From: Duncan Frissell <frissell@panix.com>
Date: Sun, 16 Jan 94 22:23:17 PST
To: CYPHERPUNKS@toad.com
Subject: Crypto and Taxes
Message-ID: <199401170622.AA08724@panix.com>
MIME-Version: 1.0
Content-Type: text/plain



H>I agree with the last point about legality helping, but I don't 
H>understand why most transactions will become legal in the future.  I
H>thought we were talking about ways to evade laws via cryptography.  

Legality is a matter of time and place.  The nets let us pick our time and 
place.  A non-economic example:

It is a crime for someone in Germany to produce, possess, or transfer 
"Nazi Material."  It is legal for someone in the US to produce, possess, 
or transfer "Nazi Material" (substitute other jurisdictions and other 
"material" to taste).  If I am in Germany and I download "Nazi Material" 
from the US, no crime has occurred in the US.  A crime may have occurred 
in Germany but discovery and proof will be very difficult.  Encryption 
will help here.  Info contraband (which also include things like 
"unregistered securities" or "American Movies in France") can be produced 
and accumulated where legal and acquired anywhere else.  Production and 
distribution remain legal.  In some cases the possession may be illegal 
but in others (unregistered securities) it won't.

H>My assumption is that governments would actually crack down when faced
H>with lost revenue, similar to what was described as happening in Italy:

If 90% of GWP is on the nets, cracking down will be difficult because 
there is nothing to seize.  What is happening of economic value on a 
private, encrypted net?  Who knows or can know?  Enterprise networks 
(properly designed) will only respond to their owners.  No one else can 
have a say.

Governments will be reduced to taxing the remaining physical parts of the 
economy.  Meanwhile, people will be learning what it's like to live in a 
free society for part of the time (on the nets).  They will not put up 
with restrictions in their physical life.  They will have assets and 
attitudes that they can apply to freeing the rest of their lives.  When 
people turn away from obedience, governments disappear (see the DDR) or at 
least weaken.

God fights on the side with the heaviest artillery.  Unless you can 
suggest some sort of artillery that governments could use over fiber optic 
cable, they will be disarmed in that environment.

In the early 80's when Continental Illinois Bank was going bankrupt, these 
fun telexes used to arrive every day from Tokyo.  "CANCEL OUR OVERNIGHT 
DEPOSIT OF $10,000,000.00 EFFECTIVE TODAY".  Suppose that the Feds had 
sought to seize this money (as governments have in the past).  How do you 
seize an overnight deposit?  It is gone when cancelled.  Simple 
bookkeeping entry in Tokyo.  Similar problems everywhere in cyberspace.

H>Is this the key, people working for virtual businesses?  No one knows 
H>the true name of anybody else, so no one is afraid of being caught?  I
H>am still skeptical.  A whole nation of people tele-commutes to work for 
H>companies whose name they don't know, with co-workers protected by
H>aliases, all so they can be paid in cash for their services.  I find
H>this notion implausible in the extreme.  Joe and Jane Sixpack aren't
H>going to want to work for a boss who wears a mask.

They can know each other.  They can be paid in digital drafts (checks) 
drawn on the First Internet Bank.  Cash not needed.  Their *nationality* 
need not be known and will be irrelevent.  Taxation is geographically 
based.    

H>Duncan> What if the MUD/MOO exists as a set of cooperative processes 
H>Duncan> spread around the globe. 

H>This may be uncertain now, but I don't see why it would always remain
H>that way.  There is nothing to stop governments from declaring, say, 
H>that residents in their boundaries are subject to their taxation, or
H>that their citizens are subject to their taxes regardless of where they
H>do business.

Try to enforce this requirement.  In any case, foreigners will not be 
covered which will give them a real competitive advantage if residents of 
the high tax nations don't "cheat."

In practice even in our current physical world, small businesses only 
report 48% of their revenue, the self employed have the lowest rates of 
individual tax compliance, and 61% of expat Americans do not file US tax 
returns.  When almost everyone is self-employed or a small business and 
when regulators can be excluded from transactions by the simple 
application of crypto technology, compliance will suffer.

H>More interesting from the crypto perspective would be the case where 
H>the business in the MUD refuses to disclose its true nationality or 
H>location.  There again, though, I think running an anonymous corporation
H>will pose many practical problems.

It can admit that its location is Grand Cayman.  After a short period of 
social development time, it will be able to admit that its location is on 
a street in a MUD commercial center.  Virtual communities can be as real 
as a skyscraper (an artificial environment.)

H>To sum up, I am willing to accept that people will be eager to avoid
H>paying taxes, but I still doubt that cryptography will bring down the
H>United States government.  Particularly when we consider the lack of
H>sophistication (both financial and technical) of the vast middle class
H>who provide the bulk of tax receipts, I think that virtual 
H>corporations and offshore tax havens are not likely to become widespread
H>enough to seriously endanger the government.

Once we get a better interface...

People will be drawn to the nets for the games and the thrills (no 
censorship).  They will start by buying legal and forbidden items there.  
Some entrepreneurs will locate there.  Any government restrictions on info 
will be market opportunities.  Porno almost everywhere, the Asian WSJ in 
Singapore, non-government TV in India, US movies in France, etc.

The last vestiges of control over money and investments will die.  These 
sorts of restrictions create market opportunities that traders can 
arbitrage.  The nets almost eliminate transaction costs.  Government regs 
on banks, stock markets, telecoms companies, etc. will end.

Once restrictions on types of info or types of money are smashed, the now 
flush markets on the nets will start to arbitrage the tax structures of 
nations.  If a transaction costs more because it occurs in a particular 
jurisdiction and is taxed, people will be able to make money by 
transferring the transaction (or part of it) to a non-taxed area (the 
nets).

Why hasn't this been done as much before?  Transaction/transportation 
costs.

Duncan Frissell

"Good will and artillery will get you more than good will alone, anytime."

-- Artillery officer's saying
--- WinQwk 2.0b#1165