Act Now: Part 2 – Tax Administration in Times of Covid

Part 2 | Tax Administration in Times of Covid

Covid has in many ways accelerated the need for new tax administration systems and better digital public services. The rapid developments of the past months have severely disrupted our lives and societies. Going back to a pre-COVID paper-based analog world is for many an inconceivable and unacceptable notion. The need to minimize physical human interactions has played a big part in prioritizing digital projects, but our public opinion has also become louder. Working from home during the pandemic and having to rely on digital services; the strong public opinion has become a driver for change. Whether it’s for food delivery, receiving the latest government COVID update, or making a doctor’s appointment online, 2020 has shown that digital advancements can be made, even in societies that were thought not to be ready for such digitalization. The improvement of citizen experience and service levels is central to this development. The public will no longer accept going to the tax administration’s office to stand in line to file a tax assessment objection or to hand in paperwork. People are demanding change.

Another crucial factor has everything to do with the economic downfall of the past year. Small and Medium Enterprises (SMEs) have taken a severe hit during the COVID-19 pandemic. Unemployment rates are up. The abrupt halt of economic activity has led to a sharp increase in unemployment benefit payments, and to a decline in tax revenues, specifically from the loss of sales and income tax from ordinary citizens and businesses. To keep their heads above water, governments will have to look at restoring revenue shortfall. That is why now is the time to focus on tax evasion and avoidance: governments cannot afford to NOT tackle this issue at this moment. The rest will be collected from those who are already compliant. This is low-hanging fruit. As previously mentioned, with the right measures, approximately 80% of tax compliance is voluntary. Governments can then focus more time and effort on closing the leak in their tax revenue due to non-compliance. Governments need to actively promote fair and balanced taxation: everybody needs to pay their fair share. If compliant taxpayers feel cheated, they are less likely to voluntarily be tax compliant, and they are less likely to trust and support any future attempts to improving tax revenue and compliance.

Embracing these challenging times and investing in new tax systems is vital. Not only because rapid digital developments are occurring in the span of a few months, but mainly because of a growing economic gap. Global income inequality is on the rise: the world’s richest 1 percent owns 46 percent of the world’s wealth^[1]. It’s only fair that everybody pays their own share. There is a direct correlation between the higher levels of taxation and satisfaction with life. It is not a coincidence that the top three nations on World’s Happiness Index are Finland, Norway, and Denmark. With tax rates as high as 60% they are among the highest tax paying nations in the world^[2]. Due to higher tax revenue, their governments are able to provide stronger social foundations, such as universal healthcare, free education, social benefits, and better infrastructure, making their citizens happier. It is no wonder that the Scandinavian voluntary tax compliance rates have been one of the strongest and highest in the world. These citizens get a lot in return for paying their taxes.

Paving the way towards a modern tax administration

The only way forward for tax administrations is to invest in their systems. In the third and final part of this series, we will offer some recommendations on how to approach this endeavor.