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Friday, June 4, 2021

Weekly SSRN Tax Article Review And Roundup: Kim Reviews 'Slack' In The Data Age By Oei And Ring

This week, Young Ran (Christine) Kim (Utah; Google Scholar) reviews a new work by Diane Ring (Boston College; Google Scholar) and Shu-yi Oei (Boston College; Google Scholar), "Slack" in the Data Age, 73 Ala. Law Rev. ___  (2021).

Kim

Legal systems tolerate "informal" spaces where law is not enforced and where those who violate the law are not sanctioned. We, tax lawyers, are familiar with this situation. In their new article, "Slack" in the Data Age, forthcoming in the Alabama Law Review, Diane Ring (Boston College) and Shu-yi Oei (Boston College) refer to this phenomenon as "slack." The authors discuss how slack relates to the formal flexibility and leniency of legal systems, and how the influx of ubiquitous data and information affects slack. While they give examples of slack in other areas of law, such as criminal law, this review will focus on slack in tax law.

Slack arises when enforcers have scarce resources and must prioritize, as Leigh Osofsky (North Carolina) demonstrated in The Case for Categorial Nonenforcement. 

The IRS regularly announces enforcement campaigns to signal its focus on certain issues in the coming years, which reflect its efforts to allocate limited resources. Slack may also exist when information gaps make full enforcement difficult. An important example is the significant tax gap in individual business or self-employment income. Taxpayers often underreport this type of income because it is not subject to withholding by third parties, and the IRS could reduce such tax gap by increasing audits or imposing additional third-party reporting obligations. But those solutions are costly, which brings the discussion back to the resource scarcity category of slack. Slack also arises from deliberate underenforcement of imperfect laws, decisions to exercise mercy, and executive branch politics.

According to the authors, slack holds both positives and negatives. On the positive side, slack permits the flexibility to accommodate human failures and imperfect laws, particularly in light of resource constraints. For example, there is theoretical justification for slack, with evidence demonstrating that less than 100% enforcement maximizes general welfare. However, such imperfect enforcement reduces morale and may increase unfairness. Racial, ethnic, socioeconomic, gender and other biases are likely to play an important role in determining how and where slack appears in the system. Conceding the risks above, however, the authors conclude that slack is desirable, especially when we need flexibility and forbearance in the legal system.  

Next, Ring and Oei explore the evolving use of data and its potential impacts on slack. Obviously, ubiquitous data and information may have positive effects on the allocation of slack, but they also bring risks. Data technologies can now make unlawful or ill-advised behaviors easily detected, reducing room for slack. However, some types of information are generated more quickly, and some technologies will take hold more rapidly than others. This suggests that the impacts of data on slack will be inconsistent, especially if the slack arises due to the information asymmetry, and may result in undesirable distributional consequences.

Consider, for instance, the offshore account reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and Foreign Bank Account Reporting (FBAR) rules. A series of whistleblower complaints and data leaks a decade ago exposed the offshore tax evasion by wealthy taxpayers, alerting enforcers to the existence of slack in that area. The FATCA and FBAR rules were enacted to deter the offshore tax evasion by increasing the data input to the government, providing an example of slack reduction in the data age. However, the new reporting obligations are very onerous, affecting immigrants in the U.S. and Americans living abroad more heavily than the wealthy Americans involved in offshore tax evasion, because the former group has less access to good advice and less ability to minimize its tax risks. (For more details on the offshore tax evasion and reporting obligations, compare previous works by authors here and here, and by yours truly here.) Moreover, increasing access to data may generate new methods of targeted enforcement by feeding human biases to machine-learning algorithms that monitor and predict behavior.

In short, both slack and the reshaping of slack that accompanies data are valuable, but sometimes problematic. To answer how to juggle the interplay and tension between slack and data, the authors propose a framework for managing the slack-data relationship. A straightforward framework would be as follows: 1) use data to help solve serious, troublesome slack, 2) refrain from using data in ways that curtail valuable slack, 3) use data fairly, and 4) revisit the design of law as data increases. However, there are a number of complications in this framework. It may not clear when slack is valuable or problematic. There may be mixed cases, and some currently valuable slack may have negative effects over time. The framework is too simple to be implemented in the real world where data obtained for one purpose may later be put to different uses. Also, some organizations may prioritize countervailing values, such as privacy, and thus value slack even more than the proposed framework does. Relatedly, some may dislike the changing relationship between government and society in the data age. Noting that reality could be more complicated than the basic framework, the authors welcome such complications because they acknowledge that slack holds risks. Thus, preserving valuable slack in our legal system presents a classic “uneasy case.”

With this interesting thought experiment for the framework of the slack-data relationship, the authors advance a data policy that gravitates toward protecting slack where appropriate. Given that both the private and public sectors collect and store vast quantities of data, the authors first suggest developing more comprehensive regulation to limit the data collection and accumulation. However, an attempt to limit overall data collection would be nearly impossible. As an alternative, we may construct data silos that constrain the uses of data after its collection. This may be a solution for problematic cross-uses of data, but a silo-based approach may bestow even bigger power to governments or incentivize governments to put more effort into accumulating their own data troves. As I have implied in Blockchain Initiatives for Tax Administration, a silo-based approach results in data redundancy and inefficiency. More importantly, it runs counter to broader trends toward transparency and, in my opinion, does not conceptually align with the new era of ubiquitous data and emerging information technologies. Nonetheless, I agree with the authors’ underlying position that we need safeguards in data collection and usage in the data age.

Furthermore, I couldn't agree more with the authors' final normative proposal, which recommends recalibrating the technical legal rules, such as penalties and statutes of limitations, and redesigning the role of government. In a world of burgeoning data, it makes more sense to have government act as ex ante compliance coordinator rather than ex post punisher in some contexts. The so-called "return-free filing" and "ready return filing"—a tax return prepared by the government for the taxpayer, which the taxpayer then reviews and submits—are great examples of the revised role of government as a compliance coordinator. (Tax Policy Center counts 36 countries that permit return-free filing, including Germany, Japan, and the U.K., based on dated materials, and I can add more countries, such as Korea and Israel, to the list.) However, shifts to ex ante coordination might weaken deterrence and raise more privacy concerns. For instance, a government which can prepare your tax return on your behalf implies that such government is a data behemoth. Therefore, the authors conclude by emphasizing that transparency will be important to mediate the changing relationship between governments and the governed data.

Starting with "slack" as a catchy concept, “Slack” in the Data Age smoothly navigates the legal problems in the data age encompassing various issues in tax law, privacy, criminal law, and so on. It will be a good read for those who have pondered big issues, such as whether a tax loophole is tolerable or how to treat tax whistleblowers, as well as small yet important issues, such as whether one's (honest) mistake in one’s tax return would be detected or whether attention-getting social media posts would invite an IRS audit. What a cool paper this is to answer those questions!

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

https://taxprof.typepad.com/taxprof_blog/2021/06/weekly-ssrn-tax-article-review-and-roundup-kim-reviews-slack-in-the-data-age-by-oei-and-ring.html

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