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The ageing population crisis – and the new ‘tax’ set to pay for it

With the global birth rate plummeting and the average age of people alive today steadily rising, the world is experiencing a demographic shift of unprecedented scale that will have a huge impact on the economy, health and climate. 

But there is another less obvious – but nonetheless potentially damaging – consequence of an ageing population: the lack of tax collected.  

The trend, predominantly seen in developed nations but also increasingly evident in developing countries, presents a myriad of economic challenges. In particular, countries with national health care services are finding the impact of an ageing population on tax revenue is hitting their budget to care for people. 

What is an ageing population and why does it matter? 

An ageing population means there is a higher proportion of elderly people relative to the working-age demographic.  

It’s a result of declining birth rates in many countries and increased life expectancy, leading to a growing percentage of the population being over the age of 65.  

Indeed, statistics show 10% of the world’s population is now over 65, compared to just 5% in 1970. In Europe, that figure is 19%.

According to the United Nations and other sources, the countries experiencing the most rapid ageing of their populations include Japan, Italy, Germany, Portugal, Finland, Bulgaria, Greece and South Korea.  

The economic implications of an ageing population are worrying as fewer young people reaching working age means a shrinking labour pool and a reduced workforce. Industries may therefore face labour shortages and higher wages, as those in demand will expect more, impacting productivity and economic growth.  

Tax revenue is fundamentally linked to the size and productivity of the workforce. With fewer working people, the amount of income tax will decrease.  

This will escalate healthcare costs as an older population typically requires more health services, putting considerable strain on already struggling public health systems, especially those funded by a welfare state. 

As more people retire, the pressure on pension systems intensifies. With fewer workers contributing and more retirees drawing benefits, many pension funds face sustainability challenges. As the snowball gathers pace, conscientious pensioners may seek to pull their money out in fear of losing it in a collapse; thus accelerating the collapse, which in turn is likely to be bailed out by the authorities.  

Ageing populations will also change consumer market dynamics. Industries focusing on youth products may see increased demand, while pensioners who are living longer will be conscious about spending. Slower growth can result in lower corporate profits and, consequently, lower corporate tax revenues.  

Rising costs, lower spending and fewer people to tax means the deficit needs to be found somewhere and with many European countries already hitting VAT of 25%, raising rates further will not be a popular move. 

However, there is a way that governments can raise considerable revenue without raising taxes for the general public; in fact the general public would not be impacted at all and it’s a tax that really does hit the wealthy more. 

The answer? A new ‘tax’ – fines for non-compliance  

Governments do not need to raise the rate of VAT – they just need to fine those that are non-compliant. And in my experience, a significant number of businesses (particularly large ones) are either non-compliant or borderline.  

With tax authorities increasingly leveraging digital systems – such as real-time reporting and e-invoicing – it won’t be long before your tax return will be completed for you directly from your financial data (think SAF-T…). Indeed, this has been a goal for Poland for some time. 

Tax authorities are now capturing vast quantities of data – more than ever before. With this data being stored on their systems, every record for every tax return for every taxpayer can be audited, potentially years after it was initially submitted.  

AI has seen a huge rise in everyday use, but it is after all a reporting tool; admittedly a very powerful one, but any reporting tool is only as good as the data you enter. And tax authorities have an enormous data set to manage, most of which is never analysed effectively.  

Now, as my son would say, ‘dad, imagine if…’ AI was trained to analyse that huge ocean of data to first find common errors, followed by more complex ones, before identifying patterns and missing digital links to get smarter in finding the gaps.  

With tax authorities keen to find extra tax revenues to overcome the challenges of an ageing population, they can create a league table showing the biggest offenders and take their time to comprehensively audit each one. And in such a scenario, they’ll already know where every mistake is; it’s not a case of tax authorities having to get lucky in finding your mistakes, it’s you that will be under pressure to justify every single one.

So all those manual tax processes that are causing you no major issues for now are the very ones that could come back to bite if they trigger a warning to a tax authority in future.  

The small mistakes you don’t even realise you’ve made could start to cost you once fines start coming in – and it could be because, for example, you cannot prove the digital link of a transaction that happened six years ago by people that left your business two years after that.  

You may even have done everything correctly, but if you cannot prove it you’ll be liable for the original tax, you’ll pay the tax again and you could be fined.  

Sounds unfair? Well, maybe, but with the digitalisation of tax every business will be exposed to hyper-scrutiny in the very near future. 

I’ve lost count of the number of times I’ve heard tax professionals say ‘we don’t need automation as we only have a few small issues’. In reality, I know the issues a business is aware of will almost certainly be just the tip of the iceberg and the big, unknown, potentially damaging errors are still lurking beneath the surface.

If your manual tax solution was the cause of your historic issues and subsequent fines, imagine the additional fines coming your way if you continue to remain non-compliant as the AI owned by tax authorities increases scrutiny of your data.  

Best of all for the tax authorities is the fact that it is the business that has to pay the fines, not the end consumer.  

It is the business that was able to recover all its VAT that is now paying the fines for not being compliant with its VAT and it is the shareholders that ultimately have to pay these fines because company profits will be impacted.  

In conclusion… 

The ageing population crisis is a global phenomenon with profound economic implications with governments having to fill gaps between income and expenses as things start to collapse. 

Countries at the forefront of this demographic shift must navigate the challenges of a shrinking workforce, increased healthcare demands and strained pension systems and find a way to pay for more with less.  

If you want to win an election, you don’t raise taxes. But fining those companies that have neglected to do their job properly is fair game and won’t face any backlash. After all, if you are wrong you are wrong.  

Governments don’t even need to add or change any laws. They simply need to utilise the tools available to them to question the transactional data being reported.  

It’s up to the company under audit to prove its innocence, not for the tax authority to prove its guilt!