The Digital Technology Revolution in Public Finance
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- Authors: SANJEEV GUPTA, MICHAEL KEEN, ALPA SHAH, GENEVIEVE VERDIER
- Published: March 1, 2018
Overview and core thesis
- Technology is reshaping how governments raise and spend money; public finance in Kenya, India, U.K., Australia, Brazil, Russia and beyond are undergoing a digital revolution.
- Digitalization is reshaping the informational core of tax and spending policy by improving the collection, processing, and use of information about incomes, employment, benefits eligibility, and economic activity.
- Digital tools can both improve existing policy delivery and enable entirely new policy designs, but they also raise concerns about privacy, confidentiality, cybersecurity, inequality, and redistribution.
Rich troves of information and tax administration improvements
- Tax authorities can access private-sector data (bank transactions, interest income) through digital systems, standardized reporting, and electronic interfaces.
- Examples:
- Australia and the United Kingdom receive real-time data on wages paid by employers.
- Brazil and Russia use electronic invoicing systems for immediate access to firm sales data.
- Benefits:
- Electronic filing reduces taxpayer and government processing costs.
- Access to third-party information allows prepopulating tax returns for taxpayers to verify.
- China uses invoice-matching technology to verify merchants seeking VAT refunds.
- Peer-to-peer platforms and custodial platforms can support tax reporting and withholding:
- Estonia: Uber can report drivers’ income directly to tax administration.
- Airbnb withholds hotel taxes on behalf of property owners in 10 advanced and emerging market economies.
Digital footprints, forecasting, and liquidity monitoring
- Aggregation of taxpayer data enables profiling and compliance assessment:
- United Kingdom: HM Revenue and Customs’ Connect system builds profiles of taxpayers’ total income from government and corporate sources and individual digital footprints.
- Increased data processing and storage improve revenue forecasting, monitoring of cash balances, and assessment of liquidity and borrowing needs.
- Big data can help anticipate economic cycles and potentially forestall crises by exploiting correlations of tax receipts with the business cycle.
Biometrics, financial inclusion, and payment delivery
- India’s Aadhaar biometric identity program has registered about 1.15 billion residents.
- Financial access initiative:
- Introduced in August 2014; by March 2017 more than 280 million bank accounts had been opened.
- Direct Benefit Transfer program (launched in 2013) transfers subsidies and payments into bank accounts linked to Aadhaar.
- In April 2017, Indians were required to include their Aadhaar number in tax filings.
- More recently, individuals were required to link their individual bank accounts to Aadhaar.
- The 2018 budget has proposed an Aadhaar program for businesses as well.
- Cost and savings estimates:
- Ministry of Communications and Information Technology (March 2017): savings from such programs about $7 billion over the previous two and a half years.
- Costs of Aadhaar through first billion-plus registrations: $1.16 a person, or $1.3 billion in total.
- McKinsey & Company estimate: digitalizing government payment processes could deliver savings of at least 1 percent of GDP in developing economies.
- India’s new tax on goods and services increased the number of registered taxpayers by 50 percent in less than one year.
Digital platforms and national examples
- Estonia’s X-Road and digital identity:
- Every Estonian assigned an 11-digit unique string and a digital identity card used across over 600 government services online.
- X-Road (introduced in 2011) enables secure exchange of Internet-based data between information systems without a fee.
- Government estimate: X-Road saved the equivalent of 820 years of work in 2016.
- Digital signatures estimated to permit a one-time savings of about 2 percent of GDP.
- Mobile technology uptake:
- Sub-Saharan Africa: 420 million unique mobile subscribers in 2016; expected to increase to 535 million.
- Kenya’s M-Pesa (launched in 2007) can be used to pay taxes.
- Digitalized payment programs cited:
- Ti Manman Cheri in Haiti.
- 4Ps in the Philippines.
New technologies and possible tax design changes
- Blockchain (distributed ledger technology) holds promise for secure storage and permanent transaction records; example: UK Department of Work and Pensions experimenting with blockchain to record benefit payments and reduce overpayment.
- Potential policy innovations enabled by digitalization:
- Moving beyond a one-year tax assessment period toward multi-year or lifetime bases for taxation and benefits.
- Using big data to assess noncompliance risks and predict behavioral impacts of policy changes.
- In principle, continuous transaction records could permit replacing staged VAT collection with a final-consumption assessment (contingent on secure, comprehensive ledgers).
Limits, risks, and distributional challenges
- Limits and implementation challenges:
- Digitalization is not a substitute for sound procedures, operations, and institutional capacity.
- Prepopulating tax returns with erroneous information can encourage noncorrection and cheating.
- Political, institutional, and human capacity constraints may hinder innovation.
- Corruption and cryptocurrencies could enable bypassing tax systems.
- Leapfrogging potential limited when large population segments lack digital access.
- Historical record includes many unsuccessful and costly IT projects.
- Security, privacy, and fraud concerns:
- Data theft from US agencies (Internal Revenue Service, State Department) demonstrates government system vulnerability.
- Multiple European countries have faced aggregated fraud from small fraudulent VAT refund claims.
- Expectation of an arms race between tax authorities and fraudsters; outcomes uncertain.
- Corporate taxation challenges:
- Digital companies (Alphabet, Amazon, Apple, Facebook) can have substantial economic presence without physical presence.
- Contentious proposals include taxing turnover elements where user-generated value is significant.
- Singling out digital companies for special tax treatment is problematic as digital technologies are integral across firms.
- Labor-market effects and tax base concerns:
- Advances in artificial intelligence and robotics raise fears of rising unemployment and widening inequality.
- Potential policy responses debated:
- Taxing labor-replacing robot capital (controversial as taxing progress).
- Taxing profits from automation and promoting fairer distribution of capital ownership.
- Universal basic income as an alternative to means-tested systems, though costlier.
Policy guidance and managing change
- Urgency for governments to harness opportunities and mitigate risks given rapid private-sector innovation.
- Prioritize solutions that address pressing national priorities:
- Developing economies with difficulty identifying vulnerable populations may benefit most from biometrics and social registries.
- Others may gain most from electronic payment systems and mobile technology to reduce leakages.
- All countries need to guard against digital exclusion, cyberattacks, fraud, and privacy infringement.
- Strong fiscal, political, and governance institutions are essential to realize benefits and manage risks.
F&D Magazine — "Public Finance Goes Digital" by SANJEEV GUPTA, MICHAEL KEEN, ALPA SHAH, GENEVIEVE VERDIER (March 2018)
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