Rethinking taxes and welfare in a cryptocurrency world

Cryptocurrency is coming. It could be Bitcoin, it could be something else, it could be a new trading framework that incorporates many cryptocurrencies. The important thing is that in a decade’s time, governments will have lost the ability to look into their citizens’ wealth and income. This, in turn, means that no taxation or welfare can be based on wealth or income. I argue that the proper way to tackle this problem from an information policy perspective is to shift the taxation base entirely to consumption and therefore shift all income tax to VAT. To keep taxation progressive, and to keep welfare systems functional, you will also need to combine it with a basic unconditional income for every citizen that amounts to some level of minimum sustenance.

The relative early success of Bitcoin in the world of hackers, means that cryptocurrencies will be coming in a decade or so. It’s urgent to rethink taxes and welfare, thinks Swedish Pirate Party leader Rick Falkvinge in this excerpt:

“From a political perspective, this development means that taxation and welfare systems must be rethought and rewired considerably and immediately.

Cryptocurrency brings new challenges to the table. The government can’t see the wealth of an individual, nor their inflow or outflow of funds, not with any amount of applied force.

I know a lot of individuals in government will react with normalcy bias to this statement and say “but we have to!”. It doesn’t matter if you have to. You can’t. Period.

This means that neither taxes nor social support systems can be based on income or wealth. It doesn’t matter if only 5% of the population use cryptocurrency; the tax morale is dependent on a sentiment in the general population that everybody is pulling their own weight and that there is a significant risk associated with trying to get a free ride. When just a tiny portion use cryptocurrency, this breaks down and snowballs.

We’ll arrive at this point within a decade. There is no time for ostriching.

So taxation first, then. Taxes can neither be based on income nor on wealth. All income taxes go out the window, both those that the employer pays and those that the employee pays. (As a positive side effect here, illicit untaxed work ceases to exist by definition.)

This leaves us with a couple of other things we can tax. We can tax land, like they did in the 1800s. But then, isn’t that, like… 1800s? What else is there? We can tax buildings, homes, cars, fuel… all very impopular tax targets. Very much so indeed.

Oh, and we can tax consumption.

The value added tax (VAT) is already one of the largest sources of revenue for the European governments. It is different from a sales tax in that it is applied to every step of the way in the sales chain: assuming we have a VAT of 25%, the original manufacturer adds this tax to his wholesale price. In the next step, the retailer gets this tax back from the government (“inbound VAT”) when buying from the manufacturer, but needs to add 25% tax on his own outgoing price (“outbound VAT”).

This has the nice effect of adding an incentive for every step in the chain to report taxes, as they will want their inbound VAT back.

Using numbers from Finland and France, if we roughly double the VAT, we can abolish all other personal taxes. The tax pressure would be the same, as would the governmental income: it would just be based on consumption and not on income. Usually, these correlate to a high enough degree.

This has two other nice side effects: first the obvious advantage of abolishing personal taxation. No individual going about their daily business needs to have anything to do with the Tax Authority again, ever. It’ll just be a thing for corporations (although the tax is taken from personal consumption, corporations collect it, just like today).

The second advantage is that all the infrastructure and bureaucracy already is in place. We just have to adjust a percentage. Once that is done, a whole lot of bureaucracy (the part with all the other taxes) can just go out the window.

But there are also drawbacks, of course. The major one is that this means taxation is entirely flat. It would hit hard against the least fortunate, which is something we want to avoid. Progressive taxation is generally seen as a good and fair aspect of a functioning society.

The normal way of doing this would be to have a basic tax deduction. But we can’t do that with VAT. We can’t argue that the kiosk clerk should deduct the VAT from the bottle of coke because here, look at this certificate, I still have some part of basic deduction left. So we’ll need to turn it the other way around.

Welfare systems have always been based on a lack of income, a lack of wealth, or both. So when you can’t measure or inspect any of them, what do you do?

I would argue that you only have two options: you can give welfare to nobody or to everybody. Since giving it to nobody isn’t really an option, all that remains is to give it to everybody, completely without condition. The basic unconditional income case. Citizen’s salary.

This kills two birds with one stone, as it also solves the progressive taxation case: a basic unconditional income for every citizen is basically the same thing as a basic tax deduction before taxes start to apply plus a guarantee that you have minimum sustenance. We already have those two anyway.

This also has the nice side effect of killing the need for all other welfare systems, from unemployment benefits to student loans, and the bureaucracy that comes with them.

Some people argue that a citizen’s salary will kill the incentive to work at all. I have previously explained why this is hogwash. Short version: GNU/Linux and Wikipedia.”

7 Comments Rethinking taxes and welfare in a cryptocurrency world

  1. AvatarLori

    Like many left-leaning Americans, my red flags go up at any suggestion of replacing income tax with sales tax. But, as you say, cryptocurrency is coming, and as when David Brin says the sensor nets are coming, I’m inclined to believe it. Package dealing it with a basic income guarantee would of course make it look less like a decisive conservative win. Like you said, this is no time for ostriching…

  2. AvatarTeilo

    Because of bigger VAT, economy would still be very cyclical.

    Actually I like the idea of progressive taxation for valuable assets. We could use RFID technology to mark all valuable physical assets. Also all valuable assets would be in a database. Police could confiscate all assets, that are unmarked.

  3. AvatarThe Doctor

    If you do not mind my asking, Lori, what is your opinion of already high sales taxes in the United States (for example, Washington DC’s 10% sales tax) or multiple sales taxes in municipalities (such as 7% state and 3% local)? Or, for that matter, ‘sin taxes’ on consumables in some states (7% sales tax plus whatever the municipal sales tax is plus 8% on alcohol or tobacco)?

  4. AvatarLori

    The bulk of progressive opinion in the USA is that sales tax is a regressive policy. I’m undecided on that. 10% sounds pretty high. Especially vicious is Alabama where even food is not sales-tax-exempt (at least a few years ago when I heard about it on the now-defunct NOW on PBS).

    I think “sin taxes” are a trap intended for Democrats, who are cowed into the “tax is a dirty word” meme and so end up either doing the Republicans’ dirty work for them re. government downsizing (per Wanniski’s “two Santa Claus” theory), or else use casinos, cigarettes, proposed cannabis ‘decriminalization’ as a revenue cow, making what’s left of the public sector more and more financially dependent on activities that are unpopular, widely disapproved of, etc. If taxes are a punishment for wrongdoing the small government crowd also wins.

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