Faculty of Business Seminar Series / Onursal Bağırgan

Faculty of Business Seminar Series / Onursal Bağırgan

Date: Tuesday, March 10th, 2020

Time: 13:30-15:00

Location: AB2, Meeting Room 345

Title: Repeated Tax Amnesties

Abstract: Governments have used tax amnesties repeatedly in recent decades. In this paper, we present a theoretical framework to explain the recurring nature of tax amnesties. We construct a model with the strategic interaction of a government and a mass of taxpayers. The government and the taxpayers interact repeatedly, and each interaction can result in a tax amnesty. We first show that the self-fulfilling characteristic of tax amnesties may lead to sub-optimal outcomes under lack of commitment. Then, we show that an amnesty can cause another amnesty in the near future by altering taxpayers' beliefs about unobservable government characteristics. There- fore, an economy may get into a sequence of consecutive tax amnesties through a reputational channel referred to as an \expectation trap." The expectation trap mechanism can explain the series of tax amnesties in some US states that rarely experienced tax amnesties in the past. Our model predicts that four factors can make an economy more vulnerable to the expectation trap: high personal income; high tax rates; low political cost for declaring an amnesty; and low audit rates. We examine US state-level data to test this prediction and show that the states with high personal income and high tax rates are using tax amnesties more frequently and repeatedly.