Weekly SSRN Tax Article Review And Roundup: Holderness Reviews New Technologies and the Evolution of Tax Compliance

This week, Hayes Holderness (Richmond) reviews James Alm (Tulane), Joyce Beebe (Rice), Michael S. Kirsch (Notre Dame), Omri Y. Marian (UC-Irvine) & Jay Soled (Rutgers), New Technologies and the Evolution of Tax Compliance, 39 Va. Tax Rev 287 (2020):

Ask almost any waiter and they will say that cash tips are best. “Why?,” a first time diner might ask. The waiter probably will not respond, “information,” but information is likely the root of the answer—or rather, control of information. Yes, there is some convenience to being paid immediately with cash. However, being fairly confident that diners will not tell the restaurant or the Internal Revenue Service how much they tipped, waiters control that information and can report it as they see fit. And when one focuses on waiters as taxpayers, their control over that information becomes problematic because that control enables the waiters to engage in tax evasion.

This is not to claim that all waiters engage in tax evasion by underreporting cash tips; as Alm, Beebe, Kirsch, Marian, and Soled survey in New Technologies and the Evolution of Tax Compliance, there are myriad factors that go into an individual’s decision not to comply with the tax law, such as the level and types of audits happening, perceptions of the level and types of audits happening, positive inducements for compliance, social norms, and demography. these factors and others, However, information is essential to tax compliance, as is trust in the tax system and authorities.

Alm et al. conduct their survey in pursuit of the larger goal of providing a framework for considering how modern technologies such as blockchain and artificial intelligence—here referring primarily to machine learning—may affect tax compliance. Developments in technology have always affected the tax compliance paradigm by offering new tools for taxpayers and tax authorities alike to conduct their activities. In the case of tax evasion, technological developments can fuel a cat-and-mouse game between tax cheats and revenue agents. Thus, one might be tempted to overlook Alm et al.’s article as simply placing a modern lens on an age-old problem. To do so would be a mistake, though.

Alm et al. succeed in highlighting the unique nature of new technologies in the context of tax compliance. The digital world is a different world, and the authors’ framework offers readers the means to consider why those differences are meaningful. New technologies drastically change not only the information available, but, more importantly, who controls it and how it is processed in ways previously unimaginable.

For instance, blockchain technologies remove middlemen like financial institutions from many transactions. While this removal certainly smooths economic transactions, it results in more control of information in taxpayers. Every transaction conducted through the blockchain might look more like the cash tip situation. Not only that, the blockchain can make the parties to the transaction more anonymous and transactions more permanent, exacerbating temptations to evade tax. As another example, artificial intelligence can harness the power of big data to develop complex transactions designed to evade taxes by exploiting weaknesses in the enforcement paradigm, and can do so far more effectively than human intelligence.

Not all hope is lost for effective tax enforcement, however. Like all technologies, new technologies are only tools; the ends to which they are put depend on who wields them. Alm et al. provide not only a framework for thinking about the potential for new technologies to exacerbate tax non-compliance but also the framework for thinking about how those technologies can promote tax compliance. For instance, despite the difficulties the blockchain might present, the transactions still are not actually cash transactions, meaning there is information available somewhere for tax authorities to uncover. Artificial intelligence can be used to ease the burden on resource-strapped revenue agencies like the Internal Revenue Service of processing information and rooting out potential tax evasion schemes.

Alm et al.’s framework is an important contribution that highlights the unique challenges and opportunities that new technologies pose for tax compliance. Harnessing their analysis, the authors provide an overview of the types of reforms that might successfully tap the potentials of technologies like the blockchain and artificial intelligence to improve tax compliance. However, these reform proposals work mainly within existing tax systems, leaving the reader to wonder whether the authors view new technologies as presenting truly unique tax compliance issues or as only creating the current iteration of the long-running cat-and-mouse game between tax evaders and revenue agencies. Perhaps the authors focus on reforming existing tax systems in favor of expediency, but a higher-level consideration of the types of tax systems best suited to capturing the potential of new technologies would reinforce the uniqueness of the considerations Alm et al. present in the bulk of the paper.

In any event, Alm et al. engage in a tremendous undertaking by clarifying the evolution of tax compliance issues of the modern world and by impressing upon the reader the gravity of that evolution and how people might respond to it. Think the cash economy presents difficult tax compliance issues? Let Alm et al. introduce you to the digital economy.

Here’s the rest of this week's SSRN Tax Roundup:

• Miguel Acosta-Henao (CUNY), Law Enforcement and the Size of the Informal Sector
• Reuven S. Avi-Yonah (Michigan), Taxation and the New “Progressives”
• Mårten Blix (IFN), Money for Nothin’ – Digitalization and Fluid Tax Bases
• Bridget J. Crawford (Pace), Taxation as a Site of Memory: Exemptions, Universities, and the Legacy of Slavery, Law Review Forum (forthcoming 2020)
• Aidan Collymore (Portsmouth), The Perception of the Ethics of Tax Evasion in the United Kingdom
• Charles Delmotte (NYU), Toward a Uniform Expense Rule
• Antonio Lopo Martinez (Coimbra) & Clébio Bis (FUCAPE), Tax Aggressiveness in Brazilian Companies with Foreign Capital Participation
• Rahmat Muttaqin (Vienna) & Emre Akın (Vienna), Turkey-Indonesia Tax Treaty Post-MLI
• Liora Schulman (Pace), Do Tax Directors Face Consequences from Tax Avoidance?
• Steven M. Sheffrin (Tulane) & Rujun Zhao (Tulane), Public Perceptions of the Tax Avoidance of Corporations and the Wealthy, Empirical Economics (forthcoming 2020)