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How China got businesses to pay taxes: scratch-n-win tickets

A decade ago China was losing about $158 million a year in tax revenues. World Bank figures show that China has steadily increased its tax revenues since 1994.

By Rebecca ChaoContributor / October 3, 2012



Beijing

There are 55 ways you can get the death penalty in China, and it once included killing pandas and tax evasion. So when it comes to setting trends for positive reinforcement, China rarely comes to mind. 

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A recent study, however, shows that China's quiet experimentations with carrot-and-stick measures throughout the past few decades has not only paid off, but has set off a trend across the nation and across Asia, even catching the interest of some experts in Japan and America. China’s most successful measure? A lottery receipt system to keep track of transactions and get businesses to pay their taxes.

Positive reinforcement programs, like China's lottery receipt program, can make governance better, say experts like Richard Thaler, a professor of economics and behavioral science at Chicago University's Booth School of Business. Typically, the governments use "exhortation and fines" to make citizens behave, but, "these efforts are usually ineffective," he wrote in an oped. Though lotteries like the one in China are only one way positive reinforcement can work – England got its citizens to recycle 35 percent more by allowing them to earn points for free merchandise – Mr. Thaler writes, "The moral here is simple. If governments want to encourage good citizenship, they should try making the desired behavior more fun." 

Like many developing countries, China’s cash-based economy makes it difficult for authorities to track transactions and easy for people to evade paying taxes.

A decade ago China was losing one billion yuan ($158 million) a year in tax revenues according to Junmin Wan, a Chinese scholar at Japan’s Fukuoka University, citing calculations study in the journal Tax Notes International.

In 1994, the Chinese government took serious measures to address this and implemented the Golden Tax Project, which involved updating its computer systems to increase the efficiency of tax collection. The Golden Tax Program also included a lottery receipt or fapiao experiment, which incentivizes consumers and businesses to declare taxes by having receipts, printed via specially designed forgery-proof machines, double as lottery tickets. 

The program was launched in 1998 in Haikou, the capital of Hainan Province. By 2002, 80 major cities were using the lottery receipt and today, it is enforced nearly nation-wide. Taiwan was the first to implement the lottery receipt program off the mainland in 1950.

How it works

Businesses purchase special machines that print special receipts known as fapiao in addition to regular receipts, called shouju, that cash registers provide. Every time a receipt is printed, a transaction is recorded and taxes must then be paid on it. To ensure owners actually use the machines, the government got creative: The fapiao that the machines print out are essentially scratch-and-win tickets with prizes ranging from 5- to 50,000 yuan ($.75 to $8,333). For perspective: A subway ticket in China is 2 yuan, and a monthly phone bill is about 60 to 127 yuan for an iPhone.

Following the implementation of the program, the frequency of customers asking for receipts increased dramatically, according to a 2009 survey conducted by Mr. Wan. Those who had never requested receipts began asking for them one out of every two transactions. The frequency of those who requested receipts before the fapiao program was implemented increased by 30 percent after hearing about the program.

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