Portugal Hopes to Find Underground Economy Tax Cheats by Giving Away Free Lottery Tickets

With value added tax on services exceeding 20%, much of Portugal's economy is cash-based with no receipts.

Instead of admitting the VAT tax of 23% on services and restaurants is so high that it encourages fraud, Portugal Tries its Luck with Tax Lottery.

The secret to good citizenship, Portuguese tax authorities believe, could lie in giving away luxury cars.

In April, they will begin holding weekly lotteries in which 60 “top-range automobiles” a year will be offered as prizes to consumers who do their civic duty by asking cafés, restaurants, car mechanics, hairdressers and other businesses for receipts that include their personal tax number.

The aim is to enlist the help of ordinary citizens in combating tax evasion, unfair competition and the black economy, estimated in Portugal at the equivalent of almost a fifth of official national output.

By converting sales receipts into lottery tickets, the government believes it can clamp down harder on tax dodgers as part of an effort to meet ambitious deficit targets set under the €78bn international bailout agreement.

The cost to the taxpayer of buying the cars – unofficially estimated at about €90,000 each – will be far outweighed by the increased tax revenue from previously undeclared earnings, the government argues.

Key Question 

Would you rather have a free lottery ticket which you have to hassle someone  to get, or would you rather split the VAT with your plumber or the waitress?

“If someone needs a plumber or an electrician, I suspect they’ll still be attracted by the discount resulting from not being charged VAT,” said John Duggan, a Portugal-based tax adviser. “They’d be able to buy a lot of ordinary lottery tickets with the money they save.”

Rational Behavior

The underground economy thrives because taxes are simply too high. That's where the real problem is. A chance to win a €90,000 luxury car does not change that picture, nor will it do much of anything to raise revenue.

The lottery program might even cost money.

The rational thing for consumers to do is ask for receipts on small purchases like a cup of coffee or a can of pop, but bargain over cost reductions on larger items.

Fraud might even enter the picture. If the expected return on a lottery ticket is high enough, store owners would have an incentive to create bogus sales receipts for tiny transactions that did not even take place.

Suppose you could get a cup of coffee for 50 cents. A 23% VAT would collect 11.5 cents.

In the above example, 1,000 lottery tickets would cost the coffee shop owner about $111.50. Is that a good deal? It depends on how many people turn in their receipts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com