1994-01-12 - Crypto and taxes

Header Data

From: Hal <hfinney@shell.portal.com>
To: cypherpunks@toad.com
Message Hash: 85373e99b8e77c87a2bff77c11af4d51167d5ed091b563027d66116a54b04ca2
Message ID: <199401120628.WAA02857@jobe.shell.portal.com>
Reply To: N/A
UTC Datetime: 1994-01-12 06:31:55 UTC
Raw Date: Tue, 11 Jan 94 22:31:55 PST

Raw message

From: Hal <hfinney@shell.portal.com>
Date: Tue, 11 Jan 94 22:31:55 PST
To: cypherpunks@toad.com
Subject: Crypto and taxes
Message-ID: <199401120628.WAA02857@jobe.shell.portal.com>
MIME-Version: 1.0
Content-Type: text/plain

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.