Blockchain Initiatives for Tax Administration
Young Ran (Christine) Kim - University of Utah
-- As blockchain technology develops, it has grown beyond the early stages of single use case, such as Bitcoin. Defined as a distributed, immutable, peer-to-peer ledger, blockchain is in the limelight for future data management systems. The evolution from public blockchains to private and consortium blockchains also expands the scope of blockchain applications. Blockchain is now being applied to many areas in the private sector, such as in financial services and supply chains, and recently in the public sector also, such as in property records, public health crisis, and compliance, where data redundancy, information transparency, and data immutability are required. Tax administration shares the same efficiency setting to these areas currently applying blockchain, yet none of the government projects thus far have attempted to apply blockchain to tax administration.
In my recent article, Blockchain Initiatives for Tax Administration, forthcoming in the UCLA Law Review, I have demonstrated that blockchain can enhance the efficiency and transparency of tax administration through its ability to deliver reliable, real-time information from many sources to a large audience. I suggest a framework to evaluate the feasibility of incorporating blockchain into various areas of tax and recommend a private consortium blockchain as the potential structure of a tax blockchain network. Potential areas that blockchain could enhance are payroll taxes, withholding taxes, value added taxes, transfer pricing, the sharing of information between federal, state, and local governments as well as information exchange among countries in international tax.
My Article not only contributes to the scholarly analysis on the feasibility of incorporating blockchain in tax administration, but also offers normative considerations for policymakers deliberating blockchain initiatives for tax administration. First, the appropriate timeframe for blockchain implementation in tax administration depends on the timing of the widespread use of distributed ledger technology within many sectors of society. Despite some skepticism of blockchain technology being overhyped, an overwhelming majority of business executives expect that blockchain will eventually achieve mainstream adoption. So, it is wise to prepare for the next phase of blockchain development sooner rather than later. Second, the areas of tax fit to incorporate blockchain are heavily intertwined with other sectors, such as financial institutions as well as other regulatory agencies and foreign governments. For streamlined performance, blockchain in tax administration should include interchangeable modules that connect with other sectors seamlessly. Standardization is also needed, but not at the price of harming innovation and competition by making the standards proprietary or less accessible. Third, it is important to understand the limitations of blockchain for tax administration. Considering that blockchain is the next phase of digital information management, the benefits of its application are limited to improving existing data management systems where information is already digitalized. It is uncertain how much the degree of the voluntary input of tax data by taxpayers at the intersection between offline and digital can be improved. For example, blockchain may not be effective in reducing the tax gap, much of which results from cash business, in the individual tax on business income.
Finally, blockchain initiatives must be accompanied by additional legislation regulating the role of government and protecting taxpayers’ rights and privacy. A properly designed blockchain has great potential to address the privacy concerns of taxpayers because it can systematically prevent the undue sharing of information, such as the sharing of undocumented taxpayers’ information with other agencies or the cross-border sharing of information with hostile foreign countries. However, the proposed blockchain networks for tax administration are consortium networks, meaning that most individual taxpayers cannot participate in the network as a node. Only tax authorities, other agencies, certain withholding agents, and third-party reporters can participate in the network and serve as a node. This raises the concerns of who controls the information system and how to protect taxpayers’ rights and privacy. One might assert that the government is a trustworthy administrator for a solution, but it might conflict with the nature of blockchain as a decentralized system—the so-called Vili’s governance paradox of blockchain.
My Article’s findings and policy proposals are very timely when more data is processed remotely, and thus digitally, and can resonate to a broader audience beyond tax policymakers who seek to improve data management system regardless of various power dynamics involved.