The Future of Tax Administration?

Low-income states struggle to collect taxes. And with low fiscal capacity comes the inability to spend any money on vital public goods and services. Take Nigeria, Africa’s biggest economy. The country struggles to collect income tax, and heavily relies on revenues from oil (58.1% of revenues in 2018) and indirect taxes. Nigeria also spends precious little on its people. In 2018, general public expenditures added up to a paltry 10.9% of GDP (believe it or not, Nigeria is a libertarian paradise!). In comparison, public expenditures in Kenya amount to about a quarter of GDP. In 2018, income tax accounted for 47.9% of Kenya’s total tax revenue haul.

The demand for public expenditures will only continue to rise as African countries get richer. Overall, government expenditures as a share of GDP tend to rise with income. For instance, in 2017 the expenditures among OECD states ranged from a low of 26% of GDP in Ireland to 56.4% in France. It goes without saying that any future increases in government spending in countries like Nigeria will require ever more efficient means of tax collection. But such moves will likely be hampered by the illegibility of taxpayers.

Enter Russia. According to the FT, Moscow is pioneering real time tax administration:

taxrusStanding in front of a huge video wall, Mikhail Mishustin, head of the tax service, prepares to show off its capabilities. “Where did you stay last night?” he asks. When I reply, his staff zoom in on a map to Hotel Budapest on the screen. “Did you have a coffee?” His staff then click on the food and drink receipts in the hotel from the previous evening. “Look, it sold three cappuccinos, one espresso and a latte. One of those was yours,” Mr Mishustin declares triumphantly. He was right.

This is the future of tax administration — digital, real-time and with no tax returns. The authorities receive the receipts of every transaction in Russia, from St Petersburg to Vladivostok, within 90 seconds. The information has exposed errors, evasion and fraud in the collection of its consumption tax, VAT, which has allowed the government to raise revenues more quickly than general Russian economic performance.

The new system is directed more at shopkeepers than oligarchs. Russia still scores poorly on international league tables of corruption, being ranked only 138 out of 180 on the Transparency International corruption perceptions index, with concerns including cronyism, a lack of independent media and a biased judiciary. But reducing tax evasion among ordinary Russians and highlighting corrupt tax officials have helped raise revenues and clean up the system.

Reasonable people should worry about the potential misuse of these government powers. But remedies to this problem must be tempered with an understanding of the deep structural barriers to poverty alleviation caused by low fiscal capacity (not to mention a weakened fiscal pact between citizens and their governments).

If no taxation without representation is true, then no representation without taxation must also be true.

Finally, as correctly noted in the FT piece, technology cannot fix the problem of tax avoidance by the politically-connected. If Russia’s system catches on in low-income countries, it will most likely be effective in widening the tax base among diffused average taxpayers. The hope then would be that higher levels of tax compliance among average taxpayers will create political pressure for the same from the big fish.

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