Perhaps the most serious worry for the tax and benefit
proposals I present in Rethinking
Taxation is that they would open up the possibility for fraud. One reason
is because the introduction of hour credits that impact upon people’s income
also creates a new form of fraud, hour credit fraud.
I have several responses to such a concern, several of
which are presented in my book, as well as in
past
and future blogs. One point is that there would be a maximum amount of hour
credits each person could claim in a given period, and another is that the
fraud of over-claiming on hour credits would in some cases replace existing
forms of over-claiming on benefits and tax exemptions.
I also propose a demanding
comprehensive
acquired income tax base, which also creates new forms of tax fraud. This
is more demanding, but I think that it is more principled and that it is better
to have a principled tax base that people defraud rather than one that gives in
to difficulty.
You might wonder what this has to do with my current series
of blogs about technology. I wish to emphasise how technology can help to find instances
of fraud, make the above forms of fraud much less likely and therefore allow a
more progressive and principled tax regime.
Here are five ways technology can make tax collection
simpler, improve compliance and detect fraud.
1.
Greater
links between financial transfers and taxation.
In a recent blog
"technology
and tax-collection" I outlined my proposal for financial institutions to
withhold tax. If this were the case, then there could be a presumption that any
income is taxable unless it is proven otherwise. Those engaged in tax base
fraud would have to either go to great lengths to convince the authorities that
their income was not in fact taxable income, and doing so repeatedly would arouse
suspicions.
This would push fraudsters further away from mainstream forms of finance and
thereby make such activities less rewarding.
2.
Electronic
transfers rather than cash.
Another point highlighted in
previous
blogs is the trend towards the use of electronic transfers rather than cash
and that I would expect this trend to continue. Cash is preferred for those
engaging in tax fraud and other criminal enterprises and so a reduction in the
amount of cash in society means that it will become more and more difficult to
generate income from illicit activities and to then utilise these gains in the
mainstream economy.
One counter-argument to this is to say that a black market would spring up that
would use an alternative currency—like cigarettes in prisons. However, this
would be a risky option. The value of such a currency (or currencies) would be
unstable without government backing and it would be easily possible for the
authorities to disrupt the currency. Furthermore, when it is disrupted those reliant
upon the currency will lose all.
The ultimate point is that the effort that people would have to go to would
mean that most would find it easier to just join the mainstream economy (after
all being at the bottom of the mainstream economy under the CLIPH-rate tax
would not be so bad).
3. Employer’s
use of IT can be helpful.
a) HR and Personnel systems
Both employers and the tax authorities have an incentive to make it possible to
share data electronically in order to save labour time at both ends. For
example, transferring information from accountancy and human resource software
to the tax authority
I think one of the strongest responses to claims that there will be a lot of
hour credit fraud alongside hourly averaging is to highlight that firms want to
get as much as possible from the workers they employ. We can expect firms to
compete for workers and so firms engaging in hour credit fraud will have a
different internal and payment structure than their competitors. This should be
picked up using the methods outlined below.
The point to make under this heading is that employers are going to use IT systems
to improve productivity and generate data that would be useful to verify hour
credit claims.
One worry is that firms engaging in fraud could create two systems, just as dodgy
firms can have a fake set of accounts for the tax authority in addition to
their real ones. So this method won’t guarantee to catch fraudsters on its own,
but it would at least make the process of assessment easier and give fraudulent
firms a disadvantage over honest ones.
b) Monitoring job applications and company structures.
Another suggestion in Rethinking Taxation
to counter hour credit fraud is to record and monitor job application processes
and internal job changes. Employers should provide some basic information during
the job application process (again, easily transferrable electronically if
systems are designed to be minimally compatible or produce files of the
required kind), the kind of work and the hourly pay rate or salary offered.
Similarly, the information listed in 3a) and 3b) (along with information about
who is approving hour credits for whom where relevant) will enable the tax
authorities to build up a profile of the structure of the organisation.
Investigators could use this information to find organisations which are
atypical in their industry and help to target investigations to find suspicious
firms and suspicious departments within otherwise typical firms.
c) Cross-referencing employer and employee statistics.
The tax authority could cross reference hourly average pay for different
workers performing similar roles to see whether some firms are paying much less
per hour. Those firms which are can be investigated to see whether they are
over-claiming hour credits for their part-time workers and therefore defrauding
the rest of society.
The penalties for firms engaging in such practices would be severe, and
managers and directors involved would lose their right to hold such positions
for a while.
d) Using Data analysis and cross-referencing to detect abuses
Another way technology can help uncover those engaging in tax base fraud is to
cross reference income and spending patterns and to analyse this in order to
pick out those who are most likely to be receiving income fraudulently.
As the options for spending and laundering money outside of recorded
transactions reduce those with illicit income will be easier to detect as their
income and spending habits might be atypical.
The methods outlined above should help uncover hour-credit fraud as well as
tax-base fraud. People and firms whose hourly average payments change in
unexpected ways can be flagged up for further investigation.
A lot of the points I have raised above are about
directing investigations towards the most suspicious individuals and employers.
This may result in false positives, of course, but directing investigations in
the above manner will be much more effective than reliance upon random
investigations and regularly scheduled audits alone (and these are also
important).
The point is not that these measures will always be
effective, but that they will also require fraudsters to go to greater lengths
to cover their tracks and make them seem legitimate. Going to these lengths greatly
increases the costs of the illicit activities and therefore discourages them.
Furthermore, in a society with hour credits fraudsters would need to obtain hour
credits in order to receive any income and partake in the society (people who
do not receive any official would only be able to get by if they are beggars, beachcombers
or smallholders). This means that they will have to try to launder their gains
through registered employers and provide a lot of information to the
authorities.
This leads on to another advantage, namely that:
4. Using
the above information will help uncover and disrupt criminal organisations.
This means not only that criminal enterprises would have to put huge amounts of
resources into creating front activities, but also that they would end up
linking all of their associates together through the web of transfers and false
employment contracts and hour credit
claims.
I believe the above listed anti-fraud detection procedures would have a
powerful impact on fraud. This would make large scale organised criminal
activity, which is often the most violent and harmful, very difficult. There
might be more ways in which people could commit fraud, but criminals would need
to keep their fraudulent activities at a very small scale in order to avoid
arousing suspicion.
It would be hyperbole to claim that the CLIPH-rate tax
would stamp out organised crime and corruption, but it would certainly make it
much harder to benefit from such activities. The additional costs of doing so,
and the greater likelihood of catching those who do engage, could be expected
to greatly reduce the amount of crime taking place.
There are legitimate concerns that big business and big
government will use technology to monitor consumers and citizens in order to
have more control over them. However, rather than attempt to stop the tide of
technology, I think that the best way to stop these developments getting out of
hand is to use these technologies to create a more equal and transparent
societies with strong checks and balances.
