Abdi Aidid and Benjamin Alarie are the authors of The Legal Singularity: How Artificial Intelligence Can Make Law Radically Better, which is shortlisted for the Donner Prize. Both are professors at the University of Toronto Faculty of Law.
The recent proposal to increase the capital-gains inclusion rate to 66.7 per cent from 50 per cent has ignited discussions among taxpayers and professionals, highlighting the increasingly intricate nature of tax law. This change, targeting corporations, trusts and individuals with substantial capital gains, is just one example of the complex adjustments that often accompany fiscal policy updates.
To understand the scale and impact of such changes, it helps to reflect on past adjustments. In 2001, Bill C-22 altered the landscape by reducing the inclusion rate from 75 per cent to 50 per cent. This legislative shift required recalibration of numerous tax provisions, from the treatment of bad debts to capital cost allowances for depreciable properties. Each adjustment had to be legislated to ensure consistent application across all relevant areas of the Income Tax Act, a task that demanded considerable expertise and precision.
Fast-forward to today, and the landscape has grown even more complex. The proposed increase in the inclusion rate is not merely a percentage change but a fundamental shift in how capital gains are taxed, affecting a wide array of tax planning and compliance processes. This complexity presents both a challenge and an opportunity to rethink how we interact with tax law.
Enter artificial intelligence. For all the talk about how AI promises to change our lives, tax happens to be one of the areas in which it is provably well-suited. As we discuss in our book, The Legal Singularity: How Artificial Intelligence Can Make Law Radically Better, AI is increasingly capable of solving complex legal problems and assisting with informed law making and adaptive regulatory oversight. AI tools already help tax professionals do everything from model tax scenarios, predict outcomes of tax strategies, offer tailored tax guidance – in plain English! – and even forecast how courts will rule in tax disputes. AI can do this with a high degree of accuracy because of its capacity to ingest and analyze vast amounts of tax and legislative data.
AI becomes crucial in scenarios where tax laws are revised, as it can swiftly adapt to new regulations and provide updated insights and strategies without the lag that typically accompanies human analysis. For taxpayers and professionals, this means more reliable and efficient compliance strategies, optimized financial planning and a better understanding of the tax implications of their decisions.
Moreover, AI can help in modelling the potential outcomes of tax law changes before they are fully enacted. By simulating various scenarios, AI can provide policy makers with a clearer picture of the potential economic impacts of their proposals, helping to refine laws in ways that maximize their benefits and minimize unintended consequences.
As with many emerging technologies, AI is a double-edged sword: Sophisticated taxpayers, equipped with AI tools, could potentially exploit loopholes and ambiguities in tax legislation at unprecedented speeds and scales. The very technology that promises to simplify tax compliance could also accelerate the pace at which tax-avoidance schemes are developed and executed. Policy makers and tax authorities must stay ahead of the curve, using AI themselves to detect and counteract these schemes, ensuring that the tax system remains fair and equitable for all participants. More than just enhanced vigilance, this should also mean creating adaptive regulatory frameworks that can move at the speed of technology.
As we look to the future, the integration of AI in tax law is not just a possibility; it is a necessity. The tax systems of tomorrow will undoubtedly be even more complex, reflecting and responding to an increasingly intricate global economic landscape. AI offers a pathway to not only manage this complexity but to harness it, ensuring that tax systems are efficient, equitable and responsive to the needs of all stakeholders.
As we grapple with the complexities introduced by change, AI will play a pivotal role in shaping the future of tax law. By transforming how we understand, interpret, and apply tax regulations, AI will help ensure that our tax systems remain robust, fair and capable of meeting the challenges of the modern world.