Today a study suggested that the Belgian Government loses 30 billion euro every year through tax evasion and fraud (here). This is a big concern to me as I pay my exceptionally high taxes in Belgium and know what a difference 30bn would make to the average tax bill. However, the problem is not as simple as my title would suggest – but greater leveraging of electronic payments IS part of the solution.
The biggest problem in taxing a nation is how to have a view on money that moves entirely outside of formal channels. By this, I mean the cash/black/informal economy that allows money to move without intervention of banks, tax authorities or regulators. I’ve blogged on this topic in the past (here) and of course it is clear that with 80% of known financial transactions taking place in cash here in Belgium, the problem for tax authorities is immense.
So why do I believe that prepaid debit or credit cards are the solution? The answer is, it depends on how they are implemented, and they are only part an overall package that needs to include punitive as well as incentive measures coupled with facilitating tools such as prepaid, tax online and easy ways to report tax avoidance anonymously. More importantly, a Europe-level decision to migrate everyday transactions away from cash wherever possible.
Prepaid is top-of-mind for me at the moment as my team has just finished a project with the national postal provider, bpost, to deploy mass-market prepaid cards in Belgium (here). During this process we learned a strong lesson from successful implementations elsewhere – use cash as a funding source. Now this can’t be done by every prepaid issuer as it requires a trusted cash-in network – similar to that used by remittance providers – but the end result is the transformation of cash into electronic. In European legislation, this is known as an e-money transaction and so falls out of scope of the Payment Services Directive. This simple fact makes that infrastructure around prepaid much lighter than traditional banking or other cards business.
Changing cash, whatever its source, into e-money has a significant benefit for tax authorities – the money becomes traceable from that point forwards. This traceability means that it becomes taxable and while this fact alone doesn’t stop tax evasion, it certainly helps to move things in the right direction. Additionally, as prepaid cards can be a standalone product, divorced from other banking products, they retain a reasonable level of anonymity in usage and so allow considerably more privacy than other banking or card products. This, coupled with their availability to just about everyone, makes them the closest thing to cash available to mass markets.