Trying Its Luck Slovakia Fights Corruption with Sales Tax Lottery
The Slovakian government has had trouble enforcing payment of sales tax for years now, leading to hundreds of millions of euros in tax shortfall. It now has an idea that is relatively novel in Europe: Bratislava wants to convert sales reciepts into lottery tickets.
In an era of economic uncertainty and spiraling national debts, governments around the world are desperate to maximize their incomes any way they can. In Slovakia, where corruption and graft are a part of everyday life, the authorities have hit upon what they believe is the perfect solution -- allowing citizens to enter a free lottery every time they pay value-added tax (VAT), in the hope that it will force businesses to pay what they owe.
With cash and cars up for grabs in the lottery, it's a safe bet that those who have been siphoning off the sales tax so sorely needed by the government for themselves are not overly keen on the idea.
Yet it's a bold move to focus on rewarding those who follow the law rather than punishing those who break it. The plan, unveiled by Slovakia's Finance Ministry last week, makes all receipts showing that customers paid VAT eligible for conversion into free lottery tickets. The goal is to urge shoppers to request receipts at every point-of-sale, thus ensuring retailers issue more receipts and boosting VAT revenues by properly recording cash transactions.
In the long term, it is hoped the lottery will alter habits by making the request for and issuing of receipts a behavioral norm. Ideally, the government will eventually be able to do away with the lottery.
"We see this as an opportunity to change people's perception," Finance Minister Peter Kaimír said in an interview. "Asking for and receiving receipts should be regarded as a standard business practice."
That is not currently the case, with VAT collection a serious problem in Slovakia. The so-called VAT gap, a number estimating uncollected tax by extrapolating from annual GDP, is 2 billion ($2.6 billion). In a country that only collected 4.27 billion last year, that means up to a third of VAT is potentially being diverted away from government coffers. Much of this revenue goes missing via sophisticated fraud and business-to-business deals unrelated to daily cash register transactions, but Finance Ministry officials believe the VAT lottery could increase tax revenues by 150 million during its first year in operation.
But it's the long term that Kaimír has his eye on. The main thrust of a tax lottery policy is "changing people's preferences through the process," said Marco Fabbri, an economist from the University of Bologna who studies such phenomenon worldwide. Indeed, Slovakia is not the first place to try a plan like this -- Malta has its own tax lottery plan, and Georgia attempted one before scrapping it. They are more common in East Asia, where Taiwan has used an equivalent of a VAT lottery since 1951. While admittedly under markedly different conditions, tax revenues there jumped 76 percent during the lottery's first year.
"It is about exploiting behavioral irregularities to change the norm," Fabbri said. "It creates the conditions where it is okay to ask for an invoice."
The Slovak plan will see nationwide VAT lottery drawings every two weeks beginning on Sept. 30. The top prize is 10,000, with nine other prizes in declining 1,000 intervals also up for grabs. Receipts can be converted into tickets either by exchanging them at shops, or by entering invoice numbers via text message, smartphone app or on a website. The drawings are overseen by the existing state-owned lottery company, with the project costing a mere 180,000 in start-up costs, according to a ministry spokesman.
A second drawing, occurring once a month with one winner in each of the country's eight regions, will give away new cars. Receipts from retailers automatically connected to the tax office -- largely multinationals like IKEA or supermarket chain Tesco -- are entered by default in this class of drawing.
'The Big Players Will Sneak By Anyway'
Such prizes will be needed to win over skeptical Slovaks, especially business owners. Katerína Tomanová owns a nail salon in the western city of Dubnica nad Váhom and said she only issues a receipt when asked by a customer, and rarely to "friends and acquaintances." She doesn't believe the lottery will have much of an impact on more serious tax fraud. "The big players will sneak by anyway," she said. "It won't work, but it is okay to let the state help itself."
Indeed, the Finance Ministry admits the VAT lottery plan does little to address sophisticated fraud, although officials say they are working on other means to combat it. Still, Tomanová sheds light on one of the biggest problems facing the new lottery: a general distrust of the state itself among the population. In a country where subverting state authority was the morally correct thing to do for decades, and where corruption in the post-communist era has further eroded trust, many are skeptical of any government action. Only the consistent conversion of increased VAT revenue into improved public services is likely to allay such fears.
"We cannot compare ourselves to Scandinavia or somewhere," said Radovan Ïurana, an analyst with the free market-oriented Institute of Economic and Social Studies in Bratislava. "Changing attitudes is a 100-year development. There is a difference between collecting more in VAT and optimizing tax policy."
In addition, there are fears that encouraging so many people to play the free lottery could lead to a surge in numbers playing the traditional one. Lotteries are often considered a regressive tax because they disproportionately draw revenues from poorer people. Put that together with criticism of the very idea of essentially bribing citizens adhere to the law, and the VAT lottery is already on a bumpy path.
Still, there are those greeting the plan with curiosity, even optimism. Alena Duhárová, a landlady in Dubnica nad Váhom, said she supports the lottery idea and will convert her receipts into tickets. "I have to pay tax on my apartments, so why shouldn't everybody else," she said. "It's a smart idea." In Bratislava, one postwoman who would only identify herself as Eva opined that the policy "will motivate people, because a lot of people play the lottery now."
With little precedent for such policies in Europe, and governments the world over looking for new ways to boost revenue many -- especially those in Central and Eastern Europe -- will be looking on with interest, especially as few have been convinced of the merits of a tax lottery by academic studies alone. As Alexander, a Bratislava pensioner, asked: "How many things have been tried and how many have been washed away by the Danube?"