Days 3 and 4, the other half

Many things have two parts. Sometimes a part is more visible and more colorful than the other. Then we are more aware of its presence. Other parts may be less well-known, even mysterious, but just as important or, sometimes, as shown by the traditional image of the iceberg, they can be larger in size, but invisible. The Star Wars Saga lovers will be already thinking about the dark side of the force. Moon lovers and daydreamers will think to the half side of the Moon that we don’t see. Music lovers will be already recalling sounds from the “Dark side of Moon”, the famous album of the English band Pink Floyd.

Indeed, the other half of the application of technology in tax administration is probably less glamorous than the part which focuses on the provision of adequate and ubiquitous services, taking advantage of Internet just as smartphones or plastic money. Like the iceberg, this less visible half is the largest part.

In retrospect, we see that the use of technology and information systems for control purposes has been evolving from the taxpayers’ registry maintenance, receiving and processing of tax returns and payments, payments and current account management or periodic obligations verification. But beyond the specific processing of transactions, for many years the tax and customs administrations have used information systems to find signs of non appropriate behavior and determine risk. Activities such as obtaining information from third parties, collection, validation, data cleaning and storage allowing to identify elements as not compatible with the officially reported  income or purchase operations reported by third parties, significantly higher than the sales reported by a specific individual.  The identification of profitability indexes and margins of added value, comparing them with other similar taxpayers in terms of economic activity and geographical location, useful to select taxpayers with a higher risk profile, being outside normal distribution levels. The application of fixed rules, and later probabilistic rules, has allowed implementing mechanisms to select cases for control with reasonable levels of success.

The technological capabilities have been increasing with the years. The so-called law of Kryder describes that the density of hard drives is multiplied by a factor of a thousand every ten years. To illustrate the process, according to Wikipedia, if storage continues to develop at the current pace, a standard 2 and half inch computer drive could store 14 Terabytes and cost about $40 by 2020. Communications have also improved significantly. Remember the modem we used to connect to the Internet, only 15 years ago. Today we do not need the modem, or noise, or wires and we transmit 300 times faster. To download a file that today requires 10 seconds, we needed one hour a decade ago.

A decade ago, to the simple question of how much time did they spend to erase information or send them to a low-cost backup system some authorities responded with a criterion that could be summarized as a couple of years more than the legal prescription term. Today some administrations may decide just to not delete anything. At the same time the sources of information increase, volumes increase, frequency increases. Returns, purchases, sales, payments, transfer of real estate, travel tickets, electronic invoices, withholding certificates, credit cards, stocks, dividends, operations abroad, jewelry, etc. And we may start to include other items such as publications on facebook, twitter, or linkedIn; or email messages, outgoing and incoming calls, and others.

In 2009 the number of devices connected to the Internet was greater than the number of people inhabiting the planet. Some people estimate that in the last two years more information has been created than in all the previous history of mankind.

The volumes of information that can be managed by administrations are such that they no longer depend only of business intelligence tools allowing  to add, define dimensions and hypercubes, and facilitate proper reporting. Crossing and storing information requires more and more sophisticated skills, which may soon exceed the traditional mechanisms supported in relational tables. Viewing information becomes a problem difficult to solve. Bringing information from billions of records to a hundred or so relevant indicators is not a simple task.

I am convinced that it will be extremely interesting to listen to what administrations are doing today in order to obtain, manage and exploit information; to determine and mitigate risk; to identify problems and tax evasion schemes, and to deal with them. We also need a vision of what is expected in the near future. Something that in a technical language,  we could describe as a big leap from data mining to “big data”. To develop the potentialities of such a volume of information, its diversity and how quickly a paradigm in tax administration can be broken, we need to move from discovery to prediction.

I remember one of the first lectures at the university. My shades of gray hair confirm that that time is already far away. César Esquetini used to say that information systems should allow transforming data into information. Today we need to further develop this concept, for being able to transform data into information and information into knowledge.

Good luck.

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