How digitalized networks can solve tax evasion.
This article by The Economist analyzes the beneficial effect of digitalizing the economy. More precisely, it shows how such changes make it harder to avoid paying taxes, therefore reducing the informal economy – the part of an economy that is neither taxed nor monitored by any form of government.
The main reason why people are able to avoid paying taxes is because they are able to hide it from the government. For that reason, government have tax authorities whose job is to control that taxes are paid and investigate suspicious cases. With this in mind, we can set up a game to better understand the situation. Let t be the node representing tax authority, and e represent tax evader. The purpose of t is to find out all the e. To do so, they can use any network that respects the following properties: it connects, in any way, both t and e; t has legal authorization to walk the network. By walking the network, I mean obtaining knowledge about the other nodes in the network in order to eventually find out e.
There are many networks that respect these two properties. Some are easier to walk, some harder. However, both players do not know all these networks. An example is the network of social interactions. Even if t can imagine that e is somehow connected to himself through a friend of a friend of another friend… it is very hard to find this path. The reason is that these networks are composed of an amount of edges so big that it makes it impossible to completely draw it. To better navigate them, clues can be used, and that is what t does. An example is a player e who declares a low income and therefore pays a small amount of taxes, but lives in a beautiful mansion and owns a Ferrari. However, such clues are limited, and many e do not get caught.
The way digitalization solves the problem is that it makes blurred networks limpid. It makes it possible for any node in the network to see all the other nodes and how they are connected. The example in the article is an Indian teacher getting paid through a smartphone’s app. In a scenario in which all payments were made this way, a computer could easily do the job of g in a couple of seconds, analyzing all the stored data for differences between payments and taxes. However, digitalization allows g to eliminate even the possibility of a node to become e – that is, for someone to avoid paying taxes. In a world where every transaction is digitally recorded, taxes could be paid automatically. That would make tax evasion impossible, save people time, and give the government more resources. This, in turn, in an idealistic world, would mean improvements for every node of the ‘’government network’’, that is, every citizen.
Source: http://www.economist.com/news/international/21708675-new-technology-may-persuade-informal-businesses-and-workers-become-formal-bringing-light