Nova workboard

a blog from young economists at Nova SBE

“Carrot policies”: more efficient to fight against tax evasion?

Since the financial crisis of 2008, governments have been trying to improve their budget management in order to pay off sovereign debt. That means looking for new budget sources as well as avoiding waste. That is why this post will deal with an article from The Financial Times entitled “Europe’s shadow economy costs €454bn in “lost” taxes”.

This article emphasizes to what extend shadow economy is a burden for public finance. Indeed, although the amount of tax evasion is hard to measure, estimations of losses for governments are really high and fighting them on an efficient way is difficult. Under reporting by businesses and undeclared work are responsible for 33% of losses and according to the IMF this is caused by corruption and excessive regulation. This article suggests that politicians should adopt incentive policies instead of repression ones.

It leads us to wonder: to what extend are incentive policies efficient to avoid tax evasion? Let’s try to answer the question and analyse qualities and limits of these policies.

In light of the results of traditional repressive policies, incentive ones seems more promising. Indeed, according to the EU, 168 billion euros of VAT have been lacking in September. Nevertheless, Friedrich Schneider’s estimations are much higher: 454 billions euros that represents 8.6% of government revenues. That is the evidence that governments have to try other policies.

That is what Belgium government does by using tax rebates and subsidies to transfer activities to formal economy. Thanks to this system, everybody can afford a voucher that corresponds to one hour of domestic help and costs 6.70 euros. This voucher is tax-deductible and the net price is only 4.69 euros while participant companies also receive a subsidize of 14.30 euros per voucher. This system makes people preferring formal economy than shadow’s one, this was the case for 10% of voucher consumers.

The tax receipts lottery is another type of incentive policy. This was implemented in several countries, Portugal and Slovakia are part of them. Citizens are encouraged to ask for receipts by organising a lottery in which the receipts selected at random makes them win big prizes like cars. In Slovakia, this special lottery is very popular and 3 million receipts are submitted every two weeks. This has made the government earn 8 million euros per year.

However, these policies present limits. Indeed, Belgium vouchers have not a significant impact on shadow economy while this policy is very costly. In 2005, this has enabled government to save 93.1 million euros when it has cost 303.3 million euros. Regarding tax receipt lottery, results are not much better. Most part of receipts is from the retail sector where shadow economy isn’t as import as the service industry. However, the later only represents 2% of submitted receipts. Tax receipt lottery also has perverse effects and negative impacts: “professional players” submit receipts from purchases they have not done, Portuguese citizens feel that it hurts their dignity and car prizes are not fitting with ecological policies.

In my opinion, these policies are not efficient enough while computing results-costs ratio, and they have to be completed by other measures like urging citizens to use credit card instead of cash. Computerising the tax system seems to be a good solution to improve control because it enables to cross data and identify dodgers. That has been implemented in France.

Marianne CUNHA

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Author: studentnovasbe

Master student in Nova Sbe

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