Public key encryption, income tax and government

[nobody at soda.berkeley.edu]

Hal Finney put out an excellent posting on why digicash and such are not
likely to undercut the tax system.  While a lot of what he says is valid, I
would like to throw in another data point.

You see, my wife is Italian, and I've spent quite a bit of time hanging out
with the in-laws, seeing how they live and how their society works.
Italy's underground economy is estimated at being 30% or more of the total
GDP.  It is a very cash-based economy, obviously.  It is also a country
where, IMHO, standards for honesty are lower than in the US and a certain
amount of cleverness in avoiding things like taxes earns respect.  Any
Italian will tell you with pride that Italians do not follow rules.

Italian merchants are required by law to produce receipts for every
transaction.  In fact, you as a customer may be required to produce the
receipt on demand and will be fined if you do not have it.  Nonetheless, if
you do not insist on a receipt for many purchases -- even for very
expensive things -- it has a good chance of not being produced.  If you do
insist, the price may suddenly increase.  Tax evasion at the retail level
is widespread.

> Suppose I walk into IBM today and offer to go to work as a programmer,
> for 10% less than they would normally pay me, as long as they pay me
> "off the books", and pass on to me in cash the amount they would
> normally have to pay to the government in payroll taxes.  Sounds like a
> win-win situation, right?  Both IBM and I save money.  But naturally
> IBM won't agree to this.

The only taxes that are sure to be paid are wage taxes for normal
employees.  Right?  Well...for normal work, yes.  My brother-in-law works
in a furniture factory that, like all the rest of them, does a lot of its
production off the books.  As a result, much of his work is off the books
too.  This is how Italians make ends meet in a country with (relative to
us) low salaries and high prices.  There is a word for it -- arrangarsi --
"to arrange oneself".  Tax evasion at the manufacturing/wholesale levels is
widespread.

The official response to this is a good study in governmental desperation.
Customers are fined for leaving businesses without a receipt.  Your car may
be stopped and searched for undocumented merchandise at any time.  Imputed
income taxes for self-employed people are at ridiculous levels (i.e. a
large degree of evasion is assumed).  Taxes are levied on everything (car
radios, the width of your driveway, electric lighters for gas stoves).  I
am told that Italians were, at one time, forbidden to possess foreign bank
accounts; this rule is not sustainable under the European Community, of
course.

And none of the above is working very well.  As long as Italians believe
that it is their right to skip out on their taxes (while, of course,
demanding extensive benefits from the government) the situation will
continue.

I guess my point here is that one should not be too quick to assume that
this sort of situation could not arise in the US.  Cryptography and digital
cash may not, in and of themselves, bring down the tax system.  But if
Americans decide that they have had enough of it, severe problems could
arise with or without such tools; they would only make it easier.  Tax
evasion rates are low (relatively) in the US because people here are more
inclined to follow the rules, and because most people seem to believe that
you can't get something for nothing.  That is a much more powerful force
than any repressive governmental action.