Tax Policy in a Society of Singularities

This post is part of a special series of posts based on contributions to a conference on ‘The Law between Singularity and Equality’ that took place in Berlin on 31 October/1 November 2025.

The ‘granular turn’ resulting from technological advances that enable the processing of individual cases with unprecedented detail also has fiscal implications. Developments in artificial intelligence and big data analytics, in particular, significantly reduce the cost of personalising the legal system and thus strengthen the conceptual case for a tax system that heavily relies on individual behaviour. 

The implications of these developments can be assessed across two dimensions: From a descriptive perspective, one might question how significant such a shift towards granularity currently is as a decisive factor in shaping tax law and policy. Based on the descriptive or prognostic assessment, one may then inquire from a normative perspective what the promises and challenges of such a development are. 

Although fiscal systems vary significantly, they generally distinguish between two methods of financing goods and services. General taxes, on one side, are compulsory contributions to the overall budget that lack a direct link between the payment and any specific benefit received. They serve as the primary source of funding for public goods and redistribution schemes. Conversely, other levies (fees or charges) differ structurally because they operate on the basis of a transactional logic: payments are made in exchange for access to particular benefits or infrastructure, and the revenue generated is kept in dedicated accounts, earmarked for providing these goods or services. 

These two mechanisms roughly correspond to two fundamental principles of taxation: The ability-to-pay principle, which serves as the primary justification for general taxation, rests on the moral and economic idea that the tax burden should be directly linked to an individual’s income (or, in parallel, a corporation’s profits). This supports progressive taxation, where those with higher incomes pay both absolutely and relatively more. According to this logic, general taxes embody the collective moral decision a society makes regarding the preferred level of equality or inequality. It also involves a deliberate disregard for the actual individual use of publicly provided goods and services when allocating the tax burden. In contrast, the benefit principle requires taxpayers to contribute to the state’s revenue in proportion to the public services they receive. Its transactional logic (‘You pay only for what you get.’) aligns with the typical regressivity of specific levies and fees.

As a factual matter, it could be argued that technological advances supporting a general ‘granular turn’ will act as a catalyst for the levy state: the opportunities to measure taxpayers’ reliance on state services and utilisation of infrastructure in an increasingly granular way will support shifting the provision of goods and services from a general tax basis towards a transactional fee basis supported by the benefit principle. 

Signs for this type of fiscal migration can be found in various countries. One example is the introduction of a metered toll system for heavy duty vehicles on highways in Germany in 2005. Previously, these vehicles had been subject to the general motor vehicle tax, with the revenue flowing into the general budget. The shift introduced a metered toll, where the revenue is now channelled into a special, earmarked reservoir used specifically to finance mobility infrastructure. Another example is the shift in some jurisdictions from lump-sum property-based water taxes or charges to consumption-based fees calculated with the help of smart meters, which comes with the additional benefit of a Pigouvian feature that encourages lower water usage.

Taking such examples as symptoms of a larger trend, and with a view to the advantages that levy-based provision has in many cases (such as the option of incentivising sustainable behaviour), what could be the problems associated with a ‘granular turn’ of this kind in taxation? 

One problem lies in the blind spots of the benefit principle that translate into a difficulty of providing certain goods on a pay-per-use basis: revenue for the provision of genuine public goods such as national security cannot — because of their non-excludable character — be generated on a transactional basis. 

The same applies to redistributive schemes. In practice, the regressivity of fees that undermines redistributive efforts is often mitigated by incorporating an ability-to-pay element into those fees themselves, such as in the form of staggered fees that vary according to income or profits. Although promising from a pragmatic perspective for arguably offering the best of both worlds, the hybrid approach is conceptually flawed insofar as it involves an arguably self-contradictory combination of ability-to-pay features with a fiscal instrument rooted in a benefit logic that requires blindness to the user’s income. 

Another issue with levy-based provision involves ‘adverse Pigouvian effects’: shifting to a transactional system might lead to unintended behavioural outcomes by crowding out other motivations. When behaviour is explicitly priced, the financial calculation can replace intrinsic moral motivations. A certain type of behaviour, then, is no longer perceived as an ethical commitment but as a transactional cost. Pigouvian levies (and taxes) aimed at promoting sustainable behaviour, for example, may backfire by provoking an ‘I pay, therefore I pollute’ response, where addressees believe that by paying the fee they have fulfilled their ethical duties, thus giving them a licence to pollute or consume as they please. 

These issues could in principle be addressed through proper calibration of the context in which levies are introduced and their specific design. Other concerns relate to more fundamental objections: they indicate a slippery slope away from general taxation based on the ability-to-pay principle towards a more fragmented and transactional levy structure. The core problem here lies in internal tensions between the different roles of taxation in a democratic state, which are not solely related to generating a financial basis for providing various types of goods and infrastructure. 

Apart from its revenue-generating role, tax policy and the structure of the tax system also serve an expressive purpose. They convey and uphold collective moral choices about social equality. To the extent that these decisions result from democratic processes, a fiscal shift from general taxation to specific fees and charges fuelled by our increasing technological abilities to ‘personalise’ the tax system may indirectly compromise democratic legitimacy and parliament’s budgetary sovereignty – even if they are compatible with constitutional provisions that limit the choice and design of fiscal instruments in many legal systems. 

Parliament’s budgetary sovereignty, which includes control over the use of funds in the general budget and is a central element in many fiscal systems, is compromised by the expanding commitment of financial resources into earmarked revenue reservoirs linked to specific levies. As more funds become confined within these separate revenue streams, parliament’s authority is less effective in that it covers only a reduced amount of revenue. From this perspective, a granular shift towards fees and levies also impacts the separation and balance of legislative versus executive powers — although one may argue that the restriction of budgetary authority typically has its roots in a decision by parliament itself, for example when initially agreeing to the exclusion of heavy duty vehicles from the general motor vehicle tax and the introduction of a metered toll system instead. Whether such shifts are desirable overall is, of course, a political decision (with constitutional relevance in some legal systems). 

Admittedly, a ‘granular turn’ in the tax system does not have to take this particular form. It is also conceivable to strengthen personalised features that have traditionally characterised general taxes, especially the income tax, which considers individual circumstances in various ways. The debate regarding the optimal level of personalisation has traditionally focused on the costs associated with increased complexity. An increase in this type of personalisation or granularity within the domain of general taxes clearly has less impact on the interaction between the ability-to-pay principle and the benefit principle; however, it is also less aligned with the aspirations linked to a new era of comprehensive personalisation of the law driven by technological progress.

Johanna Stark is a Senior Research Fellow at the Max Planck Institute for Tax Law and Public Finance.