Weekly SSRN Tax Article Review And Roundup: Speck Reviews Mazur's Can Blockchain Revolutionize Tax Administration?

This week, Sloan Speck (Colorado; Google Scholar) reviews a new work by Orly Mazur (SMU; Google Scholar), Can Blockchain Revolutionize Tax Administration?:

In Can Blockchain Revolutionize Tax Administration, Orly Mazur provides an excellent addition to the burgeoning academic commentary on blockchain technologies in tax administration. And Mazur is cautiously evangelical in her belief that blockchain offers real benefits compared to the current U.S. tax system. The stakes, for Mazur, are significant: there’s real promise that blockchain could bolster or unlock enforcement mechanisms that could help close the net tax gap. Mazur ably explores the potential benefits—and associated drawbacks—of deploying blockchain in the tax space.

Blockchain technology generally refers to data storage using a unified, secure, distributed ledger. Importantly, changes to the ledger do not rely on a trusted intermediary for approval. Instead, changes arise through an a priori consensus mechanism involving the various parties, known as nodes, that keep copies of the ledger. The term “blockchain” directly refers to a particular method for ensuring data integrity, in which a ledger is appended using time-stamped blocks of data that begin with a unique verification code (or hash) based on the prior block of data. 

Other parameters describe a menagerie of potential instantiations of this technology. Blockchain can be permissionless or permissioned, public or private, decentralized or centralized, or any number of continuous points between these extremes.

There is little doubt that tax administration in the United States needs improvement. The question is whether blockchain is the right step at the right moment. Mazur appropriately warns against viewing blockchain as an immediate panacea. Instead, Mazur suggests developing groundwork—standards, architecture, outreach—that eventually could facilitate the future deployment of blockchain principles by Treasury and the IRS. Parallel structures, such as digital identity systems and tokenized fiat currency, also could lead to broader use of blockchain. One ready-to-go application of blockchain, as a dissemination device in credit-invoice VATs, wouldn’t really apply to the United States. As Mazur notes, cross-jurisdictional information sharing about (passive) income or assets, sales taxes, or (as Christine Kim argues in detail) payroll taxes might prove easy gateways for integrating blockchain into the tax administrative system. It is clear from Mazur’s able explication that policymakers must select carefully among blockchain’s multiple features to craft software that addresses taxation’s specific needs. This process will take time.

One potential advantage of blockchain technology is that Treasury already relies heavily on private parties to administer the U.S. tax system. Indeed, deep-seated understandings of private reporting and voluntary compliance are integral to the tax gap that blockchain might help close. As a technology that blends notions of public and private, centralized and decentralized, authority and anarchy, blockchain fits well with domestic norms of new governance. For example, tax return preparation companies might go along with tax forms populated automatically by an accessible blockchain database (and, presumably, mediated by them), even though such companies historically have lobbied against filled-out tax forms sent to taxpayers by the government directly. These dynamics complicate other considerations, such as how private enforcement might apply to the big chunks of blockchain data that nongovernmental actors presumably could observe. Similarly, blockchain’s permanence implies that users can supplement data but never replace it. My intuition is that the persistence of “old” data may be particularly undesirable in tax, perhaps even to the extent of some sort of special tax right to be forgotten (Kim discusses this issue as well). Mazur’s article lays a foundation and creates a framework in which these types of questions can be asked.

Finally, one of blockchain’s fundamental attributes—data integrity without the existence of a trusted intermediary—may exist only in the most formalistic sense in the tax environment. Many implementations of blockchain will involve third-party information reporting, rather than direct reporting by a taxpayer or the revenue authority. While blockchain may ensure that third-party information is collected and disseminated accurately, the technology, as conventionally described, cannot police input errors. For example, an employer’s compliance department determines that a particular fringe benefit is includible in income. That determination is wrong. Blockchain will faithfully reproduce the error—and perhaps imbue the error with greater authority, due to its immutability. Although trusted intermediaries impose transaction costs, they also provide some degree of oversight and accountability—or even just additional time to let things rattle around in folks’ brains. Perhaps some (or most) intermediaries remain in a blockchain-friendly tax system. But there surely will be some temptation to excise these players, perhaps to the detriment of accuracy or fairness.

Overall, Mazur’s article does important work in bringing blockchain to tax administration. Mazur’s clear and careful study highlights the potential advantages and limitations of blockchain in this area. As policy entrepreneurs seek to extend blockchain principles to all areas of economic life, they (and we) would do well to read (and heed) Mazur’s analysis.

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

• Priyansh Agarwal (Jindal Global Law School), Tax Administration in the Times of an Economic Crisis, COVID-19, Vis-à-Vis India (Dec. 1, 2020)
• Reuven S. Avi-Yonah (Michigan), The Ingenious Biden Tax Plan, 102 Tax Notes Int’l 205 (Apr. 12, 2021)
• Patricia A. Cain (Santa Clara), The Unfairness of the Marriage Tax Penalty, Bloomberg Tax Insights (Mar. 31, 2021)
• Michael Conklin (Angelo State), Is the Tax Code Racist? A Critique of Dorothy Brown’s The Whiteness of Wealth (May 2021)
• Steven Dean (Brooklyn), Beyond the “Made in America Tax Plan”: GILTI and International Tax Cooperation’s Next Golden Age, 18 Pitt. Tax Rev. 1 (2021)
• Lorraine Eden (Texas A&M), Winners and Losers: U.S. Country and Industry Estimates of Pillar One Amount A, 50 Tax Mgmt. Int’l J. 5 (2021)
• Albert Feuer (Law Offices of Albert Feuer), IRS Guidance About the SECURE Act’s Beneficiary Provisions Requires Revision, 49 Comp. Plan. J. 78 (2021)
• Hannah Fisher (Chicago), Getting Down to Brass Tax: Why Courts Should Use Equitable Tolling to Help Taxpayer-Petitioners Impacted by COVID-19, 2021 U. Chi. Legal F. (forthcoming)
• Nena Gallegos (Chicago), Protecting Mixed-Status Families: Equal Protection Analysis of the Social Security Number Requirement, 2021 U. Chi. Legal F. (forthcoming)
• Martin Jacob (WHU—Otto Beisheim School of Management), Real Effects of Corporate Taxation: A Review, TRR 266 Acct. for Transparency Working Paper Ser., No. 50
• Tarun Jain (Supreme Court of India), A Case Comment on Supreme Court’s Decision in Engineering Analysis: Critical Refinement of India’s International Tax Law and Policy, 433 ITR 1 (2021)
• Juliana Kuteken (Brazilian Institute of Tax Law), Taxing Offshore Indirect Transfers in Brazil: Discussions on International Tax Policies and Recommendations for Reform (Jul. 30, 2020)
• Orly Mazur, Can Blockchain Revolutionize Tax Administration? (May 7, 2021)
• Philip MacFarlane (Independent), Taxation and Banking for Medical Marijuana: A Direct Route for Change (2021)
• Elvin S. Meka (European University of Tirana), “Legaformalesty”—A Different Approach for a New Amnesty in Albania (Dec. 21, 2020)
• Nathan Sosner (AQR Capital Management), Michael Gromis (AQR Capital Management) & Stanley Krasner (AQR Capital Management), The Tax Benefits of Direct Indexing, and How They Are Affected by the Biden Tax Plan (May 7, 2021)