Tax Surveillance and Tax Design

By Adam Thimmesch

Late last week, I ran across an article from the UK (thanks tax Twitter!) regarding a significant uptick in the number of vehicles being “clamped” or impounded in the UK due to a failure of their owners to pay a required road tax. The story wouldn’t have really captured my attention, but for its inclusion of a quote from the Driver and Vehicle License Agency’s National Wheelclamping Manager. In response to the release of information about increased noncompliance with the tax, the DVLA posted a warning on its website: “Our enforcement teams are out and about on the roads around the UK all year. Their vans are equipped with number plate recognition cameras so any vehicle that isn’t taxed is at risk of being clamped or impounded.” As someone who has spent a lot of time thinking about tax privacy lately, this was intriguing, so I did some digging.

The UK Road Tax

The UK road tax (technically the Vehicle Excise Duty imposed under the Vehicle Excise and Registration Act 1994) is a tax based on the emissions produced by the licensed vehicle. Historically, vehicle owners evidenced their payment of the VED by displaying a tax “disc” in their windshield—much like the parking permit required by my employer. In 2014, however, the government removed the tax disc requirement to save money. (For a recent briefing paper that goes into great detail about the history of the VED, see here.) The government now simply records payment of the tax in its records, and it clamps or impounds vehicles that it finds are being operated without their owners having paid the required fee.

This change in practice would seem to create an increased opportunity for vehicle owners to evade the tax, and recent data suggest that people may have done just that. Not only did tax revenue drop significantly, but the number of drivers who have had their vehicles “clamped” or impounded for failure to pay the tax has risen from 60,000 in 2014 to more than 118,000 last year. (Ford Focus and Vauxhall Astra owners were caught the most, and Porsche was the most clamped/impounded of luxury car brands.)

So how were these tax evaders being caught without the tax disc? Wouldn’t that make it must less efficient to determine which vehicles were being operated on the roads unlawfully? The warning issued by the DVLA’s National Wheelclamping Manager (referenced above) might provide the answer. Wheelclamping personnel don’t need the tax disc to detect noncompliance. Their license plate scanners and databases are much more efficient at ferreting out the tax cheats.

For some, this might seem fairly innocuous or even admirable. Faced with an enforcement problem, the government is utilizing technology that can quickly identify tax evaders. It sounds pretty logical and efficient (maybe better if the vans were autonomous, like the police cars being rolled out in Dubai). Others might be more troubled by this. The tax authority driving around in vans scanning everyone’s license plates seems like some pretty creepy big brother stuff. As someone who thinks and writes about tax privacy, my first instinct is to take the latter approach.

Technology and Tax Privacy?

The UK approach reflects the new reality of tax administration. Just as taxpayers are using new technology to evade their tax obligations, the government is using new technology to catch tax evaders. This is nothing new, and it extends quite far. For example, the IRS gathers information from our social media accounts, it uses Stingray devices, and it employs big-data analytics.

The choice to use technology in tax administration, though, can raise significant questions about individual privacy. How far should a tax authority reach into our private lives to administer the tax laws? Michael Hatfield published an article in 2015, Taxation and Surveillance: An Agenda, that discussed this very issue. In that work, he explored how the government could implement a new-age “tax surveillance system” that, among other things, could use the data generated by our Nooks, our social media accounts, and even our household appliances to help determine the propriety of our tax positions. Tracking our movements with license plate scanners could certainly be a part of this system.

The big question in this area is whether and when these actions push too far. To be sure, our tax system already involves the collection of incredible amounts of information by the government. (Michael Hatfield and I have written about the privacy aspects of this reality here and here.) This is absolutely required if we want a tax system that distributes the tax burden equitably and efficiently. Taxing authorities also have to respond to the challenges of the day, which means using the tools that are available.

The critical question is how we determine when an administrative practice pushes the boundaries of personal privacy too far. As I explore in my piece, that question is essentially impossible to answer other than on an ad hoc basis. The concept of privacy is too indeterminate to make sweeping conclusions.

Privacy and Tax Design

So what do we do? My impression is that, even if we care about privacy, we will continue to ignore it as an interest in tax policy and tax design due to the difficulty of defining privacy and weighing privacy interests against the country’s economic interests. But I think that we can do better. As a base matter, we can question how much of our tax system we want to build on government surveillance. It is one thing to use technological tools to catch tax cheats. It seems to be entirely another to intentionally create a system that requires the tax authority to spy on everyone.

Now, maybe I am naive to think that this surveillance doesn’t occur or wouldn’t occur but for tax. But we need to think about the possible implications of choosing administrative efficiency over individual privacy. When a taxing authority scans our license plates, collects our GPS data, or checks our Facebook feeds, does it aggregate and analyze that data? Does it store that information securely? Will it share that information with other government actors? How can we best ensure that our data is used properly if it is going to be collected?

These are the types of questions that privacy folks generally think about, but that have escaped attention in tax circles. Part of my recent work has been to encourage tax scholars to think about these issues when we think about tax policy and tax design. Equity, efficiency, and administrability are fine benchmarks of tax policy, but those don’t just involve monetary interests. Privacy interests are relevant as well.