Collecting taxes can be a very expensive exercise for any country. For income and sales taxes, legions of investigators are needed to make sure that the sales and incomes that are being taxed are not being understated to depress the overall tax revenue. For some countries, further efforts are expended to make sure not too many people are being paid under the table and not too many things are sold without proper receipts. Inherence, investment, and real estate taxes can be even more tedious, as specialists are needed to value illiquid assets, whether they be real estate, antiques, or paintings, to get the fair amount of tax revenues.
Hence, it makes sense for governments to pursue tax collection methods that are, for lack of better words, profitable. Existing taxations, while no doubt bringing significant amounts of revenue for governments, are done so by paying millions of bureaucrats to enforce taxation on people and businesses that are constantly coming up with novel ways to dodge paying taxes. There have to be novel cost-efficient ways to collect taxes, even if it means the tax collection process leads to less revenue. If the overall profitability of the new way is high, it is still worth considering if the overall revenue is relatively low.
An emerging technology product offers just such a way for cost-efficient tax collection. Mobile payment, or e-wallets, provide a way to systematically collect accurate consumption data across a large number of consumers. When e-wallets become the norm, both shops and consumers bypass cash and receipts, directly accumulating information on how much is spent on what, where, and when despite there not being any paper trail for bureaucrats to check and audit. Amazingly, the database is created without the need for human involvement for maintenance.
In a previous blog post, I already noted just how e-wallets can benefit rural Africa. Widespread use of e-wallets allows governments to visualize how much and where spending is happening, allowing for systematic collection of consumption taxes from what used to be the informal cash-based economy. Yet, such benefits are not limited to the rural African context. Even in developed countries with already robust VAT or equivalent consumption taxes, a replacement by one directly tied to e-wallets reduce costs by automating the jobs of thousands upon thousands of bureaucrats tasked with simply making sure the right amounts of taxes are paid.
Perhaps what is more brilliant about a tax system based on e-wallets is just how much more taxes can be collected beyond just consumption at shops. Any business transaction can be defined as consumption of some sort, meaning that any time that money is exchanged via e-wallets, not just in shops but elsewhere, can be taxed in the same way as VAT. Manufacturers buying parts to create their own products, individuals exchanging one currency for another, and money being sent across national borders can all count as consumptions and thus subject to taxation using e-wallets.
The result is an all-encompassing tax collection mechanism that replaces all existing tax systems. If e-wallets can collect taxes on everything, there is no longer a need to spend money calculating values of paintings, antiques, and other items of value. When these items are sold, appropriate amounts of tax can be easily collected via mobile money. If anything, but simply the process of paying tax, getting rid of the need to file tax returns and pay for tax accountants, a uniform tax based on e-wallets may even lead to less desire among the wealthy to dodge taxes through illicit means.
Unsurprisingly, the biggest difficulty with the system is to get people to use e-wallets in the first place. If people know every transaction on mobile money is going to be taxed, they have every incentive to avoid using it for transactions, instead preferring to go by cash or other non-taxable means. However, if governments push for a cashless society by stopping the circulation of paper money and paying government employees only in mobile money, then it is possible to push the entire economy to pay taxes one way or the other. Indeed, if people insist on using foreign currency in cash to avoid taxes, tax can still be collected when electronic money is exchanged into the said foreign cash.
But smartphone and the internet takes hold among the next generation of young users, the sheer importance of e-wallets as a convenient method of payments preferred by consumers will ensure their increasing ubiquity. Just like credit cards before them, anyone seeking to do business transactions will find themselves losing customers if they do not cater to it, even if it means taking a hit for the transaction fees. If anything, retail outlets may even seek to "subsidize" shoppers by paying for the e-wallet tax, just so that they can compete in the increasingly cutthroat retail market.
Hence, it makes sense for governments to pursue tax collection methods that are, for lack of better words, profitable. Existing taxations, while no doubt bringing significant amounts of revenue for governments, are done so by paying millions of bureaucrats to enforce taxation on people and businesses that are constantly coming up with novel ways to dodge paying taxes. There have to be novel cost-efficient ways to collect taxes, even if it means the tax collection process leads to less revenue. If the overall profitability of the new way is high, it is still worth considering if the overall revenue is relatively low.
An emerging technology product offers just such a way for cost-efficient tax collection. Mobile payment, or e-wallets, provide a way to systematically collect accurate consumption data across a large number of consumers. When e-wallets become the norm, both shops and consumers bypass cash and receipts, directly accumulating information on how much is spent on what, where, and when despite there not being any paper trail for bureaucrats to check and audit. Amazingly, the database is created without the need for human involvement for maintenance.
In a previous blog post, I already noted just how e-wallets can benefit rural Africa. Widespread use of e-wallets allows governments to visualize how much and where spending is happening, allowing for systematic collection of consumption taxes from what used to be the informal cash-based economy. Yet, such benefits are not limited to the rural African context. Even in developed countries with already robust VAT or equivalent consumption taxes, a replacement by one directly tied to e-wallets reduce costs by automating the jobs of thousands upon thousands of bureaucrats tasked with simply making sure the right amounts of taxes are paid.
Perhaps what is more brilliant about a tax system based on e-wallets is just how much more taxes can be collected beyond just consumption at shops. Any business transaction can be defined as consumption of some sort, meaning that any time that money is exchanged via e-wallets, not just in shops but elsewhere, can be taxed in the same way as VAT. Manufacturers buying parts to create their own products, individuals exchanging one currency for another, and money being sent across national borders can all count as consumptions and thus subject to taxation using e-wallets.
The result is an all-encompassing tax collection mechanism that replaces all existing tax systems. If e-wallets can collect taxes on everything, there is no longer a need to spend money calculating values of paintings, antiques, and other items of value. When these items are sold, appropriate amounts of tax can be easily collected via mobile money. If anything, but simply the process of paying tax, getting rid of the need to file tax returns and pay for tax accountants, a uniform tax based on e-wallets may even lead to less desire among the wealthy to dodge taxes through illicit means.
Unsurprisingly, the biggest difficulty with the system is to get people to use e-wallets in the first place. If people know every transaction on mobile money is going to be taxed, they have every incentive to avoid using it for transactions, instead preferring to go by cash or other non-taxable means. However, if governments push for a cashless society by stopping the circulation of paper money and paying government employees only in mobile money, then it is possible to push the entire economy to pay taxes one way or the other. Indeed, if people insist on using foreign currency in cash to avoid taxes, tax can still be collected when electronic money is exchanged into the said foreign cash.
But smartphone and the internet takes hold among the next generation of young users, the sheer importance of e-wallets as a convenient method of payments preferred by consumers will ensure their increasing ubiquity. Just like credit cards before them, anyone seeking to do business transactions will find themselves losing customers if they do not cater to it, even if it means taking a hit for the transaction fees. If anything, retail outlets may even seek to "subsidize" shoppers by paying for the e-wallet tax, just so that they can compete in the increasingly cutthroat retail market.
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