Turning Taxes to Tickets: Incentivising consumers to boost tax revenue with free stuff

Governments need taxes to provide public services. People like big piles of cash and free cars. How a VAT lottery can deliver both...

Deaths and taxes, or so the saying goes, are the only certainties in this life. While death does seem rather likely to eventually claim us all, many shopkeepers in low-income countries do a reasonable job of avoiding (some) tax.

VAT (or a GST) is one of the most common taxes in the world; over 90% of countries across the globe levy a VAT. With a tax on the consumption of goods and services, the final retailer is responsible for the payment of this tax. If a retailer under-reports sales, the VAT they pay is also reduced. The difference between the true amount of VAT that should be paid and the actual amount of VAT that is collected is known as the VAT Gap. Frequent GPI readers will not be particularly shocked to learn that governments in low- and middle-income countries have a larger VAT Gap than governments in the rich world. Ghana and Uganda have VAT Gaps of 40% and 60% respectively; the EU average is 9%.

Narrowing this gap is of clear interest to governments. And it is of particular interest to governments of low-income countries as VAT raises around 25% of all tax revenue in sub-Saharan Africa. Wielding carrots and sticks, governments try a range of compliance methods from spot audits to public education campaigns. Tax officials can’t be everywhere, of course, so some countries are trying to enlist the consumer as a pseudo-tax auditor. A novel method for this is to run a VAT lottery.

You get a car, you get a car, everybody gets a car!

In a VAT lottery, receipts that show VAT has been paid become consumers’ entry tickets. Numerous jurisdictions around the world, from Taiwan to Portugal to Brazil, have run such schemes when trying to kick start compliance. These schemes are often started after the introduction of electronic receipt machines that auto-report the tax amounts to the tax authorities. Making a sale but not entering it into your machine is a simple way for retailers to under-report. However, if a customer knows they need the receipt to go into the monthly draw for a car (Poland and Portugal), a large cash prize (the Philippines and Romania) or even to end up on Slovakian ‘The Prize is Right’, they will make the retailer issue their receipt. This sort of crowdsourced compliance can have material effects on the government bottom line. Some of the results are stunning. Beijing and Tianjin, two of China’s largest cities, reported a 17% rise in sales tax revenue over a six-year lottery period and saw faster tax growth rates (22% and 10% respectively) than comparable Chinese cities that did not have a VAT lottery in place. A review of the published studies on VAT lotteries show impressive results; some are shown below.

Sao Paulo, Brazil

• 9% increase in VAT revenue

• Firms who were reported as non-compliant by a consumer increased their reported revenues without any further intervention from the authorities.

Romania

• 6% increase in VAT revenue

• The country director of Mastercard reported an 80% increase in the sales of paper rolls used in cash registers.

Taiwan

• 20% increase in VAT revenue

Slovakia

• VAT Gap narrowed during lottery scheme:

  • 31% in 2014, 29% in 2015, 26% in 2016

Portugal

• VAT Gap narrowed from 16% to 14%

All VAT lotteries are equal, but some are more equal than others.

The designs and permutations of the lotteries do all vary slightly. However, regardless of whether the prize is a pile of cash, a car, or even a portion of the tax being returned to the consumer, lottery schemes deliver money to governments. For maximum effectiveness, a critical mass of consumers needs to be aware of the lottery and be sufficiently incentivized to force receipts out of reluctant retailers. In the Chinese example mentioned above, the prizes given out equaled about 3% of the tax gain; however, other research suggests the sweet spot in this context may have been as high as 30%.

Low-income countries collect a lot less tax than their rich world peers as a percentage of GDP. That means less money on schools, hospitals, roads and all the other public services citizens desperately need. The evidence suggests that a VAT lottery is worth investigating by an enterprising revenue department in a low-income country. Whilst familiar challenges in institutional capacity may limit the total gains, the large reliance on VAT for revenues combined with large VAT Gaps make it an area worthy of investment. Of the countries listed in the studies above, none show a rise in the VAT Gap in the years since the lottery schemes were concluded. A contributing factor is likely to be lower cost of compliance once digital systems are implemented. These systems have been progressively rolled out across sub-Saharan Africa. To collect more revenue and broaden the tax base, the time may well be ripe for governments to release their inner Oprah.