2009TAX: Transparency and channels
Conclusions
Yes, I will begin from the conclusions of this series- before presenting the third part of the “what if” section- the Hitchcock’s way.
If you read the previous two articles in this series, you probably you understood what is the missing part in my “what if”.
We saw the technological infrastructure (i.e. what is available), the possible guidelines for introducing a streamlining and (increased) intergenerational fairness (i.e. the policy, or “strategy outline”, if you prefer).
In this third part, surprise surprise, I will merge the “how” and the “who”.
The basic approach is the one used in the private sector: if you are in the wheel business, it makes sense to re-invent it.
But if you are in the transportation business… you might be better off by working with wheel and tires producers, instead of becoming a wheel producer yourself.
The focus will be, as in the previous two parts, on taxation etc- but, in reality, a similar approach could be used in other fields that are technological-intensive (i.e. require a constant monitoring of the evolving technological offer on the market), or that require specialized skills (see the old article about logistics).
Just a matter or negotiation and oversight.
Transparency and efficiency
The first issue in taxation is assessing the taxable income.
And, of course, this start with the identification of the appropriate taxpayer.
Generally, most transactions end up in cash. And cash either transits through the banking/financial system (i.e. a traceable transaction), or is based on banknotes that, at least in Europe, are often the XXI century Euro banknotes.
Go to the ECB website: also if most shopkeepers still look at the silver-like band, each Euro banknote is a traceable, unique entity, with many more identification elements.
The point is, anyway, choosing between taxing the flows vs taxing the nominal value.
If you tax the net flow, you are closer to monitoring the cash-based profits.
But that’s a matter of taxation policy.
If you live in economies where electronic transactions are common (ATM and credit cards, retailers’ “on account” cards, etc), probably you used the “cash back” system at least once, i.e. you used your retailer as an ATM.
Due to some vagaries in the cash-distribution system, few years ago became common for large retailers to reduce their own risk, by allowing customers to charge more than the bill on the card, and then get the balance in cash.
This is a convenient way to manage and ensure liquidity in the system.
And, for retailers, to better understand their own customers’ consumptions, needs, etc.
If you join the banking system, the consumer credit, and the traceability of Euro banknotes, you get a ready-made income and expenditure monitoring system.
Investment required? Nothing
As you would expect, due to my background and experience, I think that there are two groups whose interests should be covered by the taxation system- the public and the individual.
The public, as extracting from income-producing people is needed to cover for the running costs and investment required by shared services and infrastructure.
The individual, as way too many times individuals working for institutions misused the access they had to private information about individuals, sometimes by accident, sometimes by (criminal) design.
But if you merge current technology with history, you can recover some positive elements of the old “tax farming” approach (i.e. a form of “securitization” of tax revenues), by using the existing financial institutions.
Less the “securitization” aspect (i.e. private entities paying the state in advance on the supposed income from tax collection), as this has been historically the source of repeated abuses.
Our tax system cannot be changed overnight, and therefore a nice experiment could be done with the repeatedly proposed European Union tax.
Let’s say that an agreement is reached on a levy of 1% of net cash-flows.
Instead of building yet another multimillion central database, a cheaper and more privacy-conscious solution could be to extend the approach originally negotiated to manage the investment income of non-Swiss citizens holding investments in Switzerland.
Any financial institution knows on a monthly basis the net cashflow of its customers, for credit scoring and marketing purposes (e.g. to offer new financial products).
Financial institutions could withhold a monthly fee of 1% on net flows, on a customer-by-customer basis.
I worked on risk management systems on the retail side since early 1990s, and the main issue (identify the customer who holds the accounts) was solved in the 1990s, and post-BaselII any European financial institution has homogeneous reporting requirements.
Innovation? Not really
Why I call this option “privacy-conscious”? Because customers already disclosed to the financial institutions the information required to manage and identify their accounts, and therefore no additional information would be needed.
Moreover, financial institutions already withhold a tax on interests, dividends, etc- and, therefore, they have already in place most of what they would need to deliver the service (of course, for a fee).
Finally, this will avoid the “tax farming” risk, as the tax will be withhold on net cash flows, not on forecasted or supposed earnings.
But every change can generate both benefits and risks.
Benefits and risks
As the system would be fully automated, misuse or access to confidential information beyond the scope of the tax would be technically impossible (and this is the approach originally negotiated with Switzerland).
Moreover, the bureaucratic structure required to manage at the EU level this new tax would be minimal- more an auditing and reporting function than a tax administration.
Also, it would leverage on the efficiency gains achieved by financial institutions through the adoption of new technologies, without requiring investments (the financial institutions would anyway do the investment to support their own main activities- the tax fees would be just an additional revenue stream).
Finally, the organization could be expanded/downsized on demand, by creating “missions” or “teams” with experts borrowed temporarily from other organizations if and when needed.
The risks? The flip side of the benefits.
Tomorrow, an assessment of current trends on the biometric technology debate.
