When considering a lower tax rate we can make one of two assumptions. We can assume that changes to taxes rate will not change behavior, or we can assume that changes to tax rates do change behavior.
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Illinois Governor Pat Quinn signed a bill on Monday to establish a state tax amnesty program for 2010. The amnesty waives interest and penalties on unpaid tax liabilities that were due between July 2002 and July 2009. Those who do not turn themselves in during the amnesty will owe doubled interest and penalties. Officials are hoping the amnesty will raise between $100 million and $250 million.
We have long criticized tax amnesties as shortsighted and counterproductive. Amnesties provide a one-time injection of cash at the expense of undermining taxpayer respect for the law, rewarding dishonesty, and likely encouraging future non-compliance and ensuring the need for future tax amnesties.
While officials advertise amnesties as one-time deals, this is often not the case. Illinois' most recent tax amnesty was held in 2003. While there is no overlap in the eligible time frames of the 2003 and 2010 amnesties, making another offer so soon greatly undermines their threats of tougher future enforcement. And why should average Illinoisans pay their taxes on time when those who don't comply with the law are routinely rewarded for their non-compliance?
Even Gov. Quinn seemed to understand this objection earlier this year. When the possibility of an amnesty was brought up in the spring Quinn had this to say:
"We'll look at anyone's proposal, but I wouldn't hold my breath," Quinn said in April. "We already had one in 2003. You can't have amnesties all of the time. After a while, people start to think just wait for the next amnesty."
In a statement on Monday, Quinn's office said he "supports measures that will bring additional revenues to our state. He does not support the frequent use of tax amnesty programs, but feels during these unprecedented fiscal times, that all strategies which could bring additional revenue into the state need to be considered."
So, amnesties are bad policy, unless we are really desperate for money. Then they are good policy.
Often lost in the amnesty issue is the fact that much of tax non-compliance is due to tax complexity. Is it difficult to overstate the level of complexity in both federal and state tax laws. While some individuals and businesses knowingly cheat on their taxes, the complexity of our tax laws ensures that many people will be non-compliant without even knowing it. Hey, if Tim Geithner (the man in charge of managing the country's tax revenue) and Charlie Rangel (who until recently was in charge of writing the nation's tax laws) can't get it right, who can?
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29 Democratic members of Congress from California today urged California to make its film tax credit more generous. A bill to do so, AB 1839, has passed the state Assembly and is pending in the Senate.