Tax amnesties and the insurance effect: An experimental study

Many countries grant exemption from legal prosecution under certain conditions, allowing for voluntary disclosures regarding tax evasion. Empirically, tax amnesties appear most successful when accompanied by an increase in enforcement efforts as they help evaders to adjust to the new circumstances. Time-limited amnesties are frequently repeated and, in some countries, even made permanent. Anticipated tax amnesties can, however, serve as an insurance against a rise in the detection probability, potentially leading to less and not more tax compliance. We test the behavioral relevance of this insurance effect in an experimental tax game and find that it indeed decreases overall tax compliance by about 9-10 percent, highlighting its relevance for the design of tax policies. A high predictability of amnesties may work to their detriment.

Automated summary

Many countries allow voluntary disclosures of tax evasion under certain conditions to exempt individuals from legal prosecution. Empirical research shows that tax amnesties are most successful when enforcement efforts increase, as they help tax evaders adapt to new circumstances. However, anticipated tax amnesties can potentially reduce tax compliance, acting as insurance against an increased risk of detection. Experimental results demonstrate that this insurance effect does decrease overall tax compliance by about 9-10 percent, highlighting its importance in tax policy design.