which argued that such schemes penalized honest tax payers. The Indian Supreme Court asked the government to stop offering such amnesty schemes, but the government offered another one in 2013.
The 1997 scheme in India to this day is considered successful for realizing massive amount of taxes, solidifying the faith in such schemes among some policymakers but experts reveal it was because tax evaders were able to dress up their declarations by back-dating values and undervaluing their property at old prices, which ultimately represented lower taxable incomes.
What is fundamentally wrong with tax amnesty schemes though? An empirical study conducted by Oxford University in 2014 found that the occurrence of tax amnesties was due to a governments fiscal requirements and the expectations of taxpayers on future amnesties. This implies that instead of increasing tax compliance, amnesty schemes actually reduce tax compliance by letting a tax evader wait for a time until he has the incentive to declare his income. This is the opposite of what a policymaker would want if he wants to increase the tax base or formalize a parallel economy.
A 2008 IMF study called: Tax Amnesties: Theory, trends, and some alternatives argues that the short term gain in gross revenue should be offset by a reduction in taxpayer compliance in the future, the cost in foregone tax revenue (waived penalties, interest rates) and the direct cost of administering the scheme.
The same study also points out that expectations of a future tax amnesty drives up non-compliance and a tax evader finds it more optimal to remain (or become) a tax evader in the future, because the savings from evaded tax payments may outweigh the expected probability of the government detecting tax evasion and imposing penalties. Its just more economical.
Amnesty schemes are also an indicator that the government either does not have the ability or the motivation to introduce substantial and strict tax reforms that catches and punishes tax evaders and other criminals. This could further embolden the dishonest.
As historical patterns suggest, tax amnesties simply amplify the inconsistencies within a tax revenue collection system, induces future tax amnesties and incentivizes tax evasion. Not to mention, they are highly discriminatory to those who are honest and tax compliant.
Instead of amnesties, Pakistan should be making laws that bring money and capital home, initiate punitive measures (like seizing assets that are untaxed), and hunt down defaulters and tax evaders. Instead of offering incentives to evade taxes, policymakers should be targeting the source of the problem, i.e. tax non-compliance, which results from weak administration and legal system, poor enforcement of law and retrograde tax policies. These are the areas that requires attention. Instead, amnesty schemes and higher indirect taxation have remained the go-to policies for Pakistani policymakers in order meet temporary revenue targets. In the end, these policies will only dig us deeper into debt and informality, not to mention immorality and corruption. Everyones okay with that?
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