From: hfinney@shell.portal.com
Date: Sun, 16 Jan 94 19:18:49 PST
To: cypherpunks@toad.com
Subject: Crypto and Taxes
Message-ID: <199401170317.TAA24167@jobe.shell.portal.com>
MIME-Version: 1.0
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I'll just briefly recap some of the points:

Hal> I don't agree with the extreme position that cryptography will lead to
Hal> the failure of the income tax and the destruction of the government.

Perry> No one is arguing, by the way, that all the economy will go black. I'm
Perry> merely noting that whereas right now its hard to lead a normal life
Perry> entirely in the black economy (you suffer from a myriad of
Perry> inconveniences), an anonymous offshore banking system that you have
Perry> free access to changes all that.

It's not clear to what extent Perry and I disagree here.  I agree that some
people will exploit the new opportunities.  My doubt is whether the vast
silent majority on which the government depends for its taxation revenues
will do so.  I read the other day that the government gets something like
70-80% of its tax revenues from people making less than $35,000 a year.
These people are not financially sophisticated.

Duncan> In traditional Black Markets, the transactions are illegal.  In future 
Duncan> Black Markets on the nets, most of the transactions will be legal.  
Duncan> Legality certainly encourages transactions relative to illegality.

I agree with the last point about legality helping, but I don't understand
why most transactions will become legal in the future.  I thought we were
talking about ways to evade laws via cryptography.  My assumption is that
governments would actually crack down when faced with lost revenue, similar
to what was described as happening in Italy:

??> 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).

So I'd think even more transactions would be illegal in the future.  The main
issue, I thought, was whether people would widely risk violating these laws
in order to save on their taxes, and whether cryptography would let them do
so with impunity.

Duncan> You left out a few information purchases: education, much of medicine, 
Duncan> all of financial services, design, marketing, supervision, and
Duncan> management. 

Duncan is pointing out that more of the economy is in the form of information
than I was counting.  Even if we count these things as information, though,
the question is still to what extent the providers of these services will be
able to escape taxation.  Take medicine as an example.  I should be able to
go to a doctor today and pay him cash, off the books, at a greatly reduced
rate, for my medical services.  Yet no doctor I've ever seen, and I've probably
seen twenty or thirty in my lifetime, has ever suggested that.  I don't see
how cryptography will change this.

Duncan> Once the interface is good enough, virtual offices with full workgroup 
Duncan> interaction built of pure information will spring up and the
Duncan> "information" component of much of what we think of as physical work
Duncan> will become apparent.

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

Duncan> If you wander down the shopping street of a future MUD/MOO and you
Duncan> buy or sell things, what nation has jurisdiction for tax purposes.
Duncan> What if the MUD/MOO exists as a set of cooperative processes spread
Duncan> around the globe. 

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

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

Sandy> You don't need to
Sandy> *own* a car, to have the *use* of a car.  Imagine leasing a car
Sandy> and using your cyberspace bank digital checks, digital money or
Sandy> credit card to pay the monthly rent.  No audit trail, and no
Sandy> asset to be seized.  Similar techniques can be used for virtually
Sandy> all of your assets.

How does this bear on the issue of government collapse due to failure of
income tax?  This example actually strikes me as an unobjectionable use
of cryptography, one in which individual privacy is protected.  The only
tax consequence I see is possible avoidance of sales tax, which is col-
lected only at the state level and not the national level.  Sandy's
example shows that car rental agencies might be able to operate on a cash
basis, like the local fried chicken outlet.  I don't see how this brings
down the government.

Sandy> I think Hal hasn't been reading Duncan or my posts very closely.
Sandy> Here's a hint:  A Cayman Islands corporation is a non-US citizen
Sandy> even if it is owned by an American.

Sandy is replying to my question about moving out of the country to
avoid taxes.  I gather that he is suggesting that people could set up
corporations in the Cayman Islands and somehow divert some of their
income to them, so that the income would be shielded from taxes.

Can this be done today?  Can I go to my boss and ask him to start
sending my salary to this numbered bank account in the Cayman Islands,
and to stop troubling the U.S. government with information about how
much he is paying me?  Sounds great.  Why doesn't everybody do it,
and why will everybody start doing it in the future?


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

(In response to John Kreznar's comments about my use of the term "cheating"
to refer to violation of tax laws, I accept the thrust of his comments
but I'll just observe that while preparing a false set of books may be
justified and in some circumstances even honorable, it is not honest.)

Hal

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