At the end of March, the Spanish government, led by Mariano Rajoy, approved a general budget for 2012 aimed at compliance with the goal of achieving a governmental deficit equivalent to 5.3% of the country's gross domestic product (GDP). The budget was created in the hopes of restoring confidence in the country's finances and solvency among international investors. To do this, the government established a series of extraordinary measures, including a controversial "tax amnesty" for so-called "black money." These are the sorts of funds that have escaped any controls by the government, including tax payments.

The initiative introduces a special levy of 10% on undeclared income by contributors to the IRPF, the income tax imposed on corporations and non-residents not being investigated by the government's tax agency. At the same time, the government is also establishing a tax of 8% on dividends and profits from foreign sources that are repatriated before December 31. Spain's Finance Ministry calculates that these measures will enable some 25 billion euros (US$33 billion) of funds that have not been acknowledged until now to come to the surface. This, in turn, would ultimately bring about $3.3 billion into the government's coffers.

The move by the Spanish government is similar to one taken by Italian Prime Minister Mario Monti, who last November decided to expand the tax amnesty put in place by his predecessor Silvio Berlusconi in 2009. At the same time, Monti intensified the battle against tax fraud, which permitted his government to uncover 58 billion euros (some US$76 billion) in undeclared transactions in 2011.

Spainhas pursued the same path. Cristóbal Montoro, Spain's minister of finance and public administration announced that following the tax amnesty, Spain will approve an "extremely tough" battle plan against fraud, which will include such innovative measures as setting a limit on cash payments for commercial deals to just 2,500 euros (US$3,294).

But Daniel Díaz Fuentes, a professor at the University of Cantabria in Spain and an expert in fiscal and monetary policy, has doubts about the effectiveness of an amnesty policy. His assessment of such measures is "generally negative," he says. In his view, tax evasion and tax amnesties have historically been a symptom of tax systems' backwardness, which go hand and hand with a low level of public commitment to making payments to the Treasury, and the overall inefficiency of the system of tax collections. "However, the problem was not — nor is it exclusively now — the backwardness of the Treasury, but the general perception that there were unequal opportunities for committing fraud," he notes. "This [in turn] limited the possibilities for tax reform and contributed to the fraud itself."

Fuentes points out that the numerous amnesties that occurred in various countries such as Argentina, Australia, Ecuador, France, Colombia and the United States in the 1980s — and in Italy in 2009 — "have pursued short-term tax goals that have been more or less effective." Moreover, these amnesties have been presented as a means for dealing with — and reducing — fraud. That is to say, for "converting perpetrators of fraud into contributors [to the tax system]. This can create an incentive [for some citizens to commit fraud] by creating [widespread] expectations that there will be amnesties in the future, as has commonly been the case in Italy and in other Latin American countries," he warns.

Julian Lopez Laborda, a professor of economics and economic history at the University of Zaragoza, agrees with Fuentes' assessment. "Tax amnesties are awarded for reasons that are strictly related to collecting funds: To obtain money over the short term by collecting funds derived directly from the amnesties," he says. "However, they also occur, over the medium and long term, as a consequence of bringing into the system those who had failed to comply with the tax law. Nevertheless, it is clear that neither over the short, medium, nor long term, do amnesties have significant effects."

Indeed, empirical studies show that even in the most successful cases, only a modest amount of revenues has been directly obtained through such amnesties. In a 2008 study titled, "Tax Amnesties: Theory, Trends and Some Alternatives," International Monetary Fund economists Eric Le Borgne and Katherine Baer, note that the benefits achieved from a tax amnesty are "in the best of cases, exaggerated and that they frequently do not manage to exceed the costs of the program — costs that are rarely accounted for."

The economists go on to say that the standard that politicians often use for evaluating the impact of any tax amnesty is how much gross revenues increase over the short-term. While such revenues can grow effectively, those figures do not take into account the gain in net income — not only in the short term, but also over the medium term, since the "initial success of the [amnesty] measure" can decline because of various factors. Those factors include the possibility that the compliance rate of taxpayers will decline because the administration loses its credibility as a result of the social controversy generated by the perception that fraudsters receive favorable treatment. In addition, the success of an amnesty may wane due to the direct costs of administering it, including funds, employees and advertising. Finally, there can also be losses due to the cost of the tax revenues that are sacrificed; that is to say, those funds that will not be recovered after the amnesty is enacted, but which could have been collected if the authorities had detected tax evasions and applied the corresponding penalties.

Calculating Success and Failure

López Laborda notes that although tax amnesties often fail, they can succeed to a point. "When an individual decides to evade taxes, he does it, among other reasons, because he estimates that the taxes that he has to pay if he voluntarily complies are higher than those taxes that he would eventually have to pay if he decided to evade and if his evasive behavior were later detected. For example, if the tax is 50%, and the probability of detecting evasion is 1%, and the taxes he has to pay in case of fraud … are 300%, then the comparison is the following: A 'sure tax' of 50% compared with a 'probable tax' of 3% (300% x 1%). The decision of the individual will be whether to take the risk and evade the tax," he says.

When a government institutes amnesty, in order for a tax evader to change his initial decision and decided to participate, "he has to change one of the variables of the previous calculations in such a way that it winds up being better for him to pay rather than not to do so," López Laborda states.

López Laborda adds that the way the recent Spanish amnesty has been designed — it permits individuals to pay a "certain tax" of 10% — will make those individuals whose "probable tax" is greater than 10% feel more interested in participating in the amnesty. He predicts that there certainly won't be many such people, because there is a very low probability of detecting non-compliance [with the tax law]; even a zero probability in those cases where the capital is located outside of Spain in tax havens. "That makes the 'probable tax' work like this: Although the penalty is very large, if the probability of detection is zero, then the 'probable tax' will also be zero," he notes.

Dangerous Messages

Fernando Rodrigo Sauco, a professor of economics and economic history at the University of Zaragoza, says that some empirical studies stress the role that tax amnesties can play as a tool in the transition to phases of taxation characterized by more severe treatment of evasive conduct. "That is to say, if there is a severe problem of tax evasion in a country …, then a tax amnesty can contribute to a game of 'carrot and stick,' favoring a move toward a period of greater prosecution of fraud and, at the same time, toward a period when tax compliance is more generalized."

Nevertheless, Spain's most recent experiences in tax amnesty do not invite optimism with respect to the possible success of such measures. In 1991, then minister of economics Carlos Solchaga, offered taxpayers "opaque promissory notes": People were given the opportunity to bring themselves into compliance with tax law if they made complementary declarations of their true tax indebtedness in return for purchasing a special Spanish public-sector promissory note that carried a very low interest rate. According to a study by professors Julio López Laborda and Fernando Rodrigo Sauco at the University of Zaragoza, titled "The Case of the 1991 Tax Amnesty and Long-term Compliance with the IRPF,""The exercise that was done regarding a series of monthly collections of IRPF [personal income tax] between 1979 and 1998 enables us to conclude that the amnesty had no impact on tax collections, either over the short or the long term."

Beyond their limited effects on the amount of taxes collected, tax amnesties have produced all sorts of negative effects, experts say. López Laborda says amnesties "represent an extremely clear attack on the principle of equity and, in addition, they send some dangerous messages." He notes that amnesties are a sign to fraudsters that amnesties may be repeated; people assume that they will always have an opportunity to normalize their tax status under advantageous conditions. Those who do comply with the tax law are invited to reestablish their relationship with the Treasury. This suggests the following question: Why maintain a relationship of collaboration and compliance with tax authorities if non-compliance with tax law is rewarded? "In the 'performance economy,' we are already forewarned that a change in the [social] contract between the government and its population can lead to increased non-compliance," López Laborda adds. "Finally, amnesties inform everyone that the government is incapable of adequately battling against tax fraud and that there is no doubt that [the government] will sacrifice the principles of justice in return for uncertain tax collections."

According to Diaz Fuentes, amnesties have amounted to opportunities granted to fraudsters, over a limited period of time, to make voluntary contributions after admitting their evasions; and then obtaining a reduction or elimination of their corresponding penalties. "This means [amnesties] are a comparative insult to honest taxpayers. Second, they diminish the importance of the seriousness of the fraud and the infractions," he notes. "Finally, they affect socially accepted principles concerning the capacity for payment and tax justice [in which those who have more income pay more]."

Many decisive factors remain to be resolved in the measure recently approved in Spain, such as the model to be used for declaring and sending information to the government about compliance, as well as additional necessary measures for compliance with standardization measures. Rodrigo Sauco notes that in the future, authorities will more accurately evaluate the amnesty because they will be able to calibrate its generosity; that is to say, to fine-tune the effective range of its coverage. "The more generous it is, the more problems of equity there will be, since we will deal, after the fact, in a very different way … with people who should be treated in an equal way when it comes to taxes."

In his opinion, the stronger the impression that problems of equity exist, the more it will jeopardize the tax compliance of those individuals who had behaved in an honest way until now. "There may be some problems in the deterioration of the fiscal conscience of taxpayers if society feels that tax evasion is not a particularly serious or illicit act." As a result, "A decisive factor will be the way the measures that accompany the law are designed, since those measures will either strengthen or fail to strengthen the credibility of the battle against fraud in the future," he adds.

Given expectations that the tax amnesty will have a minimal impact on tax collections as well as other negative effects, López Laborda stresses that the budgetary condition of the country could worsen "beyond the [government's] already somewhat inflated forecast for revenues, which are [already] difficult to meet. They need to add a forecast for tax collections that takes into account the [impact of the tax] amnesty," he says. "No doubt, that [forecast] won't be met either, and we will find ourselves in December facing a deficit target that we cannot fulfill and without enough time to react."