One of the more important challenges for running a successful modern nation-state is figuring out an answer to the question of tax coverage.
The vast majority of people believe in at least some taxes, and practical statesmanship sees that outside of a few rare cases (a state controlling natural resources), you need to have decent tax coverage to fund your treasury and run your administrative programs.
Again, this question is totally orthogonal to what should be taxed and what tax rates should be. Regardless of where you stand in political opinion and practical evaluation on those questions, if a country has poor coverage, they stand to get in lots of trouble. My personal opinion from the history books is that a main contributing reason to the German Empire losing World War I is having poorer tax coverage than the Allies.
Taiwan, and indeed, much of Asia had and has poor tax coverage. Again, it's not about the rates -- it's about getting people to pay the rates. In a country where there's many more small vendors and independent shops, it's easy for people to artificially decrease their revenues.
Most of the time, governments try to combat this with a very stick-oriented approach, with penalties and problems for people who don't adequately report, with licensing and tracking and things like that.
But Taiwan took an interesting and novel approach to getting their tax coverage up -- they print lottery numbers on every official receipt.
Every two months, there's a drawing, and you have a chance to win a lot of little small amounts (twenty bucks here, forty bucks there) and there's a grand prize.
The end result? People love these receipts, and go out of their way to ask for them all the time. I was surprised that even a lot of semi-independent type places that could otherwise have gotten away with no formal receipts employ this practice.
It appeals to incentives, which from a systems approach is well-worth studying. If you've ever seen a fast-food restaurant with a sign, "If we don't give you a receipt, your meal is free," then you're looking at the private version of this phenomenon. Quick eats places have a strong vulnerability to having the staff sell a meal, but incorrectly ring it up on the register and pocket the cash.
The solution? Make people want the receipts, and then the customers will enforce the anti-theft measures for fast food restaurants, and enforce the tax coverage at uncovered retailers and restaurants for the government.
The point, of course, isn't about tax coverage or anti-theft measures at restaurants. Which is
It's about incentives and thinking broadly about how to make things run the way you want them to run.
It's a natural human temptation to go all on rants and tirades, make threats of penalties, and double down on enforcement if things are being done wrong under your umbrella. But oftentimes, some creativity and thinking about "carrot" incentives can do a world of good.
And more than that, sometimes you don't even need to incentivize the behavior of the people you want to change -- you can incentivize the people they interact with, and watch how your goals are met a healthy dose of third-party carrots.
Is Taiwan really smart about incentives across the board? When I was there they had a trash collection program where you had to buy a slightly expensive trash bag from a convenient store... I think it had a hologram on it or something. It made trash pickup easy because you could just put it on the street whenever, and it incented people to not throw away a ton of trash.
I live in Puerto Rico and the government started doing the same thing 2 years ago. In Puerto Rico tax coverage was insanely difficult for the government to process, since tons of business operate in the mountains, are extremely small operations, or are mostly run solely in Cash. Now, every business that caters to consumers must be connected to via telephone to the government and print out lottery tickets in each receipt. The size of the lottery is relatively small, but regardless People go out of their way to ask for and keep receipts because the lottery happens quite often.
Even though this incentives tax coverage, a lot of businesses don't like it. Technically the government has access to your books before anyone else.
Got this email titled "Investing and Living in Mongolia" from a reader. Good questions here -
I enjoy your blog. I saw that you recently moved to Mongolia. I am curious what made you move to Mongolia (i.e. curiosity to explore vs. a new job)? What is it like there for foreigners? Is it a suitable environment for investing capital? Do you feel safe?
Mongolia is an extremely promising country from the outside, yet nothing beats the perspective of someone who is there on the inside (even though you have not been there a very long time).
All the best,
We grow up being told what to do and what not to do and can't wait until we're adults and can do whatever we want. When we finally get there, there are new people like bosses, cool people on TV, and the government who try to tell us what to do again.
I don't mind getting into a little trouble here and there, so I tend to push the envelope a bit. However, even if you want to stay on the right side of the law, here are a few things that you probably THINK you have to do, but don't really.
Have any more to add? Put them in the comments and I'll add good ones here!