I can agree that cryptography will make some kinds of illegal private transactions easier. What I doubt is that this will happen at a large enough scale to seriously threaten the ability of governments to fund themselves by taxes. Take Perry's example of one person buying a rare, expensive item from another. This might be made easier to do anonymously with ecash. But how much significance will this have taxwise? If these were private individuals involved in a personal swap, chances are no taxes would be paid even under current conditions. I bought a car from my next door neighbor a few months ago. I doubt that he paid income tax on it. And transactions of this magnitude are rare among individuals in a non- business situation. Most of our transactions are done with businesses, generally corporations. Imagine taking $15,000 in cash to buy a new car anonymously. I believe you will find that the car dealers will not cooperate, that government regulations (designed to crack down on drug dealers) will require them to get some ID from you. Digicash would presumably be under the same restrictions. Furthermore, as I argued earlier, it will be much harder for a large business to successfully switch to cash transactions in the hope of evading taxes. A much larger group of people would have to be "in" on the secret, in order to cooperate to prepare the false receipts and books that would be necessary. Any situation like this will be risky and dangerous to maintain. I don't fully understand Duncan's arguments for how taxes can be avoided through being a non-citizen. I gather, though, that this would require me to either move to another country, or to go to work for a company that is in another country. Neither seems likely in the next few years for the majority of citizens. And if this did catch on, presumably this loophole could be closed, so that you were taxed by whatever country you lived in. (A similar situation exists today with respect to state income tax for people who live in one state and work in another. I don't think they are exempt from all state income taxes.) Sandy may be right that self-employed people who get cash payments do widely under-report their income, and no doubt self-employed programmers do the same to some extent. But I'm really not sure why or how a programming contractor or consultant, let alone an employee, will be able to avoid paying taxes once strong crypto is common. Won't the company paying him still want to record those payments on its books, so it can deduct them as business expenses? I believe similar records are used today to verify tax liabilities of paid consultants. Why won't this be true with crypto involved? And for employees, companies are still going to need a social security number, name and address, and they will still submit records to the government showing how much you were paid. I don't see widespread tax evasion in the picture at all. Sure, some smart people may be able to exploit the new technologies and disappear into the cracks. Self-employed information workers may have the most to gain. But the average worker and the average company aren't going to have major new opportunities for tax evasion. The economy will keep plugging along as it always has, and if the government goes down the tubes it won't be because of the advent of strong cryptography. Hal
Hal says:
Take Perry's example of one person buying a rare, expensive item from another. This might be made easier to do anonymously with ecash. But how much significance will this have taxwise? If these were private individuals involved in a personal swap, chances are no taxes would be paid even under current conditions.
I think you misunderstand, Hal. As with most people I've spoken to outside the financial community, you mistake an anonymous banking system for an anonymous payments system. Yes, it is possible that two people might swap lots of cash and valuable items now. However, it is inconvenient to do so, and impossible to conveniently invest the proceeds. What if I want to own 5000 shares of MicroSloth anonymously, order the position liquidated, go to the local cafe, and pay someone with the money that day? With conventional offshore banking, this is difficult if not impossible.
I bought a car from my next door neighbor a few months ago. I doubt that he paid income tax on it. And transactions of this magnitude are rare among individuals in a non- business situation.
That is precisely why he can get away with it -- he knows that since most of his income is declared the fraction that is not will not be noticed. Lets say, however, that he decided to do lots of illicit transactions -- he would suddenly find himself shut out of the banking system. One $2000 check without an explanation will go unnoticed. Dozens will not.
Most of our transactions are done with businesses, generally corporations. Imagine taking $15,000 in cash to buy a new car anonymously. I believe you will find that the car dealers will not cooperate, that government regulations (designed to crack down on drug dealers) will require them to get some ID from you. Digicash would presumably be under the same restrictions.
Of course it would be under the same restrictions, but in all likelyhood none of its users would pay the least bit of attention to them. New car dealers are unlikely to accept digicash -- but used car dealers might if they can get part of their transactions above ground. Cars are an unusual case because of the degree of regulation -- cars must be registered and their provenance is carefully monitored. Consider, instead, dinner. You can go to any restaurant you like in the U.S. and pay with an offshore bank's Visa card and no one will look twice. No one is arguing, by the way, that all the economy will go black. I'm merely noting that whereas right now its hard to lead a normal life entirely in the black economy (you suffer from a myriad of inconveniences), an anonymous offshore banking system that you have free access to changes all that.
Furthermore, as I argued earlier, it will be much harder for a large business to successfully switch to cash transactions in the hope of evading taxes.
Thats certainly the case -- it will likely be another pressure on large businesses to downsize since small flexible enterprises will have an even greater competitive advantage.
Sandy may be right that self-employed people who get cash payments do widely under-report their income, and no doubt self-employed programmers do the same to some extent. But I'm really not sure why or how a programming contractor or consultant, let alone an employee, will be able to avoid paying taxes once strong crypto is common. Won't the company paying him still want to record those payments on its books, so it can deduct them as business expenses?
Perhaps not. Its very common in many large business conducted here in New York in certain seemingly legitimate industries for much of the business to be conducted off the books -- people who will take cash for work are sought after. I will not name the industry in question, but it is one of the few major ones left in the city and it isn't finance. Import/Export companies, which are already a maze of evading companies, would likely be the first to take widespread advantage of digicash systems, followed by small scale information workers and smugglers of various kinds. I have no idea how deeply it might penetrate society -- who can say for sure? -- but I think you are wrong in thinking that tax evasion is as little practiced and as little desired as you apparently do. Perry
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Perry E. Metzger