Rather interesting article from the FT on Russia’s recent successes in VAT collection, which is soaring thanks to digitization and AI.
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.
How was this done? Basically, hiring IT nerds and giving them authority.
Handpicked by President Vladimir Putin to run the Federal Tax Service, Mr Mishustin was a technology specialist by background, not a policy expert, and chose to seek to improve revenues by adopting and refining the most cutting-edge systems around the world.
Normally economists and policymakers learn to do technology. Mr Mishustin says, “We built the technology and are now becoming economists.”
I wrote about a seemingly similar reshuffle at Rosstat earlier this year, in which an ageing Soviet-era economist was replaced with a younger IT specialist.
The VAT tax gap between revenue due and revenue collected was about 20 per cent in Russia before its reforms, according to Mr Mishustin, and in a mature economy such as the UK, HM Revenue & Customs estimated it at 9.1 per cent in 2017-18.
To address the leakage, Russia built two huge data centres and legislated so that companies had to submit every invoice between businesses. It also mandated every retailer to buy new cash registers that were linked securely and directly to the data centres.
In real time it can now check every invoice to ensure VAT refunds it pays are linked to invoices where companies have remitted the same money to the authorities. Then using artificial intelligence, it can quickly find patterns in the data and companies which have many broken links, allowing the authorities to target certain companies for a tax audit. Since everything is linked, it can also spot tax officials with a low collection rate from the companies for which they are responsible.
The 20 per cent VAT gap has now fallen to 1 per cent and, as collection has become more efficient, receipts have soared. Between 2014 and 2018, the money collected from VAT rose 64 per cent, compared with a 21 per cent increase in nominal household consumption over the same period.
In connection with this, revenues increased by 20% in 2018, reaching 35% of GDP. So despite a rise of 6% in expenditures, the budget balance actually went from -1.5% in 2017 to +2.7% in 2018.
Together with the pensions reform, that would appear to set Russia’s ambitious infrastructure project for 2019-2024 on rather good footing.
Incidentally, I do wonder if the “formal” quality of institutions may actually become less relevant to economic performance thanks to mass digitization plus AI (that is, if said societies are competent and/or disciplined enough to implement that setup in the first place). Regardless of a society’s cultural or sociobiological proclivity towards corruption, all people respond to incentives, and will stop engaging in it if Inquisitor AI makes it too risky.
“How do you measure inflation in the UK?” the tax commissioner booms. After hearing an explanation of how an army of people with clipboards fan out once a month across the UK checking prices for goods and services, he cries: “Bullshit! That’s bullshit. We can see everything bought everywhere,” says Mr Mishustin, who is showing the system for the first time to an international media organisation.
The Russian authorities are seeking to extend technology-led tax collection into the informal economy, where low-income self-employed people — for instance childminders or workers in the gig economy — earn small sums that have rarely been scrutinised, even though these payments are subject to income tax. Those that sign up to a new smartphone app pay 4 per cent of turnover, deducted automatically from their bank account, on services.
There have been intermittent claims that Russia is understating inflation for political reasons. I have never seen any hard proof for that, and if there actually had been, I assume there’d have been a lot more hay made out of it (as in the case of Argentina).
That said, it is amusing to think that Russian inflation statistics may now be marginally more accurate than even the UK’s.