The Information Policy Case For Flat Tax And Basic Income

[Eugen Leitl]

http://falkvinge.net/2011/05/19/the-information-policy-case-for-flat-tax-and-basic-income/

The Information Policy Case For Flat Tax And Basic Income

Ibve spent the last week experimenting with Bitcoin. Like with any new
technology that fundamentally shifts perspectives, there are both zealots and
luddites, there are Pollyannas and there are Valentis.

I will be returning to deeper analysis in a series of posts. For now, I will
just say that it stands beyond a shadow of a doubt that distributed
cryptocurrency is here to stay. Its use case is so hands-down attractive that
it beats the legacy banking and transaction systems on walk-over on point
after point. What bank holidays? What frozen assets? What taxes? What bank
fees? All these are concepts that become as irrelevant and anachronistic as,
say, the union rules of stablekeepers.

It may not be Bitcoin that comes out as the ultimate cryptocurrency standard,
but that doesnbt matter, just like it doesnbt matter if we use BitTorrent,
OneSwarm or something more resilient for distributed file sharing. Itbs the
file sharing on the conceptual level that is interesting, not BitTorrent. The
same thing goes for distributed cryptocurrency.

The baha!b moment you experience when you transfer a few bitcents to somebody
on the other side of the planet, and they have it instantly, without any
single being knowing that you just sent that money or that the receiver got
it, and with no single being being able to stop you from doing the
transaction with anything less than physical restraint in your home b that
feeling is profound. As are the ramifications. In this post, I will focus on
the political implications, and subsequent posts will go deeper.

The use case is limited by the networking effect for now. You canbt use
Bitcoin for, well, anything practical. But as I said, Ibll be returning to
that.

>From a political perspective, this development means that taxation and
welfare systems must be rethought and rewired considerably and immediately.
Rethinking taxes in a world with cryptocurrency

Cryptocurrency brings new challenges to the table. The government canbt 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 bbut we have to!b. It doesnbt matter if you have to.
You canbt. Period.

This means that neither taxes nor social support systems can be based on
income or wealth. It doesnbt 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.

Webll 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, isnbt that, likeb& 1800s? What else is
there? We can tax buildings, homes, cars, fuelb& 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 (binbound
VATb) when buying from the manufacturer, but needs to add 25% tax on his own
outgoing price (boutbound VATb).

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. Itbll 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
canbt do that with VAT. We canbt 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 webll need to turn it the other
way around.  Rethinking welfare in a cryptocurrency world

Welfare systems have always been based on a lack of income, a lack of wealth,
or both. So when you canbt 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 isnbt really an option, all that
remains is to give it to everybody, completely without condition. The basic
unconditional income case. Citizenbs 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 citizenbs salary will kill the incentive to work at
all. I have previously explained why this is hogwash. Short version:
GNU/Linux and Wikipedia.  Conclusion

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 decadebs time, governments will have lost the
ability to look into their citizensb 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.  MORE ON BITCOIN This is an article on bitcoin. You may
also want to read about why I am putting all of my savings into bitcoin, and
my first thoughts on the subject where I call it The Napster of Banking.