Crypto and taxes

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.

Hal

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