A tax amnesty can be a useful tax policy tool when exploited in exceptional circumstances. Amnesties can also be used systematically as a discriminatory mechanism to improve the efficiency or even the equity of the tax system, but only if government commitment to enforcing tax law is credible. If such credibility is lacking, amnesties may actually undermine future tax revenue by breaching the implicit, psychological contract between taxpayers and the state, thus reducing taxpayers’ internal motivation for compliance.

Amnesties also have important political implications, because they can signal intertemporal inconsistency in government decision-making and may be linked to the political business cycle. Amnesties respond to externalities among states or layers of government deriving from tax and enforcement policies, and network effects in these fields can trigger waves of amnesties.


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