Cryptocurrency & sustainable taxation

[mpfrank]

New blog post: http://minetopics.blogspot.com/2011/07/cryptocurrency-and-sustainable-taxation.html

Comments (either here or there) are welcomed.

[mouse]

Tell me if I have this right.

Your going to remove income tax, and add it to an excise tax.

1. your raw materials are going to cost a LOT more than imported materials.
2. Do you lift this tax burden for exported goods? Or are you killing all your countries export industries. If you are lifting the tax on exports, why can other countries get the goods cheaper then your own? After all, you produced them.
3. Its totally unfair. Take an unemployed person for example. Currently his income tax is zero. But your going to add the income tax of the countries wealthiest people into the basic cost of goods, so that his bread and milk costs will go way up? Thats going to benefit the high income earners greatly.

[kiba]

Want tax money? Sell your security/health/retirement fund management/water service or whatever the government have a monopoly on.

But I guess nobody wants to do that because it will mean listening to demanding customers.

[TierNolan]

The vast majority of people will still be assessable for income tax.  If you work for someone else, they will be required to report your income.

There could be a rule that when you buy something, you could get a 5% tax rebate, and the sellers pays 20% sales tax.  When a buyer claims the 5% rebate, bu submitting the receipt, the tax office can match it against the seller's sales tax report.  The effect is to conscript the general population as tax reporters.

It would make it more difficult to assess income for people who can do their work entirely online.  A webcomic author could probably get away with claiming that he has no income, if he is paid in bitcoins.  However, putting "income: zero"  on the tax form is likely to get him investigated.  If he sells physical books, then that is something he can't hide.  Also, he would have to only buy/sell with bitcoins, any link to the business to the real world would allow a tax audit.

Having said that, if you make it harder to tax people, then the government taxes less. 

[Vitalik Buterin]

The vast majority of people will still be assessable for income tax.  If you work for someone else, they will be required to report your income.

1. I have done work for people in exchange for Bitcoin already. I don't see any of my employers reporting anything to any tax agency. Of course, the money I'm making is far too small to matter, but if a couple more security precautions (eg. public key encrypting messages) are added it would be quite possible for online workers and employers to evade government taxation entirely.
2. So you want a system where people who make money by working for a physical employer can be taxed while people who make money off of money (eg. speculators) can avoid taxes untraceably?

[Fakeman]

3. Its totally unfair. Take an unemployed person for example. Currently his income tax is zero. But your going to add the income tax of the countries wealthiest people into the basic cost of goods, so that his bread and milk costs will go way up? Thats going to benefit the high income earners greatly.

In many countries I believe income taxes were introduced as temporary measures during wartime, prior to that I think governments got a lot more of their revenue from import tariffs. I'm not sure I follow how a consumption tax is inherently more unfair. For a different example, say someone inherits enough gold to more than cover a comfortable existence for his entire life. If progressive income taxes are the only government revenue collection, then this person could easily pay little or no taxes his entire life and never have to work, assuming he sells off a small enough amount every year to stay in a low tax bracket (over the table at least). The rest of his vast savings don't count as income until he sells them. Under a pure consumption tax model he would at least pay something.

[JoelKatz]

Encouraging inefficient conservation is a downside of such a tax, not an upside. Saving large stocks of resources at huge expense in economic efficiency when those resources become obsolete is not a benefit to anyone.

The expected future value of resources encourages the proper amount of conservation. If a resource is expected to be more valuable in the future because we will need it more then, it will be conserved out of its owner's self-interest. However, a tax like this will encourage conserving a resource even when doing so is wasteful and inefficient.

You want a tax that distorts the economy as little as possible and creates as few perverse incentives as possible.

[J180]

2. So you want a system where people who make money by working for a physical employer can be taxed while people who make money off of money (eg. speculators) can avoid taxes untraceably?

That seems to be the main issue which will defeat income tax, such a great portion of society would have untraceable income that it wouldn't be feasible to make everyone else pay it. You might be interested in this passage from Future Imperfect, describing how it will effect more then just speculators.

Freedom of speech is something most people, at least in this country, favor. But strong privacy will also reduce the power of government in less obviously desirable ways. Activities that occur entirely in cyberspace will be invisible to outsiders – including ones working for the Federal government. It is hard to tax or regulate things you cannot see.

If I earn money selling services in cyberspace and spend it buying goods in realspace, the government can tax my spending. If I earn money selling goods in realspace and spend it buying services in cyberspace, they can tax my income. But if I earn money in cyberspace and spend it in cyberspace they cannot observe either income or expenditure and so will have nothing to tax.

Similarly for regulation. I am, currently, a law professor but not a member of the State Bar of California, making it illegal for me to sell certain sorts of legal services in California. Suppose I wanted to do so anyway. If I do it as David D. Friedman I am likely to get in trouble. But if I do it as Legal Eagle Online, taking care to keep the true name – the real-world identity – of Legal Eagle a secret, there is not much the State Bar can do about it.

In order to sell my legal services I have to persuade someone to buy them. I cannot do that by pointing potential customers to my books and articles because they were all published under my own name. What I can do is to start by giving advice for free and then, when the recipients find that the advice is good – perhaps by checking it against the advice of their current lawyers – raise my price. Thus over time I establish an online reputation for an online identity guaranteed by my digital signature.

Legal advice is one example; the argument is a general one. Once strong privacy is well established, governmental regulation of information services can no longer be enforced. Governments may still attempt to maintain the quality of professional services by certifying professionals – providing information as to who they believe is competent. But it will no longer be possible to force customers to act on that information – to legally forbid them from using uncertified providers, as they currently are legally forbidden to use unlicensed doctors or lawyers who have not passed the Bar.

I even expect it to extend to physical goods eventually. This post has people working on a decentralized courier system: http://forum.bitcoin.org/index.php?topic=6279.0

[hugolp]

Encouraging inefficient conservation is a downside of such a tax, not an upside. Saving large stocks of resources at huge expense in economic efficiency when those resources become obsolete is not a benefit to anyone.

The expected future value of resources encourages the proper amount of conservation. If a resource is expected to be more valuable in the future because we will need it more then, it will be conserved out of its owner's self-interest. However, a tax like this will encourage conserving a resource even when doing so is wasteful and inefficient.

You want a tax that distorts the economy as little as possible and creates as few perverse incentives as possible.

Completely agree.

If you need to tax (big if) probably the best way is a mix of corporate tax, tariffs and consumption tax. The balance between tariffs and consumption tax is important to not favour too much the internal products (because you become inefficient and products more expensive) or not favour too much external production (you can cause problems of unemployment, although less than what people generally think it does, and expose yourself too much to crisis in foreign countries).

If Bitcoin goes big it will probably eliminate the income tax, because it will be too dificult to collect.

[TierNolan]

1. I have done work for people in exchange for Bitcoin already. I don't see any of my employers reporting anything to any tax agency. Of course, the money I'm making is far too small to matter, but if a couple more security precautions (eg. public key encrypting messages) are added it would be quite possible for online workers and employers to evade government taxation entirely.

If your main source of income is in bitcoins, and you live in a mansion, the government will ask questions.

The point is that they might create an incentive for you to be reported.  Your clients get a tax refund if they report the transaction.  Effectively, they get a cut of the tax take from you for acting as tax collector.

They may not even really realise that it is a problem.  They would buy your service and then report it as an expense when doing their taxes.

2. So you want a system where people who make money by working for a physical employer can be taxed while people who make money off of money (eg. speculators) can avoid taxes untraceably?

It wasn't about wanting anything.  I was just pointing out that going completely dark isn't really an option for anyone.  

However, that doesn't mean that people couldn't have a part of their income off the books.  The general public are not likely to stop paying income tax as a bloc.

[blogospheroid]

New blog post: http://minetopics.blogspot.com/2011/07/cryptocurrency-and-sustainable-taxation.html

Comments (either here or there) are welcomed.

Land value cannot be hidden. How about taxing land value?

[TierNolan]

Land value cannot be hidden. How about taxing land value?

That is often the suggestion as a way to tax in an anonymous world. 

In theory, land value taxes don't cause economic distortions.  The initial creation of the land value tax system represents a transfer of wealth to the state, since it takes ownership of the land underlying every property, but that would be once off matched with a dropping of all other taxes.

In practice, the tax is likely to be assessed on the value of the property itself, not on the underlying land.  Property taxes definitely do cause distortions and create a disincentive to improve land.

For land value taxes to work, they need to be based on easy to enforce and clear rules.  Vague rules mean that people can spend money trying to get exemptions for themselves.

For example, you could break the country up into squares and work out the average property value in each square.  Each person's land value would be calculated as (land area)*(average property value in the square)*k.  K would be a constant that translates property value into land value.  K = 1/3 would probably be reasonable.  K should be the same nationwide.  Generally, high value land will have high value buildings, so on the average the 2 should be proportional.

The key to zero distortions is not getting the land value exactly right, it is creating a rule where no matter what the owner does, they pay the same tax.  If doing certain things results in less tax being paid, then that distorts in that direction.

Ideally, the tax rate should be constant, otherwise, people would lobby to try to get the rate changed, which also creates distortions.

[blogospheroid]

Land value cannot be hidden. How about taxing land value?

That is often the suggestion as a way to tax in an anonymous world. 

In theory, land value taxes don't cause economic distortions.  The initial creation of the land value tax system represents a transfer of wealth to the state, since it takes ownership of the land underlying every property, but that would be once off matched with a dropping of all other taxes.

In practice, the tax is likely to be assessed on the value of the property itself, not on the underlying land.  Property taxes definitely do cause distortions and create a disincentive to improve land.

For land value taxes to work, they need to be based on easy to enforce and clear rules.  Vague rules mean that people can spend money trying to get exemptions for themselves.

For example, you could break the country up into squares and work out the average property value in each square.  Each person's land value would be calculated as (land area)*(average property value in the square)*k.  K would be a constant that translates property value into land value.  K = 1/3 would probably be reasonable.  K should be the same nationwide.  Generally, high value land will have high value buildings, so on the average the 2 should be proportional.

The key to zero distortions is not getting the land value exactly right, it is creating a rule where no matter what the owner does, they pay the same tax.  If doing certain things results in less tax being paid, then that distorts in that direction.

Ideally, the tax rate should be constant, otherwise, people would lobby to try to get the rate changed, which also creates distortions.

Nothing that complicated is required. Everyone can self assess their property value and for removing the structure value, one could make insurance compulsory. In theory everyone would like minimal payouts, so they might insure their property only for stray events like getting damaged by a tidal wave, instead of a more frequent event like a fire, but that doesn't matter. What matters is that someone with a motive to under-assess the structure's value, the insurer, is agreeing on the structure value.

[TierNolan]

Nothing that complicated is required. Everyone can self assess their property value and for removing the structure value, one could make insurance compulsory. In theory everyone would like minimal payouts, so they might insure their property only for stray events like getting damaged by a tidal wave, instead of a more frequent event like a fire, but that doesn't matter. What matters is that someone with a motive to under-assess the structure's value, the insurer, is agreeing on the structure value.

Interesting idea.  So, everyone states the buildings value and total property value for their property, in their tax returns.

Anyone (or maybe just the government) can buy the property from them at their stated total property value.  This would prevent understating of the property value.

The max that can be paid out in an insurance claim is the buildings value.  This is less clear cut.  A business could self insure for a portion, or all, of its insurance and then understate the buildings value.

One problem is that with high land value taxes, the property value would be equal to the buildings value, since the land tax would eliminate the value of the underlying property.

[qbg]

3. Its totally unfair. Take an unemployed person for example. Currently his income tax is zero. But your going to add the income tax of the countries wealthiest people into the basic cost of goods, so that his bread and milk costs will go way up? Thats going to benefit the high income earners greatly.

A simple solution to this is to give every citizen an equal salary (in addition to what ever they get elsewhere).

[JoelKatz]

Land value cannot be hidden. How about taxing land value?

That causes horrible economic inefficiency as it massively rewards any processes that requires little or cheap land over processes that requires more or expensive land. You want to see the family farm go away forever, that's the way to get rid of it.

It also makes holding resources much more expensive than consuming them. So this causes the reverse of the problem the tax suggestion in the original post caused. People will rush to get rid of oil, gas, coal, and other resources because the consumption will be free but the keeping will be taxed.

[Anonymous]

There's no such thing as sustainable taxation. As the government continues to grow its odious debt, it will require more funding. A government never remains small but will continue to absolute tyranny or implosive failure.

[blogospheroid]

That causes horrible economic inefficiency as it massively rewards any processes that requires little or cheap land over processes that requires more or expensive land. You want to see the family farm go away forever, that's the way to get rid of it.

Two points Joel.

Horrible inefficiency is only from the perspective of today's standards of taxation and valuation. There are many advantages of land taxation that outweigh the cost of the extremely intrusive mechanisms and the deadweight loss that income and excise taxes require and have. In a society with a large land tax, every process will be geared towards maximum efficient usage of natural land and urban land.

Taxation has a very long history as a practice, and the standard way of handling the problem mentioned (the family farm, the homestead) is a standard deduction.

It also makes holding resources much more expensive than consuming them. So this causes the reverse of the problem the tax suggestion in the original post caused. People will rush to get rid of oil, gas, coal, and other resources because the consumption will be free but the keeping will be taxed.

People will only get rid of resources that they cannot utilise. Also, if people got rid of land and resources, then the price of natural resources fall, which means more of the wealth share shifts towards labour and capital. (The georgists utilise a 3 factor model - land, labour and  capital). Higher wages and higher return to capital is what is expected by development.

In the georgist model, the wages in a society  are set by the productivity of the unowned land at the margin. As the marginal land starts becoming more and more productive, wages rise. However, if any valuable land is allowed to remain unused (In a modern sense, you might say the title is given without a sufficient land tax being applied to ensure usage) , then the wages in that society fall.

[blogospheroid]

Interesting idea.  So, everyone states the buildings value and total property value for their property, in their tax returns.

Anyone (or maybe just the government) can buy the property from them at their stated total property value.  This would prevent understating of the property value.

Yes, an open auction concept is pretty much implicit in a land tax. People assess their property values and if they understate it, someone just buys the property.

The max that can be paid out in an insurance claim is the buildings value.  This is less clear cut.  A business could self insure for a portion, or all, of its insurance and then understate the buildings value.

One problem is that with high land value taxes, the property value would be equal to the buildings value, since the land tax would eliminate the value of the underlying property.

With high land value taxes, the usage value of the property will not go away. The big city central district will still be a place where businesses and people will want to be in. All that changes is to whom the rent goes to. Right now it goes to the banks in the form of interest for home/commercial loans. In a world with bitcoin and land taxes, it will go to the local government.

[JoelKatz]

Horrible inefficiency is only from the perspective of today's standards of taxation and valuation. There are many advantages of land taxation that outweigh the cost of the extremely intrusive mechanisms and the deadweight loss that income and excise taxes require and have. In a society with a large land tax, every process will be geared towards maximum efficient usage of natural land and urban land.

I don't understand why it will be efficient. It seems to me that it will be horribly inefficient. If I can half my taxes by using half as much land, won't I do that even if it's quite inefficient?

Taxation has a very long history as a practice, and the standard way of handling the problem mentioned (the family farm, the homestead) is a standard deduction.

You start making those things tax free and your rate will have to be extremely high. That will mean the harm you do to everything else will be even higher.

It also makes holding resources much more expensive than consuming them. So this causes the reverse of the problem the tax suggestion in the original post caused. People will rush to get rid of oil, gas, coal, and other resources because the consumption will be free but the keeping will be taxed.

People will only get rid of resources that they cannot utilise. Also, if people got rid of land and resources, then the price of natural resources fall, which means more of the wealth share shifts towards labour and capital. (The georgists utilise a 3 factor model - land, labour and  capital). Higher wages and higher return to capital is what is expected by development.

Which means the tax rate has to go up even more, creating even more inefficiencies in land use.

You want taxes that don't distort economic incentives.