Public Finance, 2nd Edition

tration may be called for, providing monitoring and enforcement eVorts are

also increased. Whatever the truth of the matter, the new lesson in tax theory

is that the option of increasing revenues through increased monitoring and

enforcement should not be ignored.

Tax Amnesties

Tax amnesties are an attempt by the tax authorities to deal with the problem

of tax evasion after the fact. A Department of Revenue declares an amnesty

period of a few months in which taxpayers can declare previously hidden

income and pay taxes on it without an additional penalty. Tax amnesties have

been popular with state governments; the states declared 34 amnesties from

1981 to 1992.

The eVectiveness of tax amnesties has been the subject of sharp debate.

Those in favor of amnesties believe that they bring taxpayers out of the cold

and turn them into law-abiding taxpayers from then on. According to this

view, amnesties will reduce future tax evasion. Those opposed to amnesties

claim that they are likely to backWre among the honest taxpayers, who will

resent the break given to the dishonest taxpayers. Even worse, the honest

taxpayers will realize how widespread tax evasion is and, given their resent-

ment, be more prone to cheating themselves. The net eVect will be an increase

in tax evasion.

James Alm and William Beck used times-series econometric techniques

to test the eVects of a tax amnesty in Colorado in 1985 that ran from

September 15 to November 15, 1985. They analyzed monthly state income

revenue collections from January 1980 through December 1989 and found

that the amnesty had no eVect on monthly revenue collections whatsoever,

neither after the amnesty nor even during the amnesty period. Perhaps the

incentives noted above for amnesties to decrease and increase dishonesty

essentially cancel one another, although this is pure conjecture.

35

CONCLUDING REMARKS

The formal second-best analysis of taxation that combines the dual concerns

for eY ciency and equity dates from the 1960s. It has gone through two

distinct stages. The Wrst stage is represented by Chapters 13 and 14. It

explored optimal taxation under the assumption that the tax instruments

chosen by the government were Wxed and that monitoring and enforcement

were not an issue. The government may or may not levy lump-sum taxes; it

may tax virtually everything or only a restricted subset of goods and factors.

35

J. Alm and W. Beck, ``Tax Amnesties and Compliance in the Long Run: A Time Series

Analysis,'' National Tax Journal, March 1993.

15. TAXATION UNDER ASYMMETRIC INFORMATION 519