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AMAZING GRACE: TAX AMNESTIES AND COMPLIANCE***

JAMES ALM,* MICHAEL McKEE,* AND WILLIAM BECK**

ABSTRACT a one-time amnesty may increase future

Does a tax amnesty raise or lower com-compliance if it is accompanied by greater

pliance over time? This paper uses experi-expenditures for enforcement and stronger

mental methods to analyze the long runpenalties for evaders. Critics contend that

impact of an amnesty. The results indicatethe long run consequences of an amnesty

that the average level of compliance falls are more likely to lead to a significant

after an amnesty. However, a well-de-negative impact on voluntary compliance.

signed amnesty may be able to overcomeThey present several arguments to bol-

this decline. If post-amnesty enforcementster their case. First, honest taxpayers may

efforts increase, then aggregate comp,ii-perceive the amnesty as special treat-

ance actually increases. In fact, post-am-ment for tax cheats. If the honest taxpay-

nesty compliance is higher when an am- ers resent the tax break given to evaders

nesty is accompanied by increasedand conclude that the amnesty is unfair

enforcement efforts than when enforce-to them, then their compliance may de-

ment increases without an amnesty. Ancline. Second, individuals may not believe

amnesty may therefore be an effective toolthat the amnesty is a one-time opportu-

for easing the transition to a tougher taxnity to repay taxes. If they anticipate fu-

regime.ture amnesties, then compliance mayagain decline.

No work to date has been able to re-

1. Introductionsolve these fundamental issues. Most ofthe discussion of amnesties has focused

ELEAGUERED by declining tax rev- upon the details of their administration.'

Benues and mounting expenditures, There has been some theoretical analysis

many state governments in recent years of individual behavior under an am-

have sought alternative and novel reve- nesty,' and, as information from the state

nue sources. One approach that has been programs has become available, there has

used by twenty-eight states since 1981 is also been examination both of the char-

the tax amnesty. An amnesty typically acteristics of those who participate in am-

gives individuals an opportunity to pay nesties and of those amnesty features that

previously unpaid taxes without being lead to greater revenues.' However, these

subject to the penalties and prosecution studies have not been able to examine the

that the discovery of evasion normally central issue on the desirability of am-

brings. Some states have generated large nesties: how do amnesties affect volun-

amounts of revenues with their amnes- tary tax compliance in the long run? The

ties; New York collected $401 million, and major difficulty here is the absence of any

California, Illinois, and Michigan each field data on the post-amnesty impact upon

obtained more than $100 million. Other such things as taxpayer expectations of

states have not been as successful. Am- future amnesties or taxpayer perceptions

nesties in North Dakota, Idaho, Texas, of fairness. By its very nature, existing

Kansas, and Missouri each collected less information on amnesties must examine

than $1 million. the features of an amnesty, the revenues

Tax amnesties are a controversial rev that it generates, and the types of indi-

enue tool. Of particular concern is their viduals who participate. Field data sim-

long run impact on voluntary tax compli- ply do not exist to examine the long run

ance. Advocates of amnesties argue that effects of an amnesty.The purpose of this paper is to use ex-

*University of Colorado, Boulder, CO 80309. perimental methods to analyze the long**United Air Force Academy, Colorado Springs, co run impact of an amnesty on voluntary

80840.

23

24 NATIONAL TAX JOURNAL [Vol. XLIII

compliance. The laboratory setting cap- an amnesty. It therefore appears that antures the essential features of the tax sys- amnesty may be an effective tool for eas-tem of the states. Individuals receive ining the transition to a tougher tax re-come, they pay taxes on income voluntarily gime.reported, they face a probability of audit, Hypotheses about individual responsesthey pay a penalty on taxes not disclosed to tax amnesties are described in sectionif they are detected cheating, and they re- U. Section HI presents the experimentalceive a public good whose amount de- design, and results are discussed in sec-pends upon the tax payments of all indi- tion IV. Section V summarizes the mainviduals. A tax amnesty is then introduced, conclusions.in several alternative ways. In one treat-ment, an amnesty is offered in the middle Il. Amnesties and Individualof the experiment with no advance wam- Behavioring; in other treatments, individuals aretold at the beginning that there may be Behavioral predictions are based uponan amnesty at some point in the experi- several factors that are thought to affectment; the actual features of the amnesty the individual's decision to pay taxes. Theare also allowed to vary in different treat- first factor is the fear of detection andments. The use of laboratory methods punishment, as suggested by ex ectedtherefore allows generation of data on how utility models of tax compliance. How-individuals comply before, during, and af- ever, as argued by Skinner and Slemrodter an amnesty. In doing so, experiments (1985) and others, it seems clear that de-allow analysis of the long run effects of tection and punishment cannot explain thean amnesty in a controlled environment, tax compliance behavior of all individu-and so overcome the problems with field als. Given the percentage of tax returnsdata. that are audited and the penalties that are

The results indicate that some-but not imposed on audited tax returns, taxpay-all-of the concerns of amnesty critics ers would have to exhibit risk aversion farhave foundation. The average level of in excess of anything ever observed forcompliance generally falls after an am- compliance predicted by expected utilitynesty is given, and this decline is most theory to approximate actual compliance.likely due to taxpayer expectation of a fu- Other factors must play a role in the com-ture amnesty. It also appears that gov- pliance-and amnesty-behavior of in-emment assurances of no future amnes- dividuals, factors suggested by altema-ties do little to lessen this effect of tive theories of behavior underexpectations on compliance. However, uncertainty. A second element in the am-there is mixed evidence that there is a nesty decision may be the manner bypost-amnesty decline in compliance by which honest taxpayers perceive the am-those who complied with the pre-amnesty nesty. If honest taxpayers see the am-regime. Those who had a very high com- nesty as a reward for tax cheats, then theypliance rate before the amnesty contin- may decide that they are exploited by theirued to comply with the tax; however, those continued compliance, and compliance willwho had moderate pre-amnesty compli- decline following an amnesty. A third fac-ance rates lowered significantly their tor is the impact of an amnesty on the ex-compliance after the amnesty. Moreover, pectation of another, future amnesty. Ifa well-designed amnesty may be able to taxpayers believe that the amnesty is notovercome the post-amnesty decline in a one-time program, then they may lessencompliance. If post-amnesty enforcement their compliance now in anticipation of aefforts increase, then the results indicate future opportunity to repay back taxes.that aggregate compliance does not de- Fourth, individuals may pay taxes be-cline after the amnesty. In fact, compli- cause they recognize that taxes are nec-ance is higher when an amnesty is accom- essary to provide government programs.panied by increased enforcement efforts The expenditure side of the fiscal ex-than when enforcement increases without change must also be considered. Finally,

No. 11 AMNESTIES AND COMPLIANCE 25

there are intertemporal and interdepen- Advocates of amnesties argue that suc-dent aspects to tax compliance, elements cessful amnesties are accompanied by in-that suggest that one's compliance deci- creased enforcement efforts following thesion may depend in part upon the deci- amnesty, efforts that increase the proba-sions of others over time. The hypotheses bility of audit and the penalty on evasion.that are generated and tested reflect these If an amnesty is accompanied by thesevarious factors. features, then simple models of compli-

The first hypothesis relates to the effect ance suggest that compliance will in-of an amnesty on subsequent tax compli- crease:ance: H6: Tax compliance will fall after

Hl: Tax compliance will fall after an amnesty has occurred un-an amnesty has occurred. less enforcement efforts are

The rationale for Hl is that honest tax- increased.payers may perceive the amnesty as un- Of course, it would be possible to increasefair, since those who were failing to com- enforcement efforts without actually in-ply previously are being offered a chance troducing an amnesty, and such efforts byto atone without penalty; in addition, all themselves are likely to increase compli-taxpayers may anticipate another, future ance. This suggests an alternative to H6:amnesty. In both cases, compliance will H7: Any increased compliance fol-decline. However, it is of some interest to lowing an amnesty with greaterexamine each potential cause of reduced enforcement could be ob-compliance separately: tained with greater enforce-

H2: Taxpayers who complied prior ment alone.to the amnesty will decrease Put differently, the amnesty per se is likelytheir compliance after the am- to lessen compliance, and is unnecessarynesty. if enforcement is to be increased in any

H3: The expectation of a future case.amnesty will reduce compli- The design of the amnesty may affectance. the amount of back taxes paid during the

Note that the"anticipation effect" of a fu- amnesty itself. R is likely that individu-

ture amnesty may arise either if an am- als will pay more back taxes if they knownesty has actually occurred or if the tax- that their evasion is more certain to bepayers have some reason to believe that detected and penalized following the am-one will occur. However, it is possible that nesty. Therefore:this anticipation effect will decline over H8: The amount of back taxes paidtime if an amnesty is not actually given. in an amnesty depends uponThis suggests: the post-ammesty regime. If en.

H4: The anticipation effect will de- forcement efforts are in-cline over time. creased and if taxpayers do not

It is also possible that expectations of a anticipate a future amnesty,future amnesty will be lessened by gov- then more back taxes will beernment assurances that the amnesty, if paid.it occurs, is a one-time only opportunity The final hypothesis relates to the pub-to pay back taxes: lic good aspect of the compliance decision,

H5: The government can eliminate and requires some elaboration. The taxthe anticipation effect by regime in the United States (and in mostpromising that an amnesty will other countries) relies upon voluntarynot be repeated. compliance with penalties for evasion. As

Such assurances may be considered "cheap a mechanism for the provision of publictalk." Although there are more "expen- goods, this system is thought to have thesive talk" devices available, such as the classic prisoner's dilemma structure thatconstitutional amendment passed in Mas- leads to zero voluntary provision of publicsachusetts, there is some doubt that there goods as a unique dominant strategy forare any truly credible commitments. individuals. There is, therefore, a ten-


dency toward free riding that has been tax systems in the United States. In eachnoted by Samuelson (1954) and supported session the subjects are organized into aby the experimental work of Isaac, McCue, group of five individuals. The subjects areand Plott (1985). told that the session will last for an un-

However, casual observation suggests known number of periods, called rounds;that the likelihood of complete free riding the actual number of rounds is predeter-is somewhat overstated. Instances of vol- mined, and equals 25. Each person is givenuntary provision of collective goods are an initial endowment of 10 tokens, and toldwidespread. Perhaps based upon these ex- that accumulated tokens will be re-amples, there is much recent theoretical deemed for cash at the end of the sessionand experimental work that concludes that at a fixed announced conversion rate. Atvoluntary provision may be efficient.' This the beginning of each round, each personwork is based largely upon the recogni- is also given an income in tokens; the in-tion that the contribution decisions of income is randomly drawn from the inter-dividuals are both interdependent and re- val 2.00 to 3.00 tokens in increments ofpeated; that is, one individual's decision .25, and the actual amount is known onlyto contribute depends upon that individ- to the individual. The individual is thenual's perception of what others will con- asked to declare some or all of this in-tribute now and in the future. An indi- come. Declared income is taxed at the ratevidual may therefore think that his or her of 30 percent, and taxes of all five indi-decision is pivotal to the provision of the viduals in a group are paid into a groupgood over time, so that free riding is no fimd. The group fund is increased by alonger a unique dominant strategy. multiple of 2 to reflect the consumers'

The relevance of this work for tax am- surplus of the public good, and then dis-nesties is easily demonstrated. If the tax tributed in equal shares to the five groupcompliance game is viewed as a one-shot members.game without interdependence across in- An individual pays no taxes on incomedividuals or over time, then the game cor- that he or she does not declare. However,responds to the prisoner's dilemma struc- each individual faces a probability thatture. The unique dominant strategy of the evasion will be detected and penalized.individual is to report zero income. How- After all individuals have reported theirever, recognition that the game is inter- income and paid their taxes in a round,dependent and repeated gives a much up to one person is chosen at random forricher strategy space, some of which in- an audit. If a subject is selected for an au-cludes cooperative strategies. More gen- dit, then the actual and the declared in-erally, the compliance decision now become for the previous five rounds arecomes a complex multiplayer, multiperiod compared; if the subject did not fully com-game for which there is no unique best ply, then any back taxes are collected, andresponse strategy. Therefore: a fine equal to some multiple of unpaid

H9: The tax compliance game does taxes is also imposed, Penalties are notnot play as a prisoner's di- added to the group fimd. The probabilitylemma game. Instead, an indi- of audit and the penalty of unpaid taxesvidual's compliance decision are varied in some sessions to determinedepends upon the actions of the their impact on compliance. The audit se-other players. lection is performed using a bingo cage

The inclusion of a penalty mechanism also that contains one numbered ball for eachprovides some assurance to honest tax- subject plus additional balls that deter-payers that evaders will be punished. mine the overall probability of audit. Balls

Experiments to examine these hy- are placed in and drawn from the bingopotheses are described next. cage in full view of the subjects.

In those sessions in which an amnesty111. Experimental Design occurs, the amnesty takes place at the end

The experimental design replicates the of round 13. At that point, the subjects arebasic structure of the voluntary income told that they can pay some or all of their


unpaid taxes for the previous five rounds nesty is a one-time opportunity to pay backwith no additional fine imposed on the taxes and that under no circumstances willback taxes that they disclose. Like the a second amnesty be given. In all sevenregular tax payments, the back taxes paid sessions the tax rate on declared incomeduring the amnesty are combined, in- is .3, and the multiplier on tax paymentscreased by a multiple of 2, and then dis- to the group fund is 2.tributed in equal shares to the five mem- An important feature of the experimen-bers of the group. The post-amnesty tal design is that the instructions useprobability and penalty differ across the "neutral" terminology; that is, all refer-sessions. ences to taxes, audits, declared income, and

Seven sessions are conducted, and their the like are replaced with neutral wordsfeatures are summarized in Table 1. In the like contributions, checks, disclosed in-first session (Sl, or the "Base Case"), the come, and so on. It is a central tenet ofprobability of audit for each subject is .04, experimental economics that neutral termsthe penalty rate on detected evasion of be given in instructions in order to avoidunpaid taxes is 2,' and no amnesty is context effects. Previous experimentalgiven. Session 2 is designed to analyze the work on tax compliance has used instruc-impact of the amnesty by itself. Here an tions that place the experiment squarely

7amnesty is offered without any prior in the context of tax evasion. As noted bywarning after round 13, but the post-am- Plott (1987) and others, results of suchnesty enforcement regime (the probabil- experiments may be biased because theity of audit and the penalty on evasion) subjects' responses may reflect the valuesis not altered; also, subjects are not told they associate with such words as "audit,"that the amnesty is a one-time opportu- "compliance," or "tax evasion," rather thannity to pay back taxes. Session 3 consid- the rewards or penalties that they face iners the impact on compliance of an in- the experiment per se. Since the experi-crease in enforcement without an amnesty. menter is only able to control the latter,At the end of round 13, subjects are told it is essential that the institution be de-that the probability of audit will increase scribed in neutral terms. The instructionsto .06, and the penalty on unpaid taxes are provided in an Appendix (availablewill increase to 4. Most of the successful from the authors). The earlier discussiontax amnesty programs have combined the in the paper uses the tax terminology foramnesty with greater enforcement follow- ease of exposition."ing the amnesty. Session 4 examines the Subjects are volunteers from principlesimpact of these programs. As with S2, the of economics classes at the University ofamnesty is given after round 13 without Colorado at Boulder, and have no priorprior warning; as with S3, the post-am- experience in the experimental settingnesty probability of audit and penalty are being investigated.'9 Each treatment isincreased to .06 and 4. Sessions 5 and 6 replicated three times, and each sessionare designed to consider directly the ef- lasts approximately one hour. The aver-fect of taxpayer expectations of a future age payoff per subject is between $15 andamnesty. In both sessions, it is announced $25. All sessions begin with the investi-to the subjects in the initial instructions gators reading the instructions aloud,that an amnesty (without greater post- while the subjects follow along on theiramnesty enforcement) may be offered at own copies. The subjects retain their cop-some point in the experiment. In S5 the ies during the session, and are free to re-amnesty is not given; in S6 the amnesty fer to them at any time. Five practiceis given after round 13. An amnesty is also rounds are given, and any detailed ques-given in the practice rounds of S5 and S6. tions are then answered; in general, theSession 7 examines the impact on com- practice rounds clear up any subject ques-pliance of a promise that no further am- tions. All experiments are conducted innesties will be conducted. Unlike pre- the Laboratory for Economics and Psy-vious amnesty sessions, subjects are told chology (LEAP) at the University of Col-at the time of the amnesty that the am- orado at Boulder. This facility has a ded-


icated MicroVAX computer and sixteen 1 through 13 is 0.518, and it falls to 0.449terminals, with one terminal serving as a after the amnesty has occurred, a differ-monitor. ence that is statistically significant at the

.01 level (t-statistic = 2.60). However, it

IV. Results is possible that compliance simply fallsover time during the sessions. For Sl, this

This section presents the results of tests is clearly not the case. Average compli-of the various hypotheses. Data on aver- ance over rounds 14 through 25 is 0.585,age compliance rates by treatment are which is statistically higher than compli-sunanarized in Table 1, which reports the ance of 0.532 in rounds 1 through 13 (t-compliance rate as the ratio of declared to statistic = 1.92). These results suggest thattotal income averaged over all five sub- the tax amnesty lowers compliance andjects in all three replications. More de- that the fall in compliance in S2 is due totailed data by round are presented in Ta- the effect of the amnesty and not to theble 2.'o passage of time. Figure 1 shows the round

12The hypotheses are tested in several by round compliance rates for Sl and S2.ways. One method simply examines Sessions 5 and 6 also provide some evi-whether the difference in the average dence on HI. Recall that in the instruc-compliance rates across treatments is sta- tions to these sessions the subjects are toldtistically significant using difference of that an amnesty may occur during themeans tests. This method requires that the session, that an amnesty is included in thedistributions of the compliance rates in practice rounds of these sessions, and thateach session be normal and independent. an amnesty actually occurs in S6. The av-Independence is achieved by pooling the erage compliance rate in S5 is only 0.44,data across the three replications con- which is significantly lower than that inducted for each experimental treatment; Sl; the average compliance rate in S6 isit is these data that are used for the sta- 0.52, which is also statistically lower thantistical comparisons. Normality is veri- in Sl." The average compliance rate alsofied with the Bowman-Shelton statistic declines after round 13 in both sessions,[Newbold 19881." Hypotheses tests are from 0.488 to 0.398 in S5 and from 0.556also conducted using the Mann-Whitney to 0.486 in S6. In both cases the declinenon-parametric test [Conover, 19801, which is statistically significant at the .05 levelexamines whether two populations have (t-statistics are 3.53 and 1.93, respec-identical means and does not require that tively).the data be normally distributed. Because The second hypothesis looks at the ef-the results obtained by each of the two fect of the amnesty on honest taxpayers.methods are the same, only the difference Evidence on H2 comes from S2. The fif-of means tests are discussed in the text. teen subjects can be classified in one of

Note that average compliance rates are three groups on the basis of their averageempirically identical for the first 13 rounds compliance prior to the amnesty: group Aof all seven treatments. Only after a has very high pre-amnesty compliance (inchange is introduced in some sessions at excess of 80 percent), group B has mod-the end of round 13 do the compliance rates erate compliance prior to the amnestybegin to diverge. Reasons for these differ- (between 30 and 70 percent), and group Cences are suggested by the various hy- has extremely low compliance rates (closepotheses. to zero). Except for one individual who re-

The first hypothesis says that compli- duced compliance to zero, those in groupance will be lower following an amnesty. A continued with very high complianceSessions 1 and 2 provide some evidence rates after the amnesty, and group C sub-on Hl. Sl is the base case session; in S2 jects also continued with compliance ratesthe subjects areoffered an amnesty after near zero. However, group B subjects gen-round 13 and are not warned in advance erally lowered their compliance. A Mann-that such an amnesty will occur. The av- Whitney test indicates that the decline inerage compliance rate in S2 over rounds the compliance rate among this group is

TABLE I

EXPERIMENTAL DESIGN AND RESU

Announcement Promise ofof Possible Amnesty One-time Ave

Session Enforceme Amn= Given? AmnesLy? Rounds 1 --1

si Constant No No 0.532 (0.06)

S2 Constant No Yes No 0.518 (0.03)

S3 Increased No No 0.517 (0.07)

S4 Increased No Yes No 0.575 (0.07),

S5 Constant Yes No 0.488 (0.05)

S6 Constant Yes Yes No 0.556 (0.11)

S7 Constant No Yes Yes 0.564 (0.05)

a In all cases the tax rate on declared income is .3, and the multiplier on thb "Increase(f' enforcement means that the probability of an audit is increase

increased from 2 to 4 after round 13.c Ile average compliance rate is the ratio of declared income to true inco

three replications of each session. Standard deviations are in parentheses

30 NATIONAL TAX JOLTRNAL [Vol. NIII

TABLE 2

AVERAGE COMPLIANCE RATES BY ROUND

Session

si S2 S3 S4 S5 S6 S7Round Mean Mm Mm Mean Mm Mean Mean

1 0.56 0.58 0.50 0.68 0.55 0.49 0.622 0.56 0.54 0.47 0.59 0.54 0.53 0.533 0.56 0.53 0.62 0.55 0.54 0.54 0.564 0.53 0.51 0.42 0.63 0.52 0.39 0.555 0.42 0.46 0.60 0.47 0.53 0.37 0.516 0.44 0.50 0.52 0.62 0.49 0.66 0.537 0.51 0.55 0.44 0.50 0.46 0.61 0.528 0.64 0.50 0.57 0.60 0.43 0.62 0.539 0.51 0.49 0.62 0.66 0.43 0.61 0.51

10 0.46 0.52 '0.52 0.51 0.45 0.70 0.6811 0.58 0.49 0.49 0.53 0.53 0.68 0.6012 0.59 0.57 0.50 0.52 0.47 0.62 0.5713 0.56 0.49 0.45 0.62 0.40 0.51 0.6314 0.58 0.59 0.56 0.73 0.40 0.63 0.5315 0.63 0.50 0.53 0.75 0.31 0.49 0.5916 0.54 0.54 0.52 0.63 0.44 0.46 0.5317 0.53 0.54 0.56 0.56 0.23 0.49 0.5318 0.57 0.50 0.65 0.70 0.31 0.41 0.5119 0.66 0.45 0.60 0.69 0.45 0.53 0.4420 0.48 0.47 0.64 0.72 0.45 0.53 0.3921 0.69 0.37 0.53 0.72 0.40 0.52 0.5122 0.67 0.31 0.54 0.60 0.45 0.41 0.5323 0.58 0.39 0.50 0.69 0.48 0.51 0.5224 0.63 0.37 0.51 0.72 0.45 0.40 0.4325 0.46 0.36 0.50 0.72 0.40 0.45 0.56

Total 0.56 OA8 0.53 0.63 0.44 0.52 0.54

significant at the .10 level (z-statistic ported in Sl.14 Further, it Was noted above

1.54). It therefore appears that the neg- that compliance declines significantly af-ative impact of the amnesty is most pro- ter round 13 for S5 and S6, unlike Slnounced among those who were moder- where compliance tends to rise after roundately compliant prior to the amnesty. It is 13. These latter results again suggest thatrisky to attribute this decline in compli- compliance does not necessarily declineance entirely to taxpayer perceptions of over time of its own accord, but rather isfairness, since other factors may enter. affected by the potential for an amnesty.Still, it seems likely that questions of Comparing rounds 1 through 13 of Sl andfairness play some role in self-reporting S5 also provides some support for an an-tax systems. ticipation effect. Compliance in rounds 1

The anticipation effect (H3) is tested through 13 is lower in S5 than Sl (t-sta-with data from Sl, S5, and S6. The av- tistic = 1.99); however, there is no differ-erage compliance rate across all rounds of ence over these rounds for S6 versus SlS5 is 0.44 and 0.52 in S6, both of which (t-statistic = 0.68).are statistically lower than the 0.56 re- H4 suggests that the anticipation effect


Figure I

Compliance Rates0.8

Compliance Rate

0.7

0.60.5-

0.4

0.3

0.2

0.1oi

0 5 10 15 90 25 soRound

-al a 82

will diminish over time. An indirect test pliance rate in S4 rises from 0.57 to 0.69for H4 comes from the results reported for following the amnesty, a difference thatH3, where it was found that compliance is statistically significant at the 0.01 levelin the initial rounds of S5 is higher than (t-statistic = 4.41). Recall that compli-in its final rounds, a result in contrast to ance fell following the amnesty in S2.16Sl where the compliance rate does not fall Greater enforcement efforts may there-over time. Apparently, hope of an am- fore be able to offset the negative compli-nesty contributes to a decline in compliance impact of an amnesty by itself (seeance for a considerable time, and the ef- Figure 2). These results are also consis-fect does not readily diminish. tent with the anticipation effect. Unless

The effect of a promise that there will the penalty rate and the audit probabilitybe no further amnesties (H5) is tested via are increased following the amnesty, com-S7, in which the amnesty is a surprise, pliance will decline; however, greater en-the enforcement effort is not increased forcement efforts can mitigate the impactsubsequent to the amnesty period, and the of expectations on compliance. In fact, allsubjects are told that there could be no subjects in S4 increased their compliancefurther amnesty period. The average rate after round 13.compliance rate for the first thirteen H7 argues that increased enforcementrounds of S7 is 0.56 and falls to 0.51 after efforts are sufficient to increase compli-the amnesty round; this difference is sig- ance without reliance on an amnesty. Datanificant at the 0.05 level (t-statistic = to test this hypothesis are provided by S32.67)." (Recall that compliance rose after (where enforcement is increased afterround 13 in Sl.) Apparently the promise round 13) and by S4 (where enforcementof no further amnesties is not credible. is increased following the amnesty in

The impact of an amnesty with in- round 13). The average compliance ratecreased enforcement (H6) is examined by in the last twelve rounds of the sessionsS2 and S4. In both sessions an amnesty is higher at the .001 level in S4 (0.69) thanis given after round 13; in S4 the proba- in S3 (0.55) (t-statistic = 6.91).17 The datability of detection and the fine on detected clearly reject H7. It is therefore useful toevasion are increased. The average com- combine greater enforcement with an am-

32 NATIONAL TAX JOURNAL [Vol. XLM

Figure 2

Compliance Ratesompliance Rate

0.8

0.6-

0.4

0.2

0'0 5 10 15 20 25 30

Round

82 & 84

nesty to generate more tax compliance. increases significantly in response to theIndeed, the amnesty may ease the tran- amnesty terms: 0.55 in S2, 0.69 in S4, 0.55sition to a new enforcement regime, in a in S6, and 0.66 in S7. These results aremanner that taxpayers perceive as fair. broadly consistent with H8. The greatestAs noted, all fifteen subjects increased revenue and the highest amnesty compli-their compliance rate following the am- ance rate both occur in S4, in which thenesty in S4; only six subjects increased amnesty is followed by increased enforce-their compliance after round 13 in S3. ment; the second highest responses are for

The impact of the amnesty design on S7, in which there is a promise of no fu-back taxes paid (H8) is examined with data ture amnesties; and the lowest responsesfrom sessions S2, S4, S6, and S7. S2, S6, are for S2 and S6-the amnesty compli-and S7 offer an amnesty but do not in- ance rates are identical-where there arecrease post-amnesty enforcement; S4 in- no promises and no enforcement in-cludes both an amnesty and greater en- creases.forcement; and S7 includes a promise of Econometric analysis of individual datano future amnesties. All amnesties gen- from S2, S4, S6, and S7 provides addi-

18erated substantial revenues, in each case tional support for H8.

The amount ofgreater than the average amount of reg- taxes paid by each individual during theular taxes collected per round. However, amnesty (BACKTAX) is predicted to be athere is great variation in amnesty rev- fimction of the amount of back taxes owedenues. The amnesty in S2 collected 2.40 (or the exposure to risk of future audit) atper group, while average group tax pay- the time the amnesty is offered (TAX-ments in a given round are approxi- OVIED), a dummy variable that equals 1mately 2.00; those amnesties in S4, S6, and if there is increased post-amnesty en-S7 collected 4.88, 3.80, and 3.99, respec- forcement and 0 otherwise (ENFORCE-tively, per group. Further, if those indi- MENT), and a dummy variable that equalsviduals who owe no back taxes at the time 1 if there is expectation of another am-of the amnesty are excluded, then the av- nesty and 0 otherwise (EXPECTA-erage of the ratio of back taxes paid by TION)." Given the large number of zeroeach individual to back tax liability also observations in the dependent variable,


Tobit maximum likelihood estimation is quent amnesties are unlikely.used. The results in Table 3 provide lim- H9 argued that the individual views theited support for H8. The coefficient on compliance game as interdependent andENFORCEMENT is positive and signifi- repeated. The experimental resultscant at the 0.05 level. The coefficient on strongly support H9. For each session, anEXPECTATION is negative as expected, individual's compliance rate is estimatedbut is not significant. Revenues from the as a function of the amount of the publicamnesty will therefore be greater if tax- good that the individual received in thepayers know that evasion is more likely previous round. In all sessions, the coef-to be detected and penalized and, to a ficient on the public good is positive andlesser extent, if they know that subse- significant at the 001 level, and its mag-

TABLE 3

TOBIT MAXIMUM LIKELIHOOD ESTIMATION RESULTS

DtRendent Variable

Independent Variable BACKTAX DECLARED

TAXOWED 0.568*** --(4.39)

ENFORCEMENT 0.532* 0.164"(1.60) (2.09)

EXPECTATION -0.215(0.65)

INCOME 0.209"*(6.59)

PUBLIC 0.983*"(10.91)

ANNOUNCEMENT -0.133*'(2.34)

AMNESTY -0.131"(2.12)

AMNESTY*ENFORCEMENT -- 0.401**(2.76)

Log-likelihood -72.8 -3730.4

n 60 2625

t-statistics are in parentheses.

Significant at 0.10 levelSignificant at 0.05 levelSignificant at 0.01 level

34 NATIONAL TAX JOURNAL [Vol. XLI[II

nitude is very similar across sessions.'o A nouncement of a possible amnesty (AN-more complete specification of the com- NOUNCEMENT) .23 Also, compliance ispliance decision is discussed below. predicted to increase as a result of the

It is of some interest to examine the in- interaction of an amnesty and increaseddividual data in more detail. Figure 3 (a enforcement effort (AMNESTY*EN-and b) presents the frequency distribu- FORCEMENT). Tobit maximum likeli-tion of the individual compliance rates for hood results are reported in Table 3.several representative treatments. In The results are largely consistent withgeneral, there is substantial (though not the predictions. The coefficient on PUB-complete) evidence of all-or-none behav- LIC is positive and significant, a resultior, as would result from a linear payoff similar to the behavior observed in thefimetion for the individual, and compli- individual sessions. Increased enforce-ance tends to rise or fall across treatment effort by itself increases compli-ments by changes in the frequencies of the ance; moreover, combining enforcementextreme behavior. Hidden within Figure with an amnesty also leads to increased3 is some variation in compliance by par- compliance, as shown by the significantticular individuals across rounds. A sub- positive coefficient on AMNESTYject apparently may try different strate- *ENFORCEMENT. The coefficient ongies in the compliance game: to induce ANNOUNCEMENT is negative and sig-others to comply, to see the effects of their nificant, indicating that the expectationown tax compliance, to free ride, and so of a future amnesty leads to reduced com-on. For the most part, however, there is pliance. This result is also supported bysignificant individual consistency across the significant negative coefficient onrounds as subjects settle into a predict- AMNESTY itself. Having seen an am-able strategy. nesty, the subjects act as if they expect

24Figure 3 also indicates that the struc- another.ture of the amnesty has significant effects -on the extremes of the behavior choices of V. Conclusionsthe subjects. The simple amnesty (S2) re-sults in a considerable fall in the fre- Experimental evidence indicates thatquency of high compliance, while low many-but not all-concems about thecompliance rates become much more com- long term effects of a tax amnesty onmon. When the amnesty is accompanied compliance are correct. The overall levelby an ex post increase in enforcement (S4), of tax compliance falls after an amnesty.there is a fall in the frequency of the very The decline in compliance stems from thelow compliance rates and an accompany- behavior of those persons engaged ining increase in the frequency of near com- moderate levels of compliance prior to theplete compliance. amnesty; those who either comply com-

The large number of total observations pletely or not at all are largely unaffectedacross all seven treatments allows esti- by the amnesty. The expectation of anmation of the impact on compliance of amnesty also significantly reduces com-various institutional variables." The pliance. However, these negative impactsspecification is based upon the experi- on compliance can be offset by greater post-mental design (see Table 1) and the lim- amnesty enforcement efforts. More sig-ited empirical compliance literature.22 It nificantly, the combination of an amnestyis predicted that the amount declared by and enforcement appears to be more ef-each individual (DECLARED) is a posi- fective in generating compliance than antive function of his or her income in a equivalent change in enforcement alone.round (INCOME), the amount of the pub- Compliance may therefore depend to somelic good received in the previous round degree on individuals' recognitions that(PUBLIC), and increased enforcement ef- their decisions are interdependent and thatfort (ENFORCEMENT), while compli- there is some sort of fiscal exchange. It isance is likely to fall with the occurrence here that their perceptions of fairness playof an amnesty (AMNESTY) and the an- a crucial role in the compliance decision.


Figure 3 aFrequency of Compliance Rates

requency30

25

20

15

10

0,.l .11,.2 .21,3 .31..4 .41..G .61..6 .6t.7 .71..$ .81..9 .91.1Compliance Rates

Mala EM$2a F-134a

Figure 3 bFrequency of Compliance Rates

40requency

30

20

10

L El0

O..l .1l..2 .21@3 .3l..4 .4l..5 .51..8 .61..7 .7l..S .81.-0 .91.1Compliance Rates

=8 lb MS 2b r--l 6 4b

Round*14 - 25


If the government wants to increase pen- We would like to thmik Norm Frohlich, John Lott,alties and audits in a manner that tax- John Baldwin, and three anonymous referees of this

Joumal for helpful comments and Doreen Victor forpayers perceive as fair, then it may be programming work. Partial funding for this work wasnecessary to accompany these changes provided by the Council for Research and Creativewith an amnesty to provide a one-time Work at the University of Colorado at Boulder.grace period before the enforcement is in- 'See Mikesell (1984, 1986), Parle and Hirlinger

(1986), and Jackson (1986).creased. 2See Alm and Beck (1988) and Andreoni (1989).

As is true of any applied work, these re- 3For example, Fisher and Gocldeeris (1988) discusssults should be viewed with some caution. the Michigan --ty participants, and Ahn and BeckStill, they should not be dismissed lightly (1989) analyze empirically the revenue impact of spe-

*cific amnesty characteristics.

No field data exist at present to examine "See, for example, Allingham and Sandmo (1972).the long-run impact of an amnesty, and 'See, for example, Dawes, et al., (1986) and Bagnolithere is little chance that such data Will and McKee (1988).become available in the future. Labora- 'Note that this means that the individual pays back

taxes plus a fine equal to two times back taxes if caughttory methods offer perhaps the only op- cheating.portunity to investigate in a controlled 7For example, see Friedland, Maital, and Ruten-environment the behavioral responses to burg (1978) and Spicer and Becker (1980).a tax amnesty. 'In fact, there is some evidence that the use of loaded

terms may not affect experimental tax compliance re-Of course, one might still ask whether sults, at least under some circumstances. Alm,

experimental results can contribute to McClelland, and Schulze [19891 compare the resultspolicy debates. There is an extensive-and of two treatments, one that uses loaded terms and onegrowing-literature that argues convinc- that uses neutral terms; in all other respects the

treatments are identical. They find that the twoingly that the answer is yes. As discussed treatments give identical results, which suggests thatby Plott (1987), to be of use in policy anal- behavior may not be affected by the nature of the in-ysis the experimental setting must sat- structions when subjects are given full and complete

information on the parameters relevant to theirisfy the condition of "parallelism." This , .cnoices.does not mean that the experimental set- 'The use of student subjects is nearly universal inting must mimic every nuance of the nat- experimental economics. Availability and cost play aurally occurring setting that is the object role in this decision. The use of student subjects isof investigation. Instead, the experimen- also valid when one considers that properly designed

experiments evaluate individual decisionmaking, andtal setting must place the subjects in a there is no reason to doubt that students have accessdecisionmaking environment that cap- to the same cognitive processes as individuals in thetures the essential properties of the field outside world. Those studies comparing student andsetting. In the experiments reported here, "'tudent subject responses have generally found no

significant difference. See Plott (1987) for further dis-subjects face a tax, penalty, distribution, cussion and examples (airport landing slot alloca-and amnesty process similar in basic tions, antitrust cases, and allocation of resources withinstructure to those actually faced by tax- a committee structure).

"Some additional sessions have been conducted inpayers in deciding how to behave before, which the probability of detection and the penalty rateduring, and after an amnesty. It is pos- are set at lower levels before and after any enforce.sible to disagree over the magnitudes of ment change (the probability of audit is 0.02 beforevarious parameters in the design. It seems and 0.04 after; the penalty rate is 1 before and 2 af-likely, however, that the conditions for ter), and other parameters are unchanged from theparallelism are met here. The results from ,essions reported here. The reduced enforcement low-

ersthe average compliance rate. However, in all other

the experiments therefore provide needed respects (responses to tax amnesties, to increased en-insight into the behavior of taxpavers foreement, and so on) the results of these sessions amwhen faced with a compliance and am- identical to the results of the sessions reported here.

These sessions do not formi a complete set because theynesty decision. were conducted primarily to test the sensitivity of thedesign.

"For all treatments the data are evaluated forENDNOTES rounds 1 through 13 and for rounds 14 through 25.

The Bowman-Shelton statistics for each treatment for***An Appendix describing our experiments is each set of rounds are:available on request from the authors. Earlier ver-

sions of this paper were presented at the joint Public Session Rounds 1-13 Rounds 14-25Choice Society/Economic Science Association Meet- si 0.464 0659ings in March 1989 and at the National Tax Associ- 82 0.552 0821ation Annual Conference on Taxation in October 1989. S3 0.875 1.592


S4 0.833 2.417 Journal of Public Economics, 1 (4), 323-338.

S5 1.143 2.231 Alm, James and William Beek (1988). "Tax Amnes-

S6 1.032 0.621 ties and Tax Revenues," University of Colorado

S7 1.688 1.137 Working Paper.Alm, James and William Beck (1989). "Wiping the

The critical value of the statistic is 2.43, and the as- Slate Clean: Individual Response to State Tax Am-sumption of normality for all sessions is not rejected nesties," University of Colorado Working Paper.at the 10% level. Alm, James, Gary H. McClelland, and William D.

"The Mann-Whitney tests yield the same conclu- Schulze (1989). "Why Do People Pay Taxes?" Uni-sion. The compliance rates before the amnesty in 82 versity of Colorado Working Paper.are greater than after the amnesty at the .01 level (z- Andreoni, James (1989). "The Desirability of a Per-statistic = 2.40). Similarly, the compliance rates for manent Tax Amnesty," SSRI Workshop Series 8901,rounds 14 to 25 are higher in 81 than in S2 at the University of Wisconsin-Madison..01 level. Bagnoli, Mark and Michael McKee (1988). "Volun-

"The t-statistic for Sl and S5 is 6.06, and is 1.64 tary Provision of Public Goods Can Be EiTicient-for Sl and S6. The critical values are 1.66 and 2.33 Empirical Evidence," University of Michiganat the 0.05 and 0.01 levels for a one-tailed test with Working Paper.48 degrees of freedom. Conover, W. J. (1980) Practical Nonparanwtric Sta-

'4The t-statiatic for Sl and S5 is 5.34 and for Sl and tistics, New York, NY: John Wiley & Sons, Inc.S6 is 3.48, both of which are significant at the .001 Dawes, R., J. M. Orbell, R. T. Simmons, and A. J. C.level. This is confirmed by the Mann-Whitney test, Van de Krae (1986). "Organizing Groups for Col-which reports that compliance in Sl is higher than in lective Action," American Political Science Review.S5 and S6 at the .01 level. Dubin, Jeffrey A. and Louis Wilde (1988). "An Em-

'5A Mann-Whitney test indicates that compliance pmcal Analysis of Federal Income Tax Auditing andin S7 after the amnesty is lower than before at the Compliance," National Tax Journal, 41 (1), 61-74..05 level (z-statistic = 2.07). Fisher, Ronald C. and John H. Goddeeris (1988).

16A Mann-Whitney test for 82 indicates that the "Taxpayer Participation in Amnesties: The Indi-compliance rate before the amnesty is greater than vidual Income Tax," Michigan State Universitythat after the amnesty at the .01 level; for S4, the pre- Working Paper.amnesty compliance rate is less than the post-am- Friedland, Nehemiah, Shlomo Maital, and Aryeh Ru-nesty compliance rate at the .01 level tenburg (1978). "A Simulation Study of Income Tax

17 The Mann-Whitney test supports these findings. Evasion," Journal ofpublic Economics, 10, 107-116.Compliance is higher in rounds 14 to 25 of S4 than Isaac, R. M., K. McCue, and Charles R. Plott (1985).in S3 at the .01 level (z-statistic = 2.80) "Public Goods Provision in an Experimental Envi-

"Individual data on back taxes paid in the atnnes- ronment," Journal ofpublic Economics, 26 (1), 51-ties are available upon request. 74.

'@ENFORCEMENT equals 1 for S4 and 0 for all Jackson, Ira (1986), "Amnesty and Creative Taxother sessions. EXPECTATION equals 1 for S2, S4, Administration," National T= Journal, 38 (3), 317-and S6 and 0 for S7. 323.

'The coefficient estimates for the lagged amount of Mikesell, John L. (1986). "Amnesties for State Taxthe public good in 81 to S7 (t-statisties are in paren- Evaders: The Nature of and Response to Recenttheses) are, respectavely, .41 (5.72), 45 (3.96),.48 (7.64), Programs," National Tax Journal, 39 (4), 507-525..45 (7.43),.23 (2.39),.42 (5.39), and 39 (4 75). Newbold, P. (1988) Statistics for Business and Eco-

2'lndividual data for all sessionr, are available upon nomics, Prentice-Hall, Englewood Cliffs.request. Parle, William M. and Mike W. Hirlinger (1986).

'See, for example, Witte and Woodbury (1985) and "Evaluating the Use of Tax Amnesty by State Gov-Dubin and Wilde (1988). emments," Public Administration Review, 246-255.

'ENFORCEMENT equals I for rounds 14 to 25 of Plott, Charles R. (1987). "Dimensions of Parallelism:S3 and S4 and 0 otherwise. ANNOUNCEMENT equals Some Policy Applications of Experimental Meth-1 for all rounds of 85 and S6 and 0 otherwise. AM- ods," in Alvin E. Roth (ed.) Laboratory Experimen-NESTY equals 1 for rounds 14 to 25 of S2, S4, S6, tation in Economics: Six Points of View, New York,and S7 and 0 otherwise. NY: Cambridge University Press.

2'Me promise of no future amnesties apparently has Samuelson, Paul A. (1954). "The Pure Theory of Pub-no effect on compliance. An additional variable lic Expenditure," Review ofeconomics and Statis-PROMISE was defined (equal to 1 for rounds 14 to 25 tics, 36, 387-389.of 87 and 0 otherwise), and included as an interaction Skinner, Jonathan and Joel Slemrod (1985). "An Eco-term with AMNESTY. However, the coefficient on nomic Perspective on Tax Evasion," National TaxAMNESTY*PROMISE was never significant, and so Journal, 38 (3), 345-353.this variable was omitted from analysis. Spicer, Michael W. and Lee Becker (1980). "Fiscal in-

equity and Tax Evasion: An Experimental Ap-proach," National Tax Journal, 33 (2), 171-175.

REFERENCES Witte, Ann D., and Diane F. Woodbury (1985). "TheEffect of Tax Laws and Tax Administration on Tax

Allingham, Michael G. and Agnar Sandnio (1972). Compliance: The Case of the U.S. Individual in."Income Tax Evasion: A Theoretical Analysis," come Tax," National Tax Journal, 38 (1), 1-14.

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