Maine Tax Amnesty

August 31, 2009

Maine is offering a three month tax amnesty beginning September 1, where unpaid taxes may be squared with the state at a 90 percent reduced fine. Tax amnesties, an effort to mop up extra revenue, are popular with states during bad economic times.

While states get a quick injection of cash from these programs, there are reasons to be cynical. If states offer amnesty programs multiple times, taxpayers will expect them, and depending on the likely terms (in some cases delinquent taxpayers were made to pay about half of the interest on taxes owed and no penalty), frequent amnesty programs will encourage future tax evasion. Maine offered a more generous amnesty just back in 2003.

That being said, a study in the Journal of Public Economics claims:

[A]lthough cheating will rise as a result of the amnesty, it does not directly follow that tax revenues will also fall. In particular, cheating will rise only to the extent that people expect to participate in the amnesty. If they do participate, the government will recapture not only the new cheating, but the pre-existing cheating as well.

So amnesties might encourage more tax evasion, but as long as the state continues to offer amnesties the lost revenue will be captured (if interest is charged). Seems like an ugly cycle.

Then there is the issue of fairness, or rule of law. If a tax cheat ends up better off after the amnesty, this will anger law abiders for good reason. Criminality shouldn’t be made a beneficial strategy.


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