Tax Lotteries

Imagine sitting in front of the TV waiting with baited breath that your numbers will finally come up, and you will have won the lottery. Now imagine that instead of buying a lottery ticket, you are entered into the lottery by providing your receipts to the tax authority. Wait, what you say? The tax authority running a lottery? That would never happen. Well think again, because in two EU countries they are using a tax lottery to boost value added tax (VAT) compliance rates and collections, and many more are considering it.

Slovakia seems to be on the cutting edge of this idea. Here is the scheme. If you make a purchase totaling more than one euro AND obtain a receipt, you can enter that receipt into a monthly lottery. If your receipt is pulled, you can win €10,000, a car, or chance to be on the Price is Right (Slovakian version).

Slovakia started this scheme in the face of falling revenues from value added taxes (like our HST/GST). The tax authority found that businesses were often failing to provide receipts to its customers, a sure sign of VAT tax non-compliance. In addition, there was also evidence that showed that business were providing a fake VAT registration number on receipts. The lottery scheme encourages customers to force businesses to provide receipts, and incentive to complain to the tax authority is one if not issued. Indeed, complaints are reported to have increased from 300 before the lottery to over 7000 after the lottery came into effect. The scheme also provides the tax authority with evidence of phony registration numbers. It killed two problems with one stone.

Portugal has since followed suit, holding its first lottery this month.

Rudyard Griffiths, Munk Foundation recently proffered this on Twitter:

Would such a scheme be suitable for Canada? My inclination is No. Why? Because we do not share essential features with EU countries to make it worthwhile.

It is first important to note the VAT revenues in EU countries like Slovakia and Portugal are much, much more important source of government revenues than they are here in Canada. This is because their rates are higher and their coverage much broader. Because these countries are so reliant on these revenues, they are much more willing AND ABLE to adopt schemes such as the tax lottery.

The second feature of note is that, unlike Canada, EU countries measure their tax gap and know how much revenue they are losing from VAT noncompliance. You need to know how much revenue you are losing to figure out how much it is worth spending on compliance.

The third thing to note is that you also need to know the main features of tax noncompliance in order to devise a scheme that overcomes them. Is the EU, many more purchases are made with cash than with credit or debit. In Canada, we like our credit and debit and receipts are a natural outcome of this preference. When receipts are not issued, it is typically an agreed upon arrangement between the provider and consumer where the savings are of a magnitude that would not be overcome by a lottery. I say this because we would not be offering $10,000 as winnings given the above. Probably more like $100.

So the tax lottery idea is an interesting one and am looking forward to seeing it play out in the EU, but don’t expect it here in Canada anytime soon.

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Measuring Canada’s Tax Gap

Tax evasion is a serious policy issue faced in every country that imposes taxes. Most countries, including Canada, throw a lot of resources at trying to curb tax evasion, but few countries actually throw money at producing data and statistics regarding the amount and type of tax evasion occurring. This is unfortunate because without this information, it is not clear whether the marginal benefit of cracking down on various types of evasion is worth the marginal cost. That is, can more be recovered than it costs to collect.

As a result, it is important to have detailed information about the tax gap. The tax gap is the gap between the taxes that should be paid and the taxes that are actually paid. As most Canadians are aware, Canada has no official measure of the tax gap. There have been calls by many that this should change, including by myself, but also by my MP, NDP’s own Murray Rankin.

Are there countries that measure the tax gap? Yup, notably the U.K. and the U.S., which both produce regular detailed estimates of the tax gap.

The U.K. estimates the tax gap to be £35 billion or 7% of total tax liabilities. Nearly half of the tax gap comes from the activities of small and medium sized businesses. The U.K. also purports that the tax gap has shrunk in the last six years, largely due to greater enforcement in the areas of excise taxes and their VAT.

In the U.S., the IRS estimates the gross tax gap to amount to 17% of total taxes paid voluntarily (the equivalent of US$450 billion in 2006) and the noncompliance rate to be a whopping 16.9%. Using the usual estimate that Canada is roughly 10% of the size of the U.S., this would put our tax gap at approximately $45 billion (more than StatsCan’s ‘estimate’ of the whole Canadian underground economy!). The U.S. tax gap is comprised of $28 billion lost to nonfilers, $46 billion lost to those who underpay their liabilities, $376 billion is lost to those who underreport. In contrast to the U.K., the IRS estimates that most of the tax gap accrues to individuals, amounting to 67% of the total tax gap. The IRS notes that is was able to collect $65 billion of the tax gap for a recovery rate of a dismal 14.4%.

The EU also produces estimates of the tax gap. For all EU countries, the tax gap is estimated to be approximately €860 billion and tax avoidance amounts to an additional €150 billion. This means that EU countries miss out on nearly €trillion in unpaid taxes. Of this, the total tax gap for the VAT alone is nearly €200 billion.

I recently wrote a blurb for the Globe and Mail Report on Businesses (nestled unkindly behind their pay wall) that concluded that “Given the potential magnitude of lost tax revenues in Canada, it is essential we have greater data and information about the Canadian tax gap, similar to that which exists in the US and UK.” If the government is truly serious about tax evasion and cracking down on tax loopholes, this is essential data to have. I also think it is important for CRA to be more open about what proportion of the tax gap is recovered through its enforcement activities. I hope they do a better job than the IRS, but somehow I doubt it.