DIGITALIZATION AND TAXATION

Abstract
Taxation in Western economies reached high percentage of disposable income and consumption, but substantially decreased following the economic downturn of 2007-2009 (OECD Tax Data); reasons are structural and behavioural. The presence of substantial asymmetric information lies at the heart of the traditional economic analysis of taxation; in fact the Government is not able to verify the economic outcomes of taxpayers, who may misrepresent their incomes, consumption, wealth, or attempt to avoid or even evade paying taxes. Estimated tax evasion reached very high levels in Western countries, like Italy (OECD Fighting Tax Evasion). The taxpayer’s willingness to tolerate risk, the size of penalties if caught evading, and the tax enforcement technology determine the extent of tax avoidance.

In an ideal world, in the presence of perfect information, tax avoidance and evasion would not exist. Governments “would just know how much individuals (being households or firms) earn, save, and consume. If markets were perfect as well (no externalities, no monopoly, complete contracts, symmetric information, complete markets, and zero transaction costs), the second fundamental theorem of welfare economics would apply: governments could completely separate issues of allocation and distribution, since any efficient market outcome could be achieved with suitable redistributions using individualized lump-sum taxes and transfers” (IMF 2017 p. 25).
But the world is far from being idea, and information constraints determine a government’s tax enforcement capacity. “Governments use costly verification of economic outcomes (tax audits) and penalties for non-compliance, to alleviate information problems in verifying economic outcomes” (IMF 2017, p. 25). The asymmetric information leads to market failure, and to the efficiency-equity trade off.
The digitalization of economies and, most of all, of the information on economic activities can then improve the ability of Governments to manage tax; the digitalization can improve the tax enforcement technology of governments. “Better tax enforcement allows governments to raise the same revenue with lower taxes (more efficiency) or to raise more tax revenue with the same taxes” (IMF 2017, p. 25). Governments in digitalized system can better match information on the true economic outcomes of taxpayers, households or firms. Tax avoidance and evasion should then disappear.
Digitalization influences both the public and private sectors; in digitalised countries, Government could better target taxes, and improve income redistribution; this would also reduce the tax rate. However, the digitalization will never eliminate the equity-efficiency trade-off since relevant variables still remain unobservable, like work effort and passion.
The recent experience of Western countries has not been totally coherent with traditional public finance theory, since digitalisation increased tax avoidance and evasion, and then contributed to rise inequality in income and wealth, both of which tend to increase taxes (G7 Finance Minister Communique, Bari 2017).
The digitalisation of economies can increase the quantity of information on certain economic choice that are directly linked to taxes. Western economics should raise most of their public revenues with consumption taxes; these taxes are mostly managed at firms level, and exhibit high evasion. Consumption with digital payments can be directly observed, but this can translate into higher revenues and greater efficiency only if cash is abolished.
Taxation of wealth and capital income can also benefit form digitalised technologies that provide information and link pension funds, financial markets, bequests, real estate and home-ownerships. Privacy of data can be a substantial obstacle in certain juridical systems, while regulatory arbitrage can be a source of inefficiency. Taxation on corporate income is the challenge for regulators, since it is the most distortionary taxes of all. Firms move where tax are easy to pay and low, and the residence principle has further favoured mobility, even within economic unions like the European and the United States of America.
The flow of information and its effective management should be pursued by global authorities; the G20 is working with member countries to establish a global tax system for firms, and markets to reduce inequality and compensate for certain losses in the labour market. In fact, global businesses over the last 20 years have reduced by a half their tax payments, reducing the ability of Governments to alleviate poverty and unemployment.
Tax evasion can be reduced by Taxation Information Exchange Agreements, where countries share information on individuals’ and firms’ financial accounts in certain financial institutions. “Many countries participating in the Organisation for Economic Co-operation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters have reached bilateral agreements to share information on request for all types of investment income (including interest, dividends, income from certain insurance contracts, and other similar types of income), but also account balances and proceeds from sales of financial assets. Financial institutions include banks, custodians, brokers, certain collective investment vehicles, and certain insurance companies. Digitalization can help further to build and link international registers for asset ownership (shares, property, pensions) and capital incomes (interest, dividends, capital gains, property values, pension accrual)” (IMF 2017, p. 31).
With the full exchange of digital information, taxes on corporate profits could be eliminated, the taxation on labour could significantly diminish, and consumption would take the lead among Governments' revenues.

References
G7 Finance Ministers and Central Banks’ Governors Meeting 2017. Communiqué. Bari, Italy, May 12-13.
International Monetary Fund (IMF) 2017. Digital revolutions in public finance. Edited by Sanjeev Gupta, Washington, DC, ISBN 9781484315224.
Organisation for Economic Cooperation and Development (OECD) 2017. Overview on Fighting Tax Evasion. Paris.
Organisation for Economic Cooperation and Development (OECD) 2017. Taxation Information Exchange Agreements. Paris.