Photo by ROBIN WORRALL on Unsplash

Society is changing faster than at any time in history. Economic forecasts suggest the economy and labour markets will change at an equally rapid pace. However, as I argue, current economic modelling does not and cannot take account of change at this pace. Key components of government forecasts including labour markets, business activity, taxation and compliance are all based on assumptions that no longer necessarily hold true.

Governments rely on taxation for their existence and to provide the services that citizens demand. Substantive rules governing what and how citizens are taxed, whether through the goods and services tax (GST), capital gains tax (CGT), income tax or corporate tax are hard fought and slowly changed. Research shows it can take years to build the trust with  community and key interest groups that is needed to enact substantive change to the tax rules and the tax system.

This has also been the experience with e-commerce and responses to multinational tax avoidance. As a result, rather than changing how and what we tax to reflect a changing society, the focus has been on making administration of the existing system more efficient and effective.

Digital disruption offers significant opportunity to further improve tax administration and collection. In Australia, there is a sound base of trust in the tax administration. Taxpayer rights have become widely entrenched and more consistently observed over the last three decades. This is not because tax administrators and government have had a moral or philosophical epiphany, rather it is driven by self-interest.

Citizens have an innate sense of fairness and tend to comply with rules applied by institutions they trust, or they can at least be nudged into complying. The Australian Taxation Office (ATO), in common with other progressive tax authorities across the world, has completely transformed its approach since the 1980s to achieve high levels of taxpayer satisfaction and compliance.

By building positive relationships and making it easy for taxpayers to comply with their obligations, the ATO has freed resources to prosecute its enforcement activity against those who are (and who are perceived by the public as) unfairly avoiding or evading tax.

In recent research I asked two questions:

  1. What might tax administration look like as the ATO takes advantage of digital transformation?
  2. Do taxpayer rights need to change in the face of digital disruption: are they outdated?

What might digital transformation of tax administration look like?

Tax is only one part of government’s response to digital disruption. Health, education and social security are closely connected to tax and similar rules will and should apply.

Governments are upgrading and configuring their systems for technologies that have not been invented. They use broad principles to design systems that reflect society’s concerns about issues such as service and accessibility, trust and security, flexibility and scalability; principles designed to serve society’s interests. These broad principles are consistent with existing taxpayer rights.

Governments hold the most comprehensive data sets, particularly tax data, which are ideal for the application of automation and artificial intelligence. Tax data sets have the added advantage of being updated and validated continuously by the ATO and taxpayers. Compared to other information sources, tax administration data sets are labelled to a far greater level of detail and accuracy using highly specific definitions.

You can expect the ATO to use this data to collate information and reveal detailed patterns of behaviour, detail far more granular than created by large retailers. As government systems scale and integrate, it will enable the ATO to interact seamlessly with taxpayers across all aspects of their lives and business activities: wherever they earn, receive or spend their money.

Using these evolved digital capabilities, the ATO will respond predictively to every life event to deliver support, concessions, incentives or payments without taxpayer prompting. Automation at this level will make most nudges to comply unnecessary as compliance will be automated. Digital transparency and every taxpayer’s visibility to government will radically shrink the cash economy.

There is no reason, in time, why the ATO cannot prepare financial and management accounts for all businesses, potentially obviating the need for small businesses to prepare their own. The ATO could use its massive datasets to provide independent warning of potential financial concerns about trading methods or cash flows. Banks theoretically already do this for their business customers.

There will be significant benefits beyond a personalised tax concierge for every taxpayer. New laws and procedures could be tested against every conceivable scenario to avoid unintended consequences and make sure that the policy implications are fully understood.

Transparency will extend across borders to help taxpayers pay the right amount of tax in every jurisdiction they operate. Under existing exchange of information agreements, machine learning will overcome language, definitional and other barriers to provide full transparency. International tax authorities will likely build on their international cooperation and use their combined digital capability to counter even a perception of multinational tax avoidance or evasion.

This vision is already possible, once a new enterprise architecture is put in place. It will undoubtedly reduce the ability of the average citizen to game the tax system or to take advantage of gaps or inefficiencies.

Though, it begs the question whether taxpayers are sufficiently protected or whether they need new rights and protections?

Do taxpayer rights need to change to protect them in a digital world?

A comparative analysis of taxpayer rights shows that the principles themselves are sufficiently robust and comprehensive. Any gap will be in their application. My research challenges the traditional and prevailing view in Australia that there is no need to legislate taxpayer rights because the ATO will always act in taxpayers’ best interests. When considering our digital future, there are areas of particular concern.

Taxpayers need to know their information is secure. The ATO has complete financial and other information on all residents and many non-residents of Australia. The ATO is at the forefront, globally, in establishing cross-border information flows, networks of collaboration and partnership with third party organisations, and establishing continuous auditing capability across taxpayer groups.

Comprehensive laws protect security and confidentiality of information. However, as the points of access and potential breach expand, there are blurred lines of accountability and liability – who bears the risk and liability of failure, particularly system failure, with its potential for exponentially greater impact than in the past? What happens if cybercriminals hack the ATO’s systems through their own or a third-party vulnerability and all taxpayer information is compromised?

Administrative discretion allows a quick response to problems, but it inevitably favours the decision-making body: for taxation, the ATO. Taxpayers have limited recourse under administrative law, and governments rarely legislate after an event to assume liability for their actions – the use of flammable building cladding in high rise buildings provides a current example.

The ATO is collaborating internationally to secure Australia’s position; championing continual treaty updates to reflect the digital era. However, to date, there is little regard for the principle of proportionality that underpins our constitutional framework. There needs to be a fair balance between the state and taxpayers, and it is time for laws to ensure consistency and coherence in any tax-related amendments. They must ensure that where there is digital complexity, new tax laws are consistent both with other domestic laws and where domestic and international law intersects.

As machine learning and artificial intelligence become ubiquitous, they will replace human decision-making. This may increase fairness by reducing bias and inconsistency in decision-making. However, the programs are highly complex and must be transparent and easily capable of remediation. Currently, we rely on administrative good faith that this will happen. There are strong arguments for legislative taxpayer protection where the actions of government have the potential for such far reaching consequences for its citizens.

Why do I argue for legislative protection of taxpayer rights, when administrative discretion has served us well for so long?

Digital transformation is taking us into unknown areas of government decision-making and bureaucratic administration, at a speed that precludes consideration of all the consequences. There is comprehensive and robust research that shows society and particularly tax administration, depend on a perception of fairness and trust for success. Australia’s legislative framework must reflect this to better support a sense of fairness and trust in the tax system.

The timeless principles of taxpayer protection and the existing rights frameworks can adapt seamlessly to digital disruption. It is critical to embed these principles in legislation before the tax system faces major disruption. Doing so will allow for close consideration of consequences and the closing of unnecessary gaps that might otherwise undermine society’s trust in the fairness of the tax system. It will facilitate the review of legal, ethical and moral issues, from access for the disadvantaged and the digitally not connected, to the right of foreign governments to access the data automatically of Australian residents. Solutions are available now and can be based firmly in evidence and research.

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