Three Ways to Fight Tax Evasion

The Chinese have given the world such wonders as paper, the compass, gunpowder, fireworks, and eyeglasses, to name but a few. A few years ago, they also came up with an ingenious way to fight tax evasion: the receipt lottery. If you buy a service in certain types of establishments, such as restaurants, your receipt contains a scratch lottery in which you can win up to a few hundred dollars (true to form, I have yet to win more than the princely sum of 5 RMB ($0.74)). This gives consumers an incentive to request receipts for their purchases—in effect co-opting them in the fight against tax evasion.

According to this paper by Junmin Wan, the experiment has been quite successful—in areas where the lottery was introduced, business taxes were 17.1% higher and the growth in business tax revenue 21.5% higher than in other areas of the country over a six-year period.

The Italians opted for a rather more muscular approach to the same problem. A law from 1983 makes it illegal not to obtain a receipt for a purchase. If you fail to produce one if asked by an agent of the fiscal police upon exiting a store or a restaurant, you can be fined up to €155—something that has the potential to make your morning cappuccino a lot more expensive than you expected... I am not sure what effect—if any—this had on tax collection in Italy. Perhaps one of our readers can enlighten us?

In addition to such creative policy measures, both countries might also make tax compliance less of a burden. According to this year's Doing Business data, both countries rank in the lowest third out of 181 countries in terms of the ease of paying taxes. In China—which did begin to facilitate tax compliance this year—it still takes a small company 504 hours to prepare, file and pay its taxes each year and the effective tax rate is almost 80%. Italy does only slightly better with 334 hours spent filing and 73.3% of profits going to taxes and other mandatory payments.