From: "Perry E. Metzger" <pmetzger@lehman.com>
Date: Wed, 12 Jan 94 05:12:05 PST
To: Hal <hfinney@shell.portal.com>
Subject: Re: Crypto and taxes
In-Reply-To: <199401120628.WAA02857@jobe.shell.portal.com>
Message-ID: <199401121310.IAA23723@snark>
MIME-Version: 1.0
Content-Type: text/plain



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