ISET Economist Blog

The Georgian Tax Lottery Experiment after Seven Years
Friday, 06 December, 2019

More than three decades ago economists famously concluded that tax compliance is rather irrational behavior. Literature, across a wide range of disciplines, has since been overflowing with analysis as to why we see so much tax compliance in the modern world. The academic literature is concerned with why people pay so much tax or why so many people pay taxes, therefore policy-makers can gain an understanding of the underlying mechanisms, which thus allows them to design appropriate policy actions to boost revenue efforts.

Income generated from tax collection is essential for any government in order to provide decent public services and adequate infrastructure for its citizenry. However, tax evasion practices are widespread around the world and create real challenges for governments. This issue is particularly relevant to governments in the developing world, with their nascent political and social institutions. In such environments, taxpaying culture is feeble, with the existence of widespread corruption, hence distrust in the governmental institutions. Such weak administrative capacities provide a further deterrence to governmental efforts in collecting sufficient revenues. To tackle this problem, complex and comprehensive reforms are required.

The traditional method of prevention is to create punishment mechanisms to detect and punish tax evasion, i.e. deterrence. Though recently, more creative approaches for increasing tax collection efforts have been emerging, e.g., creating incentives through reinforcement of positive actions, not necessarily on the taxpayer, rather on those who do not always exercise their ability to impact fiscal outcomes, in our case citizens.

Cash receipts generated from a register provide proof of payment to a customer, but the cash register itself stores the information that documents purchases. This information then becomes the basis for tax payments to the revenue authority. In order to avoid these payments, business owners may be tempted simply to not register certain purchases, if not explicitly requested by a customer or if the threat of detection and punishment is low. The usual practice to eradicate such practices is, therefore, to complete random checks in which an undercover revenue authority representative makes a purchase at a particular store, and if the seller fails to catalogue the purchase in the cash register, the representative punishes the owner of the store by levying a large fine.

This practice has multiple limitations: business owners usually know their customers, and thus it is relatively easy to detect an undercover representative. Moreover, in an environment with weak institutions, the opportunity of collusion between an owner and a representative arises, where in exchange for a bribe, the official fine is never submitted.

The other remedy in countering these corrupt practices is with customers who lawfully request a receipt of purchase, although there are few incentives to do so. Requests for receipts bear social and economic costs, albeit tiny, but when the expected benefit is virtually nullified, no rational agent will thus be incentivized. Therefore, one solution to this problem is to introduce private benefits to customers, which outweigh such costs, to positively reinforce their actions.

The potential benefits of this mechanism are numerous. It could immediately result in higher tax receipts, but most importantly, such practices could stimulate behavioral changes, and with the eventual absence of such reinforcements, citizens may find it less costly to ask for a receipt and better realize the consequent benefits. While large-scale corruption practices might not be directly affected by this mechanism, it could help establish a culture of tax compliance, with possible additional spillovers in other settings. Finally, in different settings, these implemented initiatives can help us understand and design stronger incentive mechanisms. While the need for more creative approaches is well understood, gaps remain in the understanding of what exactly constitutes such creative yet beneficial approaches.

A handful of countries are in the process of or have already implemented similar initiatives. These countries include Taiwan, Malta, and Slovakia, among others. Interestingly, Georgia is one country to have introduced a mechanism, albeit short-lived, as part of its efforts to fight the shadow economy. To date, very few studies have investigated the effectiveness of these mechanisms and the evidence for Georgia was simply non-existent until a recent study by Larsen et. al (2019), which provides the very first analysis of the Georgian tax lottery experience from seven years ago.

The Georgian Revenue Service introduced the tax lottery in early 2012. The initial plan was to keep the lottery running until 1 January 2013. However, the lottery ended prematurely on 12 November 2012, on the grounds of inefficiency; although no analysis, at least public, exists to justify this statement.

In order to participate, customers had to check receipts provided by any shop or service provider for a chance to win up to 50,000 GEL. The Revenue Service, for its part, promoted the campaign through different means; via TV, radio, and other channels of communication. While the happy recipients of the 10,000 and 50,000 GEL prizes were often highlighted due to countless interviews, all with the objective of keeping the perceived probability of winning high, so that more and more people would participate and be engaged by the campaign.

The quantitative analysis by Larsen et. al (2019) studies the Revenue Service data of cash receipts for 2012 and 2013, which show that the reported aggregate weekly sales rose by 11% during the lottery, compared to non-lottery weeks and considering the overall differences between 2012 and 2013. The average sales per register also rose by 7.7% and the average number of cash registers reporting any cash transaction increased by 4% within lottery weeks. Notably, the study also discerns certain limited evidence of habit formation, where unexplained factors kept registered sales high even after the lottery was terminated, compared to the following year.

The study also utilizes a qualitative approach by interviewing a wide range of stakeholders that were directly or indirectly involved in the lottery, including both consumers and the architects of the campaign. The interviews reveal that the key reason the lottery was prematurely terminated was due to insufficient budget allocation. There were not enough funds to maintain a high enough perceived chance of winning and therefore hold public interest and participation, as daily receipts decreased significantly from around 2 mln. out of 2.5-2.8 mln in the first months of the lottery to only 300,000 by the end. Boosting the budget to keep consumers engaged was not a priority of the newly elected government, and considering, with its existing budget, that the project did not appear to pay off, the decision was made to discontinue the program.

Seven years after the termination of the program, Georgia still struggles with a significant shadow economy. According to the infamous study by Medina and Schneider (2018), in 2015 the shadow economy in Georgia constituted 53% of the GDP, which is in stark contrast to the National Statistics Office estimate of 10.3% for the same year. The truth, most likely, lies somewhere in between. With the rapid development of available financial services, we have outgrown cash register-based receipt lotteries, however, increasing financial inclusion through more innovative mechanisms is a promising method of curbing tax evasion and eliminating the shadow economy.


Larsen, L., Arakelyan, R., Gogsadze, T., Katsadze, M., Skhirtladze, S., & Muench, N. (2019). The Georgian Tax Lottery of 2012. A Multi-Methodological Assessment. International School of Economics at TSU, Tbilisi, Republic of Georgia.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.