How innovative tech can influence the social contract

In this episode of Better Innovation, host Jeff Saviano interviews HMRC Innovation Lead, Nick Davies, on the the ways that innovative technology is influencing a rapidly digitized economy.

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How will innovative technologies influence the Citizen - State relationship? In this episode, Jeff is joined by Nick Davies, an innovation and technology leader within Her Majesty's Revenue & Customs (HMRC), the UK tax authority. Jeff and Nick discuss the role of innovation and advanced tech in the changing economy, perhaps manifested in a new (digital) social contract. Technologies such as AI and blockchain are supercharging the State’s participation in the digital economy. Governments are playing an increasing role in the development and regulation of new tech, along with new incentive mechanisms to foster fresh growth opportunities.

For your convenience, full text transcript of this podcast is also available.

Introductiion

Jeff Saviano

Hey, Better Innovation. It's Jeff. I'd like to start today's episode with a special thank you to you our listeners. First of all, I don't think I thank you enough. You have many options in the innovation media. I'm just so appreciative that you take in these episodes. We put a lot into the show. We love feedback. Keep your ideas coming. Any ideas for future guests or focus areas, Would love to hear. Okay. Let's talk about today's guest and set up the theme for the episode. I'm really excited to share this episode with you today. This is a special one for me. Today we have Nick Davies with us on the show. Nick has been working within the UK government for the tax authority for close to 40 years now.
That's right. 40 years. As you can imagine. Tax has changed unbelievably during that time. Nick got a start in tax inspection and moved over to international tax. He's also worked on tax issues for financial institutions and he is now a prominent leader on the innovation team within the UK Government's Tax Authority. That agency is known as Her Majesty's Revenue and Customs or HMRC for short.
Well, five years ago Nick came across a piece written about blockchain and he was hooked. Nick has since dedicated much of his career to the blockchain and distributed ledger space. He is truly a leader in the world for understanding and developing new, innovative technologies. Those technologies are improving all facets of public finance and taxation and that's from both a taxpayer and a government perspective.
Full disclosure - Nick and I worked really closely together during 2021. We call it an innovation initiative on behalf of the Global Blockchain Business Council. We helped develop standards in leading principles for application of distributed ledger systems to tax. As part of this work. We led a team that chronicled every known blockchain based system in the world that's addressing a tax problem.
We found precisely 26 of those tax blockchain systems. If you're interested in the report, drop me a line, you can find me on LinkedIn and Twitter or send me an email, and I'm happy to send you a copy of that. Nick and I have had dozens of rich conversations off the air about the impact of technology in public finance.
Today, we talk about the implications for a new, digitally focused social contract between citizen and state. We'll unpack what we mean by a social contract. Nick has always been a forward thinker when it comes to technology and innovation. He's just so thoughtful about the future as it's influenced by new technologies. Much like another guest we had on the show this season, Rita McGrath,
Nick has a knack for seeing around corners, particularly when it comes to the next big thing in tax and public finance. Here we go. Nick Davies on Better Innovation.
Nick, welcome to the show.

Nick Davies

Thank you.

Saviano

Nick, I have to say, I had a vision for this interview today. Do you want to hear what that was? Go ahead. Well, I thought that we would be together in London, where you're based.
We would do a bit of work together on the initiatives that we're working on. We'd conduct the interview then maybe we'd hit an English pub for a pint. That was my vision, Nick. But it didn't happen.

Davies

Shame! we'll introduce you to warm beer and pork scratchings another time.

Saviano

That would be nice. I tell you, that would be really nice. It wasn't meant to be this time. International travel, I feel, is getting closer I can just feel it. So perhaps in the next couple of months, that is the first destination that I would like to have coming out of the pandemic and ready for international travel. But really, I was hoping we could do this together. Nick, I've said this a few times before with just a small handful of our guests where we've had terrific off-air conversations where we could have just hit the cord.
But I have to say, that has never been more true with our conversations Nick.

Davies

Yeah, I've thoroughly enjoyed those and very happy to be reprising those. I should just mention, Jeff, for you and for our listeners that although I am an employee of Her Majesty's Revenue and Customs and therefore a representative of that department, I speak to you today in a personal capacity.
So please don't take anything I say today as representing the formal policy position of the departments or reflecting the views of the UK government. This is very much a conversation between fellow friends and innovators and I hope you and people will be treat it to such.

Saviano

Wonderful Nick. Thank you for that. We appreciate it. We're going to get the best of Nick Davies today.
And you and I have been working very closely together over the past year or so on a specific blockchain initiative. I am thrilled that we have finally landed you as a guest today on better innovation. I thought that we could start with the history of Nick. Could you give our listeners a taste of your background, your innovation experience and focus, and what led you to your current role within the UK government?

Davies

Well, thanks, Jeff. If I gave my full history would be for a whole hour with no time for anything else. But yeah, suffice to say after a brief career in teaching, I've been part of the tax authority in the UK for 36 years now. I think it is sort of man and boy, as it were, and my background is very much as a tax inspector picking up on investigations and then doing some technical and policy design work or an international tax, oil tax, financial institutions like the Lloyd's Insurance Market in London, which was very interesting. But I was introduced about ten years ago to a team that was looking to improve the way in which we did pay as you earn - our payroll tax regime in the UK. I was introduced to the idea that tax for payroll is very much connected to the fact of a transaction having taken place.
And we were looking to see to what extent the PACE payment system in the UK could actually be a means of actually making that better. And sure enough, we've done that and perhaps we could talk a little bit more about that. Just after that, I also spent some time with our Department for Work and Pensions, which looks after the welfare payments in the UK, which taught me that there was more to tax more to government finance and just putting in money that we were very much paying it down as well.
So, there's a credit and a debit balance there. And finally, I got sucked in about five years ago to the writing of the seminal UK report on blockchain by Sir Mark Walport, who was then the government chief scientific adviser. And since then, I've been firmly in the blockchain and distributed system space. And somewhere along the way.

Saviano

So that is such rich experience from pay as you earn tax for payroll to a dose of the welfare system, social payments, the safety net that governments provide and then your work certainly with blockchain. Somewhere along the way you think I'm also in this boat caught the innovation bug.

Davies

I did.

Saviano

And where do you think that happened, Nick? Where in your journey I'm always just so curious to ask that question where in your experiences and because you are you're so passionate about doing something new and finding new approaches to old and new problems. Where do you think that came from?

Davies

Well, I think it came back to a combination of those three things.
It was recognizing that actually tax wasn't something that was separate from the economy. It was part of it and indeed part of the policy as well, because we were both collecting it in and paying it out. And also that tax doesn't happen in a in a void, in a vacuum, in an esoteric application of the Taxes Act. It does actually sit upon a real-life economy and a real life policy out there.
And I realized that actually this wasn't about the interpretation of Section 274 (three subsection one), you know, and the definition of controlled foreign company. It was actually about real-life transactions, real life people, real life technological developments out there. And that it was incumbent on any tax authority any tax person to be aware of how the economy was changing around us so that our tax system and our administration of it actually was as relevant and as robust as it possibly could be on behalf of both the Exchequer and the citizen.

Saviano

And a key element of that, I think you just hit on it at the end. Is that what I love about a work together is that, you know, you always very much looking at, what is right for the populace, for the citizenry, not just what it's certainly never been about the state extracting the pound of flesh, but it's about that relationship which we're going to talk about a lot today, the citizen state relationship.
But in particular, Nick, you know, I've always found that you're so curious about the world around you, especially the tax world that that we're both in and you're in a key innovation role within UK government's tax authority, which, as you mentioned, is called HMRC for our listeners. That stands for Her Majesty's Revenue and Customs Department within the UK Government. The intersection of innovation and the government tax administrator may not be immediately apparent to our listeners today.
What is the aim of your innovation team, Nick, and the outcomes that you're trying to achieve?

Davies

I think it's twofold as far as I'm concerned. Firstly, it's to show and to demonstrate to policy deliverers and policy designers what we can do now. How can we make things better? We're always looking to improve the efficiency of our tax system.
We've got quite a small tax gap in the UK compared to some others, but we can always do better and we can always reduce the burden that we place on our citizens to comply with our sometimes quite complex rules. So it's about what can we do now to make the administration of the current system better? But it's also about that forward look, it's about understanding what's coming towards us and how our tax system might need to respond to that.
And indeed how, how can the tax authority because we do carry so much weight in the way that the economy operates, how can we influence to the good. Yes. Those developments that that are out there. So it's a two way thing. What can we do now? What must we take account of in the future?

Saviano

And one way to look at that, we we've talked a bit on the podcast with some other guests about the three horizons Horizon one, two and three of Horizon one is today, what are the innovation opportunities, perhaps, and like the zero to one year, what is immediately in front of us? Horizon two may be in that one, two-to-three-year range, and Horizon three would be a bit further out and what I love about what you just said is that it's important to have that forward looking, that forward looking component and especially, you know, that perhaps that may be Horizon three.
We had a guest on the show this year, Rita McGrath, who was a professor at Columbia University, wrote a great book during the pandemic called Seeing Around Corners. And it was all about how do you develop the skills and capabilities to the proverbial look around the corner to see what's coming next. We've touched on that a bit on the show in the past Nick, I'm just so curious. How do you do that? Actually, you do that particularly well. You you've got your thumb on the pulse of what may be coming. Any tips for our listeners about how to see the future?

Davies

I think so. I think I have to misquote an old adage, what know they of tax who only tax know.
I think there's a there's a feeling that sometimes we focus too much on the internal developments of our tax system and how we refine our little bits of the responsibility. To come your point, what we need to do is to take much more accounts of what's happening out there. And the way I put it is designing our tax system from the outside in.
I think most people generally, to be honest, wants to pay tax. They just want to do it easily, intuitively and compliantly. It's just that they struggle. They struggle because our rules are quite difficult to follow So I think we should be looking at those technological development and saying, how can that mean? How can we make the life of those involved for both HMRC and for the citizen easier?
And that's the way to do it. Look at what's happening out there. And this is particularly true in the cross-border area. You know, we've got domestic tax going on, pay as you earn, VAT and so on. But actually I think some of the more exciting opportunities are actually in the customs, in the withholding tax and with the transfer pricing type areas where there's real ingenuity going on in the way in which normal transactions are done. Those transactions can include tax within them. And that's the really exciting bit for me.

Saviano

Oh, it is for me to we're going to talk a lot about application of technology in that particular context. But maybe first, Nick, how do you think advances in innovative technology and innovative technology, for example, could include artificial intelligence, could include distributed ledger like blockchain? How do you think those advances will empower the states participation in the digital economy and positively impact this citizen state relationship that we talk a lot about?

Davies

Yeah, I think you've put your finger on it. I think that's where I think we can and ought to be heading is towards that participation by the state in the economy. So, it's almost as if tax is I'm not I wouldn't want to say that we want to abolish tax but I think we think of tax as being something that is imposed, something that is separate, something that is difficult and something which is after the fact. Actually, the states with the new technologies that you've mentioned, smart contracts, DLT, AI, IoT. I think it's quite conceivable for the states to be able to participate in the proceeds of the economy, in the economy as it runs and actually take the bit that it is that is the states and that is being properly and legitimately shown to be the states by Parliament or by Congress as it happens. So, that we are a third party to some of those contracts as they settle, as those tax events happen. And that seems to me to be quite achievable in technological terms, but with policy and society and small political considerations, that too, that's the real challenge, is whether we can bring that slower burn culture and approach to match what the Cape the technology actually enables.

Saviano

That is a complex equation. Our guest today is Nick Davies, an innovation leader within the UK Government. I'm Jeff Saviano. This is the Better Innovation Podcast. Nick, let's further explore this citizen state relationship, the framework for how government and its citizens interact is sometimes referred to as a social contract. Let's start with a definition. What do you mean by social contract?

Davies

Well, I kind of suspected you were going to ask me that, and I didn't want to get into too philosophical a debate here because there are much greater minds than mine who will be thinking about the social contract and what it means in a theoretical sense. My own view is that it's pretty much there sitting still and it's in its enlightenment terms and its conception by the by the founding fathers and by the likes of Thomas Hobbs and Montesquieu and Rousseau.
This idea of a theoretical bargain and so on. But I still, I think we can bring it into the 21st century by saying, actually in think of how contracting has changed in, in just normal economic terms. We are now doing things at the flick of a switch, at the press of a click of a mouse.
Payments are made instantaneously and very clearly and intuitively. There's no reason in my mind why we shouldn't harness the technology to actually make the social contract much clearer, much more real-time and much more intuitive to the citizens who partake in it. And crucial to any contract is the consideration and the consideration that the citizen pays for their base of the social contract is money.
It is the tax that is paid to the state by currency. And, that also speaks to the capacity of the government to continue to support that currency so that it itself continues to have value, both intrinsic and extrinsic.

Saviano

I love it. And let's maybe go one low level deeper and for the benefit of our audience, maybe the first you've heard of this concept of a social contract, some have to find it as an implicit agreement.
It's not as though there's an actual signing of the paper in an app, a seal of a contract, but it's an implicit agreement among members of a society that intent to cooperate for social benefits. And there's a sacrifice, to sacrifice some individual freedom for some state services and protection. These theories have become popular as a way to explain the origin of government in the origin and the obligations of the people.
The one is just a very simple definition from another. English philosopher Isaiah Berlin called it, quote, “For every right, there is an obligation.” yeah, I always like that right. For every right, there is an obligation. The state has certain rights and people have certain rights, but there is an obligation in our world Nick, that obligation is often a tax obligation, a question I've been dying to ask you. Nick, how is the relationship between citizen and state being impacted by advances in digitalization and advances in technology? Give us some examples of how that's happening today.

Davies

Well, yeah, I would even go back before, if I may, before you say Montesquieu, right back to Plato and his definition of government, which was the redistribution of scarce resource within any social control construct within a society or what he called a polity.
And I think this is crucial. What government does, why governments exist is to take resources from somewhere and give it to somewhere else. That's all it does, really.

Saviano

Redistribution.

Davies

It takes money from everybody to buy defense. It takes money of people through taxes to provide welfare and so on. It's a redistribution effort and for that redistribution efforts, it expects certain obligations from the from the citizen.
And of course, they pay their taxes. It's largely settled through the medium of money. We are used to money going immediately and have our contractual requirements met immediately and accountably. It seems to me that with the sorts of things that we are now doing and you don't really have to go as far as blockchain, this is about payments, for example, payments and now real time.
I know the US system is a little bit different from the UK, but we now settle most of our retail transactions through the foster payment system in 250 milliseconds, that’s the average. So it’s immediate and we are used to Amazon turning up with our goods the following day.

Saviano

Right.

Davies

And it's there instant gratification it seems to me there is no reason why that shouldn't happen to the relationship between the state and the citizen.
And actually COVID is only brought back into sharper focus without the sort of support that my department had been has been able to give to the citizen switching around the typical sort of tax collection role that we play to being one of actually negative tax almost in supporting people whose livelihoods were under severe threat because of COVID restrictions, it shows that there is actually a very dynamic relationship between the state and the citizen, regardless of whether you're a debtor or a creditor there to.

Saviano

Right. Right. And I think that's absolutely true. These innovative technologies are, of course, impacting both sides of the citizens state relationship, both sides of the coin, if you will. State services and public goods are improved. Perhaps there are greater efficiencies I think of I had to renew my driver's license recently and I still can remember those days of standing in endless lines to do that. Now, it happens in the click of a few mouse clicks online and much easier, but also improving tax processes as well. And we're going to get into that in a bit. Let's make this real for our Better Innovation listeners. Nick, can you give us an example of technology advance that's influencing the social contract? Maybe it's an extension of what you were saying about payment mechanisms or there are so many great examples where innovative tech is has been influencing the social contract. Give us another example.

Davies

Well, I would actually use the word smart here because I think smart contracts. I know there's a lot of criticism of what we term smart contracts. A lot of people say they're not smart and they're not contracts, but they do perform some part of the idea of a contract, you know, consideration, consensus and idem and so on.
It seems to me that we are in a position where we can make the social contract smart, we can apply the terms that we want to apply to our economic, financial and indeed social interaction to take account of the needs of the state in so doing. So, we can start to build in not just financial considerations so that, for example, when I buy my goods at the supermarket, the VAT that is due, the state is deducted in real time, but also I can build into that and I want that supply to be ethical as well.
I want it to be demonstrably sustainable. So that too can be evidenced in the data that is provided. So, it's less about one technology being a magic wand. It's actually about a combination of technologies all providing me the customer the citizen, the taxpayer with a richer outcome. Everything that I want and I want more is settled and is met at the time.
That's how I contract. And that can apply as much as it can to governments and public services as it can to when I go to the supermarket or when I go online to purchase goods.

Saviano

And for the audience has been of it to algorithmically through software code to influence transactions and from a tax perspective whether it's the determination of how much tax to pay. Think of you know you walk into a store and you pay in the U.S. retail sales tax or you pay a value added tax could be customs duties on a cross-border shipment. That tax needs to be determined needs to be paid over to the tax authority. Tax authorities need to have collection mechanisms through smart contracts. We have the ability to program even to program currency itself.
But to influence those transactions could be retail transactions, could be business to business, could be employer paying employee wages. And that opportunity is immense. And what a massive opportunity to take this new technology and apply it smart contracts and to improve tax processes. Would you agree with that, Nick?

Davies

I certainly would. And I would say there is an even more competitive market when you think of some of the not quite so ethical purposes that other people are using.
The date that I would data for when we transact, you know, when we go online and when we transact, when we buy something, somebody somewhere is scraping that data and using it for all sorts of purposes, which are not only invisible to us, but which may actually be quite antithetical to us. We may not want somebody to pick up the patterns of my purchasing and then feed it back to me so that when I go online, the first thing I come across is some things I didn't really think of buying, but which I'm persuaded to buy because I've got that data.
So I think there is there is a strong case for the states to take back some of that rebalance that. That data rebalance between the big platforms and the citizen and actually apply some of that to for good.

Saviano

Let's think about this, this rights and obligations a bit and in particular to the role that government has. What role do you think the government can play to further develop these technologies?
Could be, for example, through incentives that many governments use, including the UK will use tax incentives, could be regional innovation hubs that are both public and private, university aligned and research. If interested in this topic, we had a guest on our show last year, Ivan McKee, who was the Scottish Minister for Trade, Investment and Innovation, actually led a delegation to Cambridge, visited us in our lab to better understand the ecosystem and the role of the state in proliferating innovation.
I'd love to hear from you what rights do you think in an obligation perhaps that the state has to actually extend these technologies?

Davies

That's a very good question, Jeff, and I'm a big fan of Marianne Moscato and her thesis about the entrepreneurial state. There's a, you may argue about the detail, but her accounts of how the smartphone is really something that Steve Jobs put together from technologies that were largely developed by DARPA is a really revealing thing that some of these things just don't happen unless there is a degree of government involvement, a bit of specific derision which actually makes these advances.
And I think that's what the government can do. What it can also do is ensure that the technology itself develops on as broad a front as possible so that the maximum benefits are realized by the maximum number of people. I'm not going into sort of heavily, you to the in terms here, but there is a real sense in which blockchain is a classic example that I think it's something that is really so transformational that it almost, it generates a new operating system for the planet.
If I'm even 1% right, that has as many risks associated with it as it does opportunities. So I think there's every reason why governments should be involved in that and ensuring that consumer protection, GDPR is sustainability and generic utility is built in to the way in which it develops. And at some point it will be safe to let it go.
And for a thousand flowers to bloom based on a fundamental layer of good solid compliance and protective infrastructure. But until we reach that point I think there's a real risk that we might sleepwalk into another sort of, you know, oligopoly stick situation where the markets in the technology is dominated by one or two or a handful of very large suppliers.
And I don't think that's in anybody's interest.

Saviano

I think that's excellent Nick. Let's go a bit deeper with that into taxation as a critical component of the social contract, as you're suggesting. And I, I would definitely agree the government tax authority taxpayer relationship is often the most dominant state citizen relationship in societies. So, if you if we believe that, then I suppose that would necessarily follow that the application of these innovative technologies to taxing matters will of course influence what we may refer to as a new digital social contract.
Do you agree with that?

Davies

I do, yes. And I think the additional element here is transparency. So, you know. HMRC in particular is very jealous of its data. As soon as any piece of data comes across our threshold, that's the end of it. You know, it can't be disclosed unless there is a court order or something.
I think there's a much more collaborative open and transparent model for the way in which we interact both between each other and between countries and with the states within our individual policies. That is based much more on openness, transparency and accountability. Yes. And that plays to things like the sustainability requirement here. That's what I would really like to see is us exploring this idea of there being a much more collaborative and dare I say, co-operative approach to how we do tax so that it becomes something that is intuitive, but it's also something that you can get proud of you know, I've done my tax. Imagine if we could send a token to somebody each time they've done something good for tax purposes, you know, they feel they file their it's not time and it's all good. We send them a token that says, you've done good, you've done well, you're a good tax compliance citizen and you and that token can only come from HMRC and it can only be transferred at the behest of the recipient. And they take that to their, I don't know, their insurers and they say, look, I'm a good citizen and the insurer says, well, we'll give you 5% of your next premium renewal. And suddenly what you have there is a sort of market driven, compliant behaviour, reinforcing itself both in commercial and in public sector interactions.
And before you know, it, you end up with this ecosystem of trust and of compliance behaviour that suddenly means that you do have to do a lot less enforcement, a lot less debt chasing, a lot less compliance work, because everybody can see that everybody is being good citizens. Now, I know there are privacy and Big Brother type challenges there.
And I don't underestimate the size and the importance of those, but that's the beauty of the new technology. It can be deployed in ways that protect identities that protect GDPR, that that expose no more data than you wants, but where you actually get a definitive return from it so that so that your compliance is almost monetized in a way and in a way which just doesn't happen now with the Internet come back to our previous example where the benefit is all on one side.

Saviano

And as you and I've talked about many times, honest taxpayers will embrace that transparency. Yeah. And you know, your point about public private together certainly agree there is an explosion of public private partnerships that have emerged during the pandemic, many of them for tax purposes. You and I are working on a few together organizations, individuals, institutions aligning across public, private and civil society and multilateral organizations.
These rich consortiums to solve important problems. These are not private sector problems. They're not public sector. They are societal issues. And it has been, frankly, one of the few positive aspects I look over the past few years. The emergence of these public private partnerships are so exciting with the other important word you use was cooperation. And tax authorities have been experimenting with concepts like cooperative compliance and new ways to audit taxpayers by looking to the processes that they employ and the cooperation to open up if taxpayers open up on their process for determining and paying their taxes, then perhaps the traditional audits would be improved. So there's been some important experimentation with that.
I want to stick with let's really go a bit deeper with blockchain distributed ledger systems Nick. This past year, you and I led a team to study the application of distributed systems to tax. We did that on behalf of the initial project led by the World Economic Forum and the Global Blockchain Business Council called the Global Standards Mapping Initiative.
And our work was, there was an emphasis on the public sector. We looked at the implications of blockchain for tax purposes and we discovered that there were precisely 26 distributed system applications to tax in the world. We didn't find 11, we didn't find 50. We found precisely 26. Talk a bit Nick about the systems that are in place today.
I'm curious, how do you think these and perhaps future distributed taxing systems will impact the social contract?

Davies

Well, I think it will make the social contract much more solid and it will bring it into the technological age. And I think you'll you know, we did, as you say, we looked at 26 different applications are quite similar in a way that there was this commonality about them, which was they were based on transactions at this stage, I can see why transactional taxes are the first applications which attract this technology because it's an instantaneous thing.
It's a bit more difficult to see how it apply to profit-based taxes or yearly taxes, although I still think that's quite feasible. But again, it comes down to this accountability. And I would say there's a there's a big opportunity here to make the social contract much broader in scope. And that's the reason I say that is because we are going to need some quite different behaviour from our citizens in the future.
And I go back to Glasgow last year. You know, our prime minister said that the clock was at one minute to midnight. And this is serious stuff. This is saving the planet for our children and their children. And in those circumstances, you can have the best tax system in the world. But if you haven't got a world to tax, nobody cares really.
So, there's a real sense in which we will need people to behave differently and tax will be a major function of and result of how they do that. So, we must project forward into that sustainable, accountable, transparent world and say what do we want people to be doing? And how can the tax system both encourage that and respond to it?

Saviano

And what was important, I think Nick, from the 26 systems that we identified, we had I should mention we had a fantastic group behind us. We had 30 individuals, 30 specialists from around the world representing the private sector, but other governments, we had inclusion from Australia and Estonia, we had multilaterals, like the World Bank organizations and academic institutions like the University of Vienna and MIT we had, I think, the Dream Team to study blockchain application for tax.
And going deeper into these 26 systems has been just so refreshing to see where the world is going. We found a couple of threads. There's a data sharing thread where there are distinct number of tax problems that can best be solved. The optimal approach is for organizations to share data for some purposes. We work together on that for withholding taxes.
We see it with product origin, as VAT application. So that was that was one thread but the other thread to really be interested in your thoughts is that I think that there was a representation across those systems. Many of the systems where the state realized that had an obligation to make it easier for its citizenry to pay taxes.
And I thought that was really refreshing. Did you get that same sense from many of the systems? I did. But just to just to come back to one word to use there, which was shared data, the phrase used to share data, that scares people because that suggests that we want all their data. We're going to come and lock it out of the air.
We're going to use it for all sorts of nefarious purposes. And I think that puts people on the defensive right away. It does. I don't use the word share data. I use the word access data. So, I want to generate my data once and I want to control the access that anybody else gets to that data on my terms.
You the citizen. And I think this applies to a cross-border commercial transaction as much as it does from it from an individual citizen. Exposing data to government agencies that could be multiple. So it’s much less about exchanging and sharing data where I take a great big spreadsheet of all my very sensitive data and I send it through an email to somebody else.
So, you immediately duplicated it? I think I've used this phrase before. Data isn't the new oil, it's the new plastic. We're generating loads and loads of it. We use it once and we don't know what to do with it afterwards. There is idea of data obesity, it is becoming current. This is not about replicating lots of data.
This is about generating very, very assured data and allowing lots of people to access it. When I say and how I say. Absolutely. And that applies that much cross-border as much as it does individually. But see that that that's what makes it easier is and is that the state is not saying in order for it to do our tax, we want you to format that data in a format that suits us, replicate it and send it to us in a timetable and in a mechanism that suits us.
We're just going to look in. Yeah. We where we're designing for example, in the UK, we're designing a single trade window and it's designed to be a means by which trade can tell government only once that they're doing a transaction. And then that is then sent to all the 37 or whatever it is agencies to be operating the border.
Actually, my own personal view is that's the wrong way round. What we actually need is a window for government into trade so that as that trade is going, we observe the trade is happening, we do all the customs stuff through the same platform and the trader need do nothing else and that applies Mutatis Mutandis to just about any type of tax regime where if we are in there, if we are participating in the means by which those tax events are generated and assured, then that is what we need and we can then use that data to feed our systems.
But we need to put that citizen or the trader to any further trouble.

Saviano

And what is so important about that and I appreciate the distinction on the word share. And of course, you know, we're talking about that it needs to be privacy preserving said a couple of really key points. Yeah, privacy, preserving taxpayers, citizen control of the data.
And there's a lot of great experiments happening in the world that demonstrate and actually show that, you know, that can work and to empower citizens as controlling their data. But also that there are some new technology advances. And we've we've talked many, many times with leading teams at MIT, for example, that are proposing that you don't, to your point Nick, we're not sharing data.
Instead, we're sharing insights from data. Yeah, we're not copying data. Yeah. Also consistent with the point you're raising, every time we copy it and we transmit it, we're creating additional risk of loss, it could be one scintilla of risk, but it's additional risk. And so, yeah, I appreciate the point you're making. And the world is moving away from these massive data lakes with single points of failure and instead moving to using federated systems to derive insights from data.
So, you don't have to transmit it many, many times. Is that. Yeah, is that fair?

Saviano

Absolutely.

Davies

And I think it goes beyond data as well. Data is a very it does sort of blend representation, a digital representation of an event, actually. And I think that I’m not a data scientists, as you could probably tell. But I think there's a decrease in the usefulness of data, the loan guarantees for the greater the separation there is between it and its usage and that and the real world events that it actually represents.
So I think the best time to make a decision about an event is why it's happening, even if it's actually 250 milliseconds time frame, which again is technically possible.

Saviano

Yes. You're in the moment when you're in the moment.

Davies

Absolutely.

Saviano

And what a great time to do it. So there's no, there's no lag. If there's one a one word perhaps that is we have not really mentioned yet that circling this great conversation is trust.
Yep. We had, I think, an important discussion about trust with one of our former guests on the show, Marcello Estavi, who is a leader and a rockstar economist with the World Bank. We talked with Marcelo about the importance of trust or confidence that the citizenry needs to have in the taxing system. What role, Nick, do you think trust plays in the states citizen social contract?
How important is trust to you in this relationship?

Davies

Well, I wonder if I can just pick up. I'd only end up with semantic arguments about this, but I would prefer to use the word ‘trustability’. Because it's trust is there is a is a sort of emotive term and it describes, I think, in people's everyday language a relationship between probably about two people or two entities and it brings up emotive stuff and brings in some subjectivity which isn't helpful. If we're in the area of tax and technology which are objective and empirical things.
I think the word ‘trustability’ is better. How do I demonstrate that somebody can trust me and what is it that I need to do in order to generate it? And then whether they do or not is sort of up to them. So I'm not presupposing their position. I'm just making it as easy as possible for my behavior to be something that somebody else could trust if they wanted to.

Saviano

I like that, ‘trust ability’.

Davies

The way I look at it is that there is there is an environment in which I participate with a group of other people whose trust ability I need to assess and I transact within that environment openly and transparently. And the ecosystem then confirms my trustability by what I do within it and indeed, by the very fact of my participation in it. And so my ‘trustableness’, trustable quotient will increase as not just a single transaction goes through the whole ecosystem, but also, as I do lots and lots of transactions which equally go through the ecosystem. So there's both. So there's about a sort of ecological trustability, as well as an epidemiological one as well, which accrues over time.
And I think that's the sort of thing that is again enabled by the technology and gets you away from some rather sort of subjective and emotive term like trust, but actually enables a trustability quotient to build up which can then be renewed. I like that distinction. I think it's a healthy distinction.

Saviano

And first, I'm still stuck on there's no emotion in tax. I've had nearly a 30-year career in tax and now I'm learning that there's no emotion there that like that kind of blew me away. I've got to let that sink in a bit. I think it's a, it's a really important point, Nick, that especially you know, another example, our friends at the World Bank, you and I have had discussions with our friends at the World Bank about this and the concept.
I love how they describe tax morale or the taxpayer confidence or to use your word ‘trustability’ that their tax revenue will be used wisely by the state and I've often thought that, you know, this idea of tax morale is so critically important and how it will influence this new digital social contract. I actually think it all just falls apart.
Before the pandemic, we had we had the lead tax administrator from an African nation come into our lab. And we spent a day together. And, you know, we heard first hand about the great difficulty that they have of convincing the people of their great country that their tax revenue will be used for valid and necessary purposes by the state.
When you lose that tax morale or that confidence. In my opinion, I think that's where you start to see the snowball effect of tax revenue goes way down and there becomes a larger gap. Would you agree with all that, Nick?

Davies

I do.
I do to a degree. We actually tried an experiment in the UK. Some years back where we actually, when we sent somebody their annual bill, we would break that down into how that bill was spent.
So even in, hospitals, police, roads, that sort of thing and in an in an attempt to sort of be a little bit more accountable to the citizen about where their tax was going didn't really work. I don't think people, well, I don't know for sure why it didn't work, but it certainly didn't seem to increase that tax morale very much.
And it's always very complicated because unless I don't know what the US is like, we don't have hypothecated tax. I mean, we don't have many, we have some, but not very much. Most of it, most of our tax money and national insurance goes into one big part and is then divided up by Treasury processes. So, actually that that direct link between the money that we pay and how it spends is quite difficult in political terms to identify.
But I think, I think one of the other things that affects tax priorities is the feeling that everybody's paying their fair share. Now, that is something I think we can do much better because we can introduce this the systems, the smart contract the mechanisms by which not only will tax be deducted, but it can be shown to be deducted if you so choose.
We sort of comes back to my tax compliant token idea. Why shouldn't somebody be able to go to a third party and say, well, at least HMRC is happy with my tax compliance? Right. You know, I've given my data to HMRC. They've made a decision according to the law of the land to tax me appropriately.
And I have now a certificate for that. It's the same where you're not allowed to get into a car without insurance, so you have to show that insurance certificate to somebody who's interested in you getting a license or whatever. So why not when I go to a bank and I want a loan, why can't I use evidence from HMRC that actually I've got this token, and that's I think how you build up that sort of that ecosystem of tax compliance then becomes a matter of civic pride almost.
You can imagine people going even getting a badge on the 6th of April, which is and you're saying I've done my bit for 21 22 or something.

Saviano

It is such an interesting idea Nick and, and as we bring our great discussion today to a close, I'd love to know Nick, what are you most excited about in particular give us one technology or application of a technology that you're just over the moon about?
I think I know what it is, but for the benefit of our audience, what are you really crazy about, Nick?

Davies

I'm crazy about. All right. Distributed ledgers then. Let me say distributed systems rather than that particular technology. I think the idea that we can all collaborate to bring not your benefits to all the commercial, the public policy, the ethical, the sustainability, all of that is doable.
If we find the means by which we can cooperate. And by the way, I think the technology is pretty much proven. I think there is sufficient evidence now to say that distributed ledgers do work and can actually work in a way that doesn't kill the planet. So we're not talking about banks and banks of computers in Chinese warehouses or whatever.
We're actually saying there is a sustainable and transformative means of all sorts of people, entities and countries participating together in collaborative and operative systems to just improve everybody's welfare.

Saviano

And that's not just, oh, that is so well said.

Davies

It's not just a Tapscott type propaganda that, you know, I sincerely believe that if we if we really looked forwards and we've got we've got a phrase over here, the difference between leapfrogging and horse holding, if we did a bit of leapfrogging into that, you know, not and it's not that far, it really doesn't have to be it's not decades away.
You think I'm thinking quickly, things change, you know. Yeah. 20 years ago if you thought, you know, 30 years ago, if you thought the Internet was going to be as quite as pervasive as what you would never have guessed it, I think blockchain is the next big thing. I think it will transform the way that we interact in all sorts of ways.
How we contract, transact and interact and that's for me, that's for me is this exciting thing. And I just wish that people would get past blockchain and crypto nastiness and really recognize what the technology itself delivers, never mind some of its more questionable applications. Nick, I love the energy. You know how.

Saviano

Oh, I agree with that as well of the energy that you bring to this.
We have moved as a community, as a blockchain tax public finance community. We have moved beyond pilots. I love a member of my team founds the some use the word pilot Titus as a bit of a disease of just yet conducting endless pilot after the pilot. I personally, I don't think we need to prove many aspects and we, EY and HMRC have done some of that together that we really appreciate our contribution to this community.
Nick, that's such a great point. You made a really great opportunity for us to anchor the conversation today as we bring this great discussion to a close. Anything else that you'd like to say before we wrap up?

Davies

Well, just that I think tax can be a driver as well as a responder to change, you know, particularly in the world of the sort of financial services we, we, we know because we've spoken about it, Jeff, that is a digital currency, whether that's a stable coil token let's call it tokenized money is a better phrase.
Whether that's a CBDC, whether it's a stablecoin, whether it's another type of tokenized money, that is going to change very fundamentally. The functionality of money and tax systems are nothing if they're not money businesses. They are taking money from some people and giving it to others on behalf of the state. So we in tax authorities across the globe need to be thinking, what does that mean for the way in which we fund our respective states?
And I would really like to get sort of that sort of debate and sort of bring it out of the sort of votes of the central banks and the financial regulators and the people who are concerned with monetary policy. I think they've got to do that. Good grief. Yes. They really must think about that. But there is so much many other opportunities.
What I would really like is for us to be able to adduce sort of evidence about how could we transform the lives of those who are financially excluded. If we had either at some sort of tokenized money, how could we transform international transactions if we had tokenized money, how could we reduce the overall costs and risks of things like TPML trade based money laundering?
How could we reduce fraud if we had tokenized money? That was a much more extreme, you know, intrinsically linked to a device or to an identity or to an individual. You know, there's a whole world of possibilities out there, which at the moment I don't think are being understood or fed into policy design strands. And that's the bit that I think is a little bit lacking.

Saviano

The innovation Nick, around the future of money has just been profound, the extension of that to digital currencies.
Our last guest on the show, Jeremy Allaire, the CEO of Circle Financial, we dedicated an episode just this season to the future of money. To apply that to taxation is incredibly important. That requires action. I love the quote that, “many a false step have been made by standing still” and there needs to be action. We need to move quickly as a community.

Davies

I agree and sorry, I'll just add there that if we can't make the tax case for a CBDC, it probably doesn't have a case.

Saviano

I would agree with that. I think it's that the end. To go back to the topic of discussion today, the social contract, how do you improve the social contract? Neither from just solely the state's point of view or the citizenry.
This is the nature of that compact. It is a compact and how can that improve, how can the future of money and these opportunities with digital currencies, how can it positively impact the social contract.

Davies

If we can't if we can't show that, okay, it's probably not a good idea, but I think we can.

Saviano

Totally agree.
Okay. Nick, before we wrap up, we have a regular feature on Better Innovation. We finish each interview with three rapid questions and responses.

Davies

Yep.

Saviano

What do you think? You up for this?

Davies

Give it a shot.

Saviano

Okay. Here we go. Nick, what book do you have on your nightstand?

Davies

Utopia for Realists by Rutger Bregman. Absolutely. How we can how we can transform society, harness the technology and get ourselves out of the current position we're in.
Brilliant, brilliantly brilliant simple analysis, good recommended to everybody.

Saviano

Oh, that sounds really good. How far along are you?

Davies

I'm starting again because I read it through and I want to read it again because I just want to make sure.

Saviano

That says it all.

Davies

But Utopia is achievable. It is definitely out there. Excellent. Our audience will appreciate that.

Saviano

Okay, Nick, tell us about a historical figure whom you admire.

Davies

Well, you're an American, Jeff, so I'm going to go for Thomas Paine. Oh, I think he was a man ahead of his time. Very humble beginnings. Born over here, he was a tax man as well, which stands him in good stead. But yeah, his ideas about how we should organize society and his appeal to common sense, his optimism and how we can make human society based on just the basic instincts of a of humans and just a little bit of an organization around it could, you know, if we if we just went back to him every now and then and thought, you know, what is this all about. I think we would all be better off.

Saviano

It is common sense, isn't it? I just love that you chose the tax person as your historical figure. That's awesome.
Okay. Nick, last question. What do you see as our greatest opportunity to build back stronger when we emerge from this pandemic?

Davies

Well, I think it's a word we've used quite a lot, but it's to collaborate and cooperate across all sectors, across all types of organization and across people and most of all, across countries. And I think the technology really does help with that.

Saviano

And I appreciate, Nick, it's how you lead. I appreciate that is pervasive as we see throughout the UK government and as we've mentioned today a few times that that we are seeing that all around the world.
New Public-Private Partnerships. We're all in this together, especially in this tax community. Nick, thank you so much for coming on the show today. This is everything that I was hoping for. What a wonderful conversation. You'll come back, I hope, on the show, Nick, to talk again with us. So, thank you for giving us some of your time today.

Davies

It's been a great pleasure. Thank you very much, Jeff for the invitation. Thank you.

Presenters

Jeffrey Saviano

EY Global Emerging Technology Strategy & Governance Leader

Podcast

Episode 4

Duration

1h 3m 32s

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.