Friday, 18 December 2015

Modern governance for a complex world

It's been three centuries since the last human being to claim to know everything - Gottfried Wilhelm Leibniz - died. Since the death of this remarkable polymath, I doubt that there's anyone today who'd claim to know everything about even one discrete area of knowledge, from microbiology to astrophysics, from neurology to genetics. Our known universe is becoming more complex at an exponential rate; the more we get to understand, the more it becomes apparent that whole new swathes of the unknown open up to us.

And so it is with government.

It all seems so complex, the business of running a state! Yet it should be so simple... Voters, disgruntled with this or that, were taken in by promises of 500 złotys a month child benefit, free prescription medicines for the over-75s, increased minimum wages, earlier retirement, etc, etc. How this was then to be delivered - well, the voters trusted the promising party to deliver. PiS has been busy sweeping out the corrupt old cronies from power, rearranging government departments to suit its world view - and suddenly the party leadership (J. Kaczyński, esq.) has realised that promises rashly made to win elections have to be paid for somehow, and that this is a lot more difficult to deliver than to promise.

How to do it? Collect more taxes! From the evil banks! From foreign supermarket chains! Making the VAT system watertight! Except once the new government got to grips with the detail, the complexity of the world we live in today became apparent. Impose a tax on the banks, and they will simply raise their margins for loans and cut the interest rate on deposits. Who suffers? The citizens, small business. Supermarket retailing is a cut-throat, ultra-low margin business. Impose a turnover tax that's higher than the margins the supermarkets make, and they'll pass that on... not to the consumer, but on to the suppliers. Small businesses once again, bakers, dairies, farmers, who'll get squeezed even further, passing the pain onto their workers and subcontractors. And meanwhile, the amount of tax raised fails to meet the costs of all the promises made.

Collecting VAT. Yesterday I read a report by PwC into Polish VAT. This year, the consultancy estimates that the Polish state will miss out on 53 billion złotys of foregone revenue - uncollected VAT - from the grey sector. This sum represents 3% of the Polish GDP. All those garages (warsztaty), builders, dodgy petrol stations, smuggled cigarettes and alcohol.

Now, 53 billion złotys is more than enough to pay for all of PiS's election promises and then some more. But saying 'we'll collect all the taxes' and actually doing it are two different things. It can be done to a much better extent than at present, but no government can totally close down the grey sector.

There are two approaches to making the VAT system more watertight. One is the modern way - digitise, digitise, digitise. You buy a woollen hat with a debit card for 123zł. Instantly, 100 złotys travels electronically from your bank account to the merchant's bank account. And at the same time, 23 złotys goes to the taxman - the Value Added Tax. This is called 'split payment' and it works already in Czech Republic and a few other advanced economies. Digitising tax collection also allows for the reconciliation of invoices in real time, business managers will no longer have to wait for the end of the month for visibility of sales figures, costs, taxes and post-tax profits.

The PiS approach to tax collection, I fear, will be different. More tax inspectors will be hired. A Big State must be protected by a Big Army of administrators. The tax inspectors will descend on hapless owners of newspaper kiosks at 01:30, they will go through mountains of VAT receipts and invoices and check the cash register and interrogate the kiosk owners and discover, and the end of a month-long investigation, that the kiosk owner has underpaid VAT that month to the tune of 37 złotys. The cost of the investigation, however, was 5,000 złotys. The kiosk owner is prosecuted, quits the business, no one is bold enough to step into their place, and another light goes out.

Tax inspectors will need to be inspected. "Ile mam dać, aby nie dać?" And of course, the inspectors of tax inspectors will need to be carefully monitored. And so on. Paralysis will happen - or else the whole thing will just blow apart - the human factor - and we're reduced to the level of Russia.

Digitising tax collection is the way forward. Clever algorithms can cross-check e-invoices (in .xml rather than dumb .pdf files) against payments, reconciling revenue with tax payments. Algorithms cannot be bribed. They will instantly show anomalies, mistakes, outright tax evasion. [Please read this blog post from October about the relative inefficiency of the Polish tax authorities. It costs 1.60zł to raise 100zł of tax in Poland; it costs 73p to raise £100 of tax in the UK. Too much chasing grosze, not enough strategy and digitalisation.]

Tax collection should be made as easy as possible, and it needs to go online. Pre-filled tax returns, where an ordinary citizen on an ordinary work contract merely clicks to accept a tax return form where their monthly income and tax payments have already been entered.

If we look at how well banks and airlines, to name two industries, have digitised, as citizens we should be demanding that the state does likewise.

But to get things done, companies - and governments - needs a strategy and good execution. Od ogółu do szczegółu - from the big picture down to the detail. Ministers must formulate and articulate; the civil administration must make it happen. All this requires high quality human resources. Properly motivated, trained and experienced. I cannot see this happening here.

The British example is interesting. As Chancellor of the Exchequer,from 2010 to 2015  George Osborne reduced the size of the UK public administration by half a million people. At the same time, private sector employment grew by over two million. Front-line service numbers - doctors and nurses, policemen, teachers - were not cut. The tax administration was, however, slimmed down still further and now is to be consolidated into regional centres with local tax offices being closed down. The Inland Revenue and Customs & Excise - two separate bodies - merged in 2005 to form Her Majesty's Revenue and Customs. This is something Poland should do, in particular given that so much excise duty (again, fuel, tobacco and alcohol) not being collected because of a lack of cooperation between the tax authorities (responsible for VAT) and excise duty collectors.

Will Poland's new government modernise its tax system? I fear not. The hope that 'at least grown-ups are in charge of the economy' seems to be fading on a rising tide of Kaczyzm, an ideology based on a world-view from the past century. Public administrators that are replacing the 'old corrupt elite of cronies' are somewhat lacking in relevant experience. Closed to the outside world, to new ideas, without any concept of how complex the issues that face the modern state are, I fear they have no frame of reference, they are like children who wander into the middle of a movie.

Choosing an IT provider to digitise something as huge and complex as a medium-sized nation's tax system will be a nightmare. It's much tougher than choosing a tactical transport helicopter for one's army. There will be mistakes. They will be costly. But it has to be done if taxes are to be collected effectively.

My fear is that this government is becoming paralysed by the fear it has generated itself. It will show itself to be inept. Laughable. Decisions made will be rash, the fallout painful. If taxes cannot be collected efficiently and the system cannot be made more watertight, democracy will falter.

This time last year:
Contagion - CEE's foreign-exchange markets

This time two years ago:
Muddy Karczunkowska

This time four years ago:
Ul. Trombity - a step closer to dry feet?

This time five years ago:
Matters of style

This time six years ago:
Real winter hits Warsaw

This time seven years ago:
This is not Mazowsze, no?


Paddy said...

If Poland wants to implement such IT improvements it really should look no further than the UK, which has one of the world's leading IT and digital infrastructure projects ongoing The US and the Dutch have already modelled their digital infrastructure projects on the British one, so I can think of no better partner!

dr Marcin said...

The PiS approach to tax collection, I fear, will be different. More tax inspectors will be hired. A Big State must be protected by a Big Army of administrators.

Yes, Mike. You've enforced me to make a data research and some of computations. So, perhaps yours readers do not know that the Supreme Audit Office annually examines of the state budget execution, so among of many figures and data there displays of an employment of the fiscal administration apart of the headquarters of the Ministry of Finance. Hence, the results are:

2005-2007 (years of the PiS governments): average employment of the fiscal administration 47823, while
2008-2014 (years of the PO governments): 48201.

Saying more, at a peak year of 2007 PiS increased tax staff up to 48021, while PO consecutively reached its peaks twice - in 2010 (48600) and 2011 (48585). So, who favored a Big State more? Yes, it's true, that there was a decrease of an employment of the fiscal administration down to 47576 in 2014. But it was the only 194 less than that of what PiS has inherited from the lasting government.

Michael Dembinski said...

@ Paddy:

I'm all in favour of promoting UK best practice in this area. Question is - will the current Polish government be willing to learn from it?

@ Dr Marcin:

UK's HMRC employs 63,800 people - one per 1,000 citizens. If Poland were to have a comparably sized tax administration, it would need to sack 10,000 urzędnicy to be left with 38,000. PO lost the elections because it lost the will to reform. Had it spent those eight years wisely, it would have tackled the vested interests of that vast army of public functionaries to get a more effective state. PO didn't really try. PiS lacks the vision and the will to do anything in this area. It will drift, get worse and stagnate. Interesting to see whether that 48,000 becomes 38,000 or 68,000 by 2019. I rather think the latter.

dr Marcin said...

UK's HMRC employs 63,800 people

Fascinating! And adding of yours lecturing on digitizing of public services, can you imagine that I was unable to check on-line of a status of my National Insurance Number matter contrary to that of what is available to get here while applying for a passport? There's none of an opportunity to get an access to any of a web tool on the HMRC web site in order to follow of a given matter's prospects and to check a stage of application proceeding. So, what for the God's sake are "our reference number" and "form serial number" of application, for? This should be in such a way, that there should be a tool on the HMRC web site on which one may write of the both things a get an access to his/hers matter.

Anonymous said...

They are out of their element ;-)