Some governments will go to extremes to encourage people to pay their taxes.
In Chile, for example, when VAT was first introduced in the 1980s, contributors who sent in 30 invoices that included sales tax stood to win a fully furnished apartment. In China, the arrival of capitalism brought with it fapiaos, scratch-and-win invoices. More recently, a number of EU member states have introduced incentives to persuade people to get small businesses to pay their taxes.
The experts agree that such initiatives can have a positive impact when part of a broader system of checks, but that they will probably not increase tax revenue significantly.
Following Greece and Slovakia, Portugal is the latest EU country to come up with a scheme to encourage its citizens to pay their taxes. Putting the carrot before the stick, so to speak, the government in Lisbon says that from April, individuals who pay VAT to small businesses such as hairdressers, plumbers, as well as bars and restaurants, and keep the invoice, stand a chance of winning a luxury car. The tax authorities there are predicting a 50-percent increase in tax revenue as a result.
“This is clearly an interesting initiative, and certainly an imaginative one: it makes people more aware of their duties, and is also a way of discouraging tax fraud by including more businesses in the national database, after which they can be better checked on,” says Julio Ransés Pérez Boga, president of Spain’s tax inspectors’ association. “But this will not be effective in the long term; it’s more like a psychological measure. It’s similar to something the tax office started a few months ago, when we beefed up inspections of weddings, as well as what was going on during major festivals in say, Valencia or Seville. The idea is to get more information about certain sectors where we know there is a lot of hidden activity,” he explains.
The goal is clear: to force sellers and service providers to declare everything they earn to the tax authorities, in the process setting up a register to help root out tax dodgers. Aside from small businesses, there are other areas where fraud is widespread, such as among self-employed workers: dentists, lawyers, car workshops, and painters and decorators.
“There are two types of fraud: that carried out by very large businesses, and that carried out by very small operators,” says Valentí Pich, president of the General Council of Economists’ Associations.
Tax inspectors such as Pérez Boga are tasked with making sure that we all pay our taxes, and point out that new supplementary measures encouraging us to do so will not mean they won’t continue pursuing the traditional methods of checking our tax returns.
“Taking part in lotteries is an incentive to get people to ask for an invoice, and to encourage businesses to join the wider economy,” says Friedrich Schneider, a specialist in tax evasion and a lecturer at Austria’s Johannes Kepler University in Linz. “It is an effective way of reducing activities that do not contribute to the tax system.
“I do not think that these kinds of measures are going too far. It is a positive incentive. If the state employs more tax inspectors, then people see this as punitive. Tax inspectors are an important way of tackling organized crime, which makes up 15 percent of the hidden economy,” Schneider adds.
In China a scratch-and-win tax lottery has proved highly popular
The experts say that the main benefit of these types of mechanism is that people see that there are tangible rewards for paying their taxes. In China, which has a lot of experience of operating such systems, the tax lottery has proved highly popular. Estimates suggest that the hidden economy makes up 13 percent of GDP. In 1998, the Communist Party, aware that it was losing millions of yuan a year in tax revenue, set up the Golden Tax Project, which included a receipt lottery, or fapiao. Anybody purchasing goods or services would ask for a special receipt with a hidden number that could be scratched away, leaving the seller with no choice but to declare the income from the sale.
The scheme was launched in Haikou, the capital of Hainan province. Some 80 cities soon followed suit, and it is now applied in just about every corner of the country. Prizes range from 60 cents of a euro to 6,000 euros, and the program has produced a 10.4-percent increase in tax revenue, according to a 2009 survey carried out by economist Junmin Wan of Japan’s Fukuoka University.
Taiwan launched a bimonthly lottery in 2013, while Greece and Slovakia, which have some of the lowest tax revenues in the EU, have also introduced similar schemes. Portugal did so in January. In Latin America, the Brazilian state of São Paulo has organized lotteries and draws, as have the tax authorities in Argentina, Costa Rica and Chile.
Spain also has a significant hidden economy, which makes up around 19 percent of GDP. But tax experts say that they doubt a lottery would do much to increase revenue. Former tax office head Jesús Gascón says the country’s tax laws are lax: small businesses are not required to give invoices for amounts below 3,000 euros, although they must provide a receipt. Monitoring tax collection is made more difficult because there are several different kinds of invoice.
Spain’s tax inspectors want to change the current system so that invoices from personal costs, such as a visit to the dentist, can be deducted from annual tax returns. “This would give users an incentive to ask for an invoice,” says Ransés Pérez Boga, adding that it is difficult for the authorities to track down tax fraud in some sectors. “It is almost impossible to detect, because the purchasers and sellers are private individuals,” he says.
“We don’t ask for an invoice from dentists because there is no incentive to do so,” points out José Félix Sanz, a professor of applied economics at Madrid’s Complutense University.
We don’t ask for an invoice from dentists because there is no incentive to do so”
According to the Association of Tax Inspectors, the key issue is how to encourage the public and small businesses to collect and pay sales tax. In the case of small garages and decorators, the current deduction they can make for registering for VAT doesn’t compensate. “Those working in the hidden economy can charge lower prices because they do not pay sales tax. If you are going to have some work done on your home, you know it is going to be cheaper if you choose a couple of guys with a van than if you contract a reputable company,” says Gascón.
Another area of the Spanish economy where fraud is rampant is home cleaning. José Félix Sanz says there are few incentives to encourage employees and employers alike to declare earnings: most home cleaners do not earn enough to bring them up to the tax threshold.
In short, Sanz says, there are no easy solutions to tax fraud among small companies and the self-employed. “It is a very complicated issue. When people believe that the system is fair and is applied to everybody, then they tend to cheat less. Broadly speaking, people are prepared to pay their taxes if they see that the state spends their money wisely, and that the tax system is fair,” says Sanz.
“We have to convince people that asking for an invoice is their guarantee,” adds Gascón.
The General Council of Economists’ Associations says that tax collection is made more difficult by the fact that the Spanish economy is dominated by small- and medium-sized companies, as well as having a large self-employed sector. “VAT is a difficult tax to keep track of down the chain, which is when it reaches the final seller,” says Valentí Pich.
“We need imaginative solutions,” he adds, referring to the idea of a lottery to encourage small businesses to declare their earnings.
But Lola Ortega, spokeswoman for tax consultant Asefiget, says there are no easy answers: “This is complex problem, and a lottery is not a real solution.”
Spain’s tax collectors have more ideas about how to encourage people to pay their taxes. Aside from allowing us to claim back private healthcare costs on our tax return, they say it is essential to teach schoolchildren about the important role tax revenue plays in a country’s development. “We need to educate the young about the need to be honest,” says Ransés Pérez Boga. This could be backed up by ongoing awareness campaigns in the media about why it is necessary to pay your taxes, he says. Finally, some tax inspectors say that people should be encouraged via financial rewards to report businesses that do not pay their taxes, and that a “name and shame” policy toward tax cheats could also work.