How To Catch Tax Dodgers With a Lottery

Slovakia has a VAT gap because too many businesses are not paying the tax money they owe.

Slovakia’s solution to its VAT problem is a lottery. By sending in or registering a sales slip online, consumers can win a car, cash, or an invitation to be a contestant on the Slovakian “Price is Right.” (For the Macedonian VAT lottery, it is a house!) Once the government has the sales slip, it can see what the retailer owes in taxes.

So, where are we going? To the amazing gap in Value Added Tax receipts in the eurozone.

Sort of a distant relative of the sales tax, the VAT is a consumption tax. For a pretzel, if we levied a VAT, as with the sales tax, our pretzel would have a higher price at the cash register. But with a VAT, that elevated price is based on the value that is added to the product at each production stage, At the last stage, because businesses pass it along, the consumer covers the full VAT payment. (Sounds simple but the economics are much more complex because of the incentives.)

To go after the tax dodgers, Slovakia just needed to know that was happening at the cash register. Suddenly, businesses are being asked for receipts by customers who never cared about them. Having collected 64 million receipts since September 2013, the government says the lottery has been a huge success.

Our bottom Line: VAT Gaps

You can see below that Slovakian VAT gap is large. They are missing 37% of what they should have collected. As we might expect, with 39% less than what they should be collecting, Greece also has a gargantuan VAT gap. By contrast, Germany, at 13%, does not. Our bottom line? The VAT gap is further evidence of the vast fiscal discrepancies in the eurozone countries.

[amcharts id=”map-euro-vat-gap”]