Obsolete legal order…unpredictable future

The suggestion to integrate taxation regimes for segments of taxpayers with different characteristics of economic activity, tax liability, and/or tax capacity in a single general regime and the complications that some professionals see in the tax benefits granted by the socio-economic policy (from the blog: “Bridges to an Optimal Tax System ”), have led me to think of the difficulties faced in translating the complexity of some legal-tax orders into technology solutions.

One of the regimes, included in such an idea, addresses the problem of informality by simplifying the tax duty to formalize small businesses. The fiscal neglect in the control of compliance or the definitions in the universe included in such a regime facilitates the illegal avoidance of taxpayers, whose economic importance is included in the general taxation regime (perhaps this is one of the reasons for inducing reforms of the legal regime that do not solve the fundamental problem).

Different segments of the economy call for specific of service or process conditions, which collide with each other and require processes with adjustments and grouping for consolidation in the final result. The administration must be prepared to control the complexities presented by the legal order and overcome them with the smallest margin of discretion of its operators and the lowest compliance costs.

The design of a taxation model involves both the structures and definitions of the collection regimes, and those that derive from the use of instrumentalism in theories and scientific models of the economy in order to meet policy goals. If the legal terms are clear, there are no shades in the definition of decisions and appropriate technology is used, the existence of regimes with different legal structures does not necessarily imply insurmountable complications for the administration.

Once the model designed, it must be systematized to be implemented, hence ambiguities, vagueness, implicit omissions, and problems in the operational structures that must be translated into precision to define the processes that must run and thus contrast the hypotheses, because if not, they remain hypothetical.

Major technological changes have occurred in the tax field for more than 3 decades: simple mobile phone can access information in the cloud for identification, activity and responsibilities of the subjects; the analysis of the networks to predict future behaviors and databases to facilitate the biometric recognition of its members, however, the investment systems in high-security technology cryptocurrencies and digital markets, exceed the ability of traditional methods auditors, limiting the possibilities of control of the administration.

The legal instruments memories are not always useful for defining the software of technological systems without distorting their essence, those responsible for programming are confused in the semantic networks of regimes, with more interest in adjusting systems to the conditions of new legal structures, than in interpreting them to simplify the technological applications.

While the law expresses the conditions of the legal regime in archaic terms and paragraphs, the gaps created by the technology are used by significant parts of the economy to evade control.

The economic pression induce the states to hurry in creating instruments that could solve them, administrators must explain to legislators the risks of implementation so that the tax law can be applied properly. Expert professionals must interpret the outdated criteria and definitions of the tax decision and prior to proposing legal adjustments, they try to overcome the entanglements of their literature with updated processes.

The implementation of a tax system requires the development of 3 subsystems of components: the first, Policy”, should define the decisions implicit in the conception of a tax to collect revenues and implement the socio-economic policies; the second “Legal” should program the implementation of such decisions in “descriptive legal terms”, establishing the rights and obligations of the State and the taxpayers, and, finally, the third, “Administration” operates the services and the preventive and dissuasive processes required for the tax control.

The three subsystems integrate a sequence of logically concatenated steps to allow the implementation, monitoring and feedback of the social duty and the socio-economic policies included.

From the consensus on the policies defined, the logical chain of legal instruments and the support in services and deterrent capacity of the administration results the indicator of willingness to comply.

The systemic development of the tax regime facilitates the integration of complicated structures, the inclusion of specific conditions to tax different situations of financial and technological capacity, and the stimulation of the policies included, with respect to the principles of neutrality, stability, and flexibility that must guarantee its purposes.

The value of a tax system reflects the value of the organization responsible for applying it (Musgrave). The amounts of income that the Tax Agency ceases to receive due to the inclusion of special treatments justified in socio-political, economic, or tax purposes for certain activity zones or taxpayers usually worry the administrators who must answer for the expectations of collection.

The tax system must address the instrumentation of welfare policies that generate income and influence the distribution of income and wealth in society; stabilize the economy; promote or discourage economic activities; protect the industry; stimulate or discourage consumption; stimulate employment and protect the environment through tax-benefit policies.

These special treatments result in costs summarized in distortions in the allocation of resources, collection losses, higher costs of administration and compliance, spaces left for evasion, opacity in management, conflicts of jurisdictional competence and losses of equity or progressivity.

The complexities resulting from the incorporation of policy purposes into the system, respond to finance ministers and members of Parliament who, in general, do not have training as tax administrators and analyze the tax regime from multiple points of view.

Tax administrators must explain to policy makers and legislators the implementation risks caused by the use of the instrumentalization so that the tax law can be well applied, without hindering the decision implementing the model.

The administration must participate in the development of the implementation and compliance control of the socio-economic policies incorporated into the tax system, as well as in their feedback on the impacts produced on economic variables, the implementation problems, the results of tax gap and tax burden indicators, the income monitoring and the causes of non-compliance if detected.

The way to a technological development that requires qualified human intervention, administrations must update their aging workforce and summon professionals whose talent is needed for the corrections, structural adjustments, and semantic conversions of the new model with the support of the appropriate technology.

I have always considered that the tax law should be represented by a logical diagram, a thing unthinkable until now, the technology requires descriptive reports that support systems, there will be no tax document with languages understandable to the common humanity, the technology can impose its own rules as it is shown by the lack of control of digitalized economic facts, for which the administration does not find applications.

The society must respond to conditions agreed in the legalized or legitimized pact, and today the agreements are broken, the natural circumstances and political and ideological dissent have determined a level of anomie from which does not emerge the willingness to pay, nor the political decision to implement legal instruments that facilitate the deterrent capacity that the situation requires.

A change of social order is needed, with subordinate orders that will surely supply a pact in which perhaps the law does not arise from parliamentary sovereignties, which today allow states to develop its own orders. The reality alerts us, weighs on the social and administrative structures, the lines of thought must change, a change in the talent of institutions is needed to foresee the changes in a likely future or at least help to understand them.


Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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