Shiny, new cars, satellite imagery and loft clearance – the new face of governance
This is a story of how one Eastern European nation is fighting tax evasion. It is also a story of how the public sector responds to complex challenges, and how critical government roles are evolving.
Slovakia, according to a recent article in The New York Times, is having difficulty collecting VAT from its merchants. VAT, or Value Added Tax, is a source of government revenue akin to a sales tax. It is charged to consumers and businesses alike, and is remitted to state treasuries by business. The amount of VAT owed to the government can be manipulated via fraud or aggressive minimisation schemes.
To encourage tax compliance, the Slovak government crafted a clever lottery. Members of the public submit their VAT receipts to the lottery, and while the government chooses a lucky winner, it also checks the receipts, looking for fakes. The ingenuity of the lottery is admirable. This is out-of-the-box thinking, a creative solution to a problem many countries face. Slovaks are now clamouring for VAT receipts from their merchants. Clearly, we are meant to applaud these sorts of initiatives. This very ingenuity, however, feeds a sense of foreboding at the evolving picture of governance and statecraft. Are we now bribing members of the public to recruit them into vigilante tax collectors? Was this not once the role of the state, or is that now being crowd-sourced? How long will the supply of free cars last?
You don’t have to live in Slovakia to care about these issues. At their heart lie questions of how governments interact with their constituents, be they citizens or businesses. Monitoring these issues is one way to predict how a government’s challenges – and its responses – evolve. Keeping a close eye on these issues can help predict future government behaviour as well.
Slovakia’s experiment has impact far beyond its borders. According to the Times article, many of the countries where tax evasion is high are also recipients of substantial economic bailouts from supranational organisations like the EU. Put bluntly, it would be nice to know that the recipients of bailouts are doing what they can to bring their financial affairs into order. At the heart of the issue in Slovakia – and in Greece, Portugal, and other countries struggling through the massive fiscal downturn – is the matter of whether the state can (re)assert itself in the teeth of a crisis. What does the Slovak lottery say about how it will manage other parts of the economy, where clever lotteries aren’t the solution? What happens once the new cars lose their factory-fresh smell?
Shrinking government budgets mean diminishing resources for enforcement. Corruption means that for a small consideration, tax inspectors look the other way. Greece, where tax collection has been chronically lax, resorted to satellite images to identify luxury homeowners – they looked for the swimming pools – who claimed they owed no income tax. This only serves to demonstrate how difficult it is to eradicate tax evasion. Experience shows that once the state – or its lottery-crazed populace – gets more clever at spotting tax cheats, the tax cheats just become more clever.
So the race is on. The Slovak lottery is a close relative to an initiative taking root in the UK – the nudge movement, brought to you by a partnership between the Cabinet Office and The Behavioural Insights Team. UK residents may already be familiar with the nudge movement, so called because it uses behavioural guides to steer us toward socially productive habits.
These socially productive habits include insulating our lofts (it saves energy), paying our taxes more promptly (boom go the government’s coffers) and paying fines on time (see previous item). These and similar initiatives rely on doing one simple thing to encourage a related behaviour. Britain’s heat-leaking lofts, for example, were far too cluttered for people to take advantage of a government-backed insulation programme. Once that programme included a de-cluttering service, uptake on the insulation soared. These measures, in turn, seem closely related to the Malcolm Gladwell family of social and government initiatives, as chronicled in his book The Tipping Point.
On balance, these creative initiatives strike a hopeful tone. Perhaps resolving thorny fiscal problems doesn’t require years of hearings, white papers and legislative debates. Perhaps instead of bloated bureaucracy, we only need cleaner lofts. There will always be problems that resist simple solutions. Let’s see where we get nudged to next.
Source: Control Risks