## The Digital Technology Revolution in Public Finance

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**Canonical URL:** [The Digital Technology Revolution in Public Finance](https://www.imf.org/en/publications/fandd/issues/2018/03/gupta)

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## Bibliographic details
- Authors: SANJEEV GUPTA, MICHAEL KEEN, ALPA SHAH, GENEVIEVE VERDIER
- Published: March 1, 2018

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### 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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_Source: https://www.imf.org/en/publications/fandd/issues/2018/03/gupta_