From: "Timothy C. May" <tcmay@got.net>
Date: Tue, 12 Nov 1996 15:17:58 -0800 (PST)
To: cypherpunks@toad.com
Subject: Re: Taxation Thought Experiment
In-Reply-To: <3.0.32.19961112152531.00a068b0@rpcp.mit.edu>
Message-ID: <v03007800aeaeb3e87bba@[207.167.93.63]>
MIME-Version: 1.0
Content-Type: text/plain


At 3:25 PM -0500 11/12/96, Joseph M. Reagle Jr. wrote:
>Another thought experiment, comments welcomed:
>
>o TAXES THOUGHT EXPERIMENT
>
> 1) I generate $100 of productivity for my company
> 2) Company is taxed %30, $70 left
> 3) Company pay shareholders and costs, $30 is left
> 4) Company pays me
> 5) I pay 40% in taxes, so $18 left
> 6) With $18 I can buy a $16.82 object (%07 sales tax).
>
>Results:
> 1) I see $16.82 realization from $100 productivity increase.
> * Govt. gets $49.26 of my productivity, or nearly 3 times the amount I get.

Indeed, this is one of several ways of looking at the sickness that faces
us with taxes.

Here's a variant of direct interest to me:

1. Some friends of mine have a good idea for a product and wish to form a
venture to develop it.

2. I sell $200,000 of some asset I own.

3. Tax collectors take 40% of this, leaving me with $120,000 to invest in
the startup venture.

4. There's a high probablility the investment will fail ("venture"
capital). If it fails, and my money has been tied up for several years, I
have not only paid a lot of taxes, but also have lost a normal return. And
my losses, at liquidation, are deductible only against other capital gains.
If I happened to have no other capital gains, I am largely screwed (there
are a few provisions for tax-loss carryforwards, blah blah, but basically
the tax laws are set up to make sure all gains are taxed and make sure
losses are as hard to deduct as possible).

5. In the event that my friends basically succeed, here's the tax situation:

- They owe corporate income taxes of between 35 and 50%, depending.

- Their salaries have been taxed, at rates of 30-45%, typically.

- Any net appreciation in stock value is taxed upon sale at 40%, roughly.

6. It doesn't take a racket scientist to see that investing in a new
business is  increasingly a losing proposition. Add up all the taxes,
factor in the risks, and the answer is clear: why bother?

The crypto-relevance is via crypto anarchy: we need to undermine the tax
system enough that _everyone_, not just us, loses faith in it. (There could
be a "straw that broke the camel's back" effect, if people lose confidence
in the system. Even if most people are _not_ using anonymous digital cash
to hide income, if _enough_ are (and this "enough" could be a visible
minority, visible through recounts of their deeds), then confidence could
be lost. As in Italy and other such places, where compliance rates on taxes
are very low.)

--Tim May

"The government announcement is disastrous," said Jim Bidzos,.."We warned IBM
that the National Security Agency would try to twist their technology."
[NYT, 1996-10-02]
We got computers, we're tapping phone lines, I know that that ain't allowed.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1,257,787-1 | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."