Truth, Justice, and the Waco Way

Events like Waco and the Persian Gulf War, in which an
authoritarian superpower obliterates a mostly harmless and
largely defenseless group of people, translate with relative ease
to the cyberspacial realm.

Seems like a valid Cypherpunks topic to me, so I will take a
crack at responding to the following message

L. Todd Masco <cactus@bb.com> writes:

 > Am I the only one that's struck by the similarity between
 > the propaganda about the Waco massacre and the propaganda
 > preceding the Persion Gulf massacre?

Not at all.  We should remember Herbert's Two Laws here.

       1.  All governments lie.
       2.  If you think you have found a counterexample,
           please reread law number one.

Also worth remembering is the old saying that "a liar who lies
one hundred percent of the time is unlikely to be a successful
liar."

The trick, therefore, is learning to separate the lies from the
truth in a mixture of both.

The quintessential lie from the Persian Gulf War was of course
the memorable "baby incubator" story, recited tearfully on the
floor of the Congress by a supposedly uninvolved eyewitness who
later was revealed to be the daughter of the Kuwaiti ambassador.
The alleged events, which never happened, turned the tide in
Congress with regard to support for the war.

Of course lies abounded in the Waco case as well, with Koresh
being portrayed as a heavily armed lunatic yearning to fulfill
Biblical prophecy by perishing in battle with all his followers.
In reality, they simply wished to live their lives and be left
alone.

The pitfall here, which is to be avoided, is to start
characterizing every negative thing said about the folks in Waco
or Iraq as false, or to start suggesting that negative comments
are a ploy to absolve government of all responsibility for what
took place.  Some of the negative things said in both these cases
were certainly truthful.

For instance, political opponents of Saddam Hussein in Iraq
certainly had a markedly shortened life expectancy, and the
Branch Davidians certainly took a Biblical fire and brimstone
approach towards signs of independent thought or action in their
offspring.  Not a reason for lots of people to be killed, but not
a reason to recommend their canonization either.

The lesson to be learned here is that societies based on a
diffuse "Web of Trust" organization are far less dangerous than
those based on a powerful centralized authority.  A powerful
centralized authority inevitably devolves into interacting with
its subjects using the protocol...

           Do What We Say Or We'll Kill You!

Or in its more tasteful two-part form...

           1.  Do What We Say.
           2.  You're Under Arrest, And If You Resist,
               We'll Kill You.

At that point, Wars, Wacos, Encryption Bans, and BBS Porno Show
trials lurk just around the corner.

-- 
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $

-----BEGIN PGP SIGNED MESSAGE-----

In Message-Id: <199407312314.QAA16264@netcom4.netcom.com>, Mike Duvos
wrote:

> No personal attack intended.  I am a strong supporter of
> egalitarian societies with strong social safety nets, and think
> that youth emancipation will likely be the next big civil rights
> movement in this country.  I am also willing to pay high taxes in
> order to feel secure that all citizen-units are suitably housed,
> well-fed, and taken care of.  This is entirely self-serving on my
> part, since it cuts down on social unrest and street crime.

Yet in the present message he observes that

> The lesson to be learned here is that societies based on a
> diffuse "Web of Trust" organization are far less dangerous than
> those based on a powerful centralized authority.  A powerful
> centralized authority inevitably devolves into interacting with
> its subjects using the protocol...

>            Do What We Say Or We'll Kill You!

> Or in its more tasteful two-part form...

>            1.  Do What We Say.
>            2.  You're Under Arrest, And If You Resist,
>                We'll Kill You.

> At that point, Wars, Wacos, Encryption Bans, and BBS Porno Show
> trials lurk just around the corner.

Mike Duvos, how I wish I had the time to try to understand how you
reconcile these seemingly incompatible sentiments!

How can you achieve ``egalitarian societies with strong social safety
nets'' without using ``powerful centralized authority''?  As a proponent
of ``high taxes'', how can you also favor strong cryptography?  Do you
doubt that expropriating ``high taxes'' from your neighbor will be made
more difficult in a world with strong cryptography?  In view of the
natural diversity among people, how can you achieve an ``egalitarian
society'' without someone who says ``Do What We Say Or We'll Kill
You!''?

	John E. Kreznar		| Relations among people to be by
	jkreznar@ininx.com	| mutual consent, or not at all.

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jkreznar@ininx.com (John E. Kreznar) asks:

 > Mike Duvos, how I wish I had the time to try to understand
 > how you reconcile these seemingly incompatible sentiments!

 > How can you achieve ``egalitarian societies with strong
 > social safety nets'' without using ``powerful centralized
 > authority''? As a proponent of ``high taxes'', how can you
 > also favor strong cryptography?  Do you doubt that
 > expropriating ``high taxes'' from your neighbor will be made
 > more difficult in a world with strong cryptography?  In
 > view of the natural diversity among people, how can you
 > achieve an ``egalitarian society'' without someone who says
 >``Do What We Say Or We'll Kill You!''?

Excellent questions!

I view society as a collection of services provided to
individuals. Things like education, housing, medical care, food,
legal services, locating appropriate employment, and others.  To
the extent that these services are provided in an efficient
manner at a reasonable price, citizens live well.

I also think these services should be provided by the private
sector and not by any centralized government.  In fact, I think
the centralized government should be as small as possible and
reduced primarily to ceremonial functions.

An egalitarian society can then be achieved by simply not making
certain groups of people, like the young, exceptions to the laws
which protect everyone else, and giving them equal access to the
courts and other social institutions.  Egalitarianism should
always be approached by providing "equality of opportunity" and
never by legislating "equality of result."

Taxation should be small, uniform, and applied to transactions
and never to the earnings of individuals.  Income tax is not
necessary to generate revenue and exists primarily to justify
government snooping into the private business of citizens and
secret police organizations like the IRS.  A VAT would do the
trick nicely and could be easily built into the DigiCash system
of the future.

I also favor a small guaranteed annual income which would allow
citizens to live just slightly better than they do in prison.
Incarceration can never be a deterent if it is a step upward in
ones standard of living, something the US seems to have lost
sight of.

As for strong cryptography, it should be unrestricted and used
whenever approprate.  If individuals wish to go to the trouble of
avoiding taxes setting up secret businesses that encrypt all
transactions, more power to them.  The small number of people who
will bother to do this will not have any real impact on taxation.
If taxes are reasonable and the money is used for things that
people support, people will be suitably incentivised not to avoid
them.

Thus strong crypto, egalitarianism, less government, and
tolerable taxes can all live happily together in our future.

-- 
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $

Mike Duvos writes:

(Good sentiments about small government elided....)

> Taxation should be small, uniform, and applied to transactions
> and never to the earnings of individuals.  Income tax is not
> necessary to generate revenue and exists primarily to justify
> government snooping into the private business of citizens and
> secret police organizations like the IRS.  A VAT would do the
> trick nicely and could be easily built into the DigiCash system
                   ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
> of the future.
  ^^^^^^^^^^^^^^

Not the untraceable cash systems most of us are interested in, that's
for sure. Since transactions between "Alice" and "Bob" are invisible
to outsiders, and they may not even know the identity of the other,
then it's hard to imagine how the Tax Man interjects himself.

Unless of course some "escrow" system is mandated, and independent
schemes are extirpated ruthlessly. Not a pretty sight.

> I also favor a small guaranteed annual income which would allow
> citizens to live just slightly better than they do in prison.
> Incarceration can never be a deterent if it is a step upward in
> ones standard of living, something the US seems to have lost
> sight of.

In the crypto anarchist future I envision, this will never happen.
Mike and his friends are of course free to donate some or all of their
earnings to provide a "guaranteed annual income" for others, but not
me.

But this gets into basic ideological issues, so I'll stop now.

The crypto significance is that strong crypto makes many things Mike
wants essentially impossible to achieve, fortunately.

> As for strong cryptography, it should be unrestricted and used
                                           ^^^^^^^^^^^^
> whenever approprate.  If individuals wish to go to the trouble of
> avoiding taxes setting up secret businesses that encrypt all
> transactions, more power to them.  The small number of people who
> will bother to do this will not have any real impact on taxation.
> If taxes are reasonable and the money is used for things that
> people support, people will be suitably incentivised not to avoid
> them.

Huh? This paragraph does not compute.

> Thus strong crypto, egalitarianism, less government, and
> tolerable taxes can all live happily together in our future.
> 

In your dreams.


--Tim May


-- 
..........................................................................
Timothy C. May         | Crypto Anarchy: encryption, digital money,  
tcmay@netcom.com       | anonymous networks, digital pseudonyms, zero
408-688-5409           | knowledge, reputations, information markets, 
W.A.S.T.E.: Aptos, CA  | black markets, collapse of governments.
Higher Power: 2^859433 | Public Key: PGP and MailSafe available.
"National borders are just speed bumps on the information superhighway."

Timothy C. May writes:

 > (Good sentiments about small government elided....)

Thank-you.

 >> Taxation should be small, uniform, and applied to
 >> transactions and never to the earnings of individuals. ... A
 >> VAT would do the trick nicely and could be easily built into
 >> the DigiCash system of the future.

 > Not the untraceable cash systems most of us are interested
 > in, that's for sure. Since transactions between "Alice" and
 > "Bob" are invisible to outsiders, and they may not even know
 > the identity of the other, then it's hard to imagine how the
 > Tax Man interjects himself.

The theoretical possibility of untraceable cash systems and the
absence of legal sanctions against those who use them do not
imply that such systems will become the standard in the future.
Even in the obnoxious political climate which prevails in this
country today, strong crypto is in the hands of only a few
percent of the citizens.  In a society with a "user-friendly"
government, most people wouldn't even be interested.

If given a choice between ordering a pizza by clicking ones air
mouse while tuned to the Pizza Channel, and ordering one via
Tim's Strong Crypto Pizza Service in order to avoid a small VAT,
most people will choose the easy way.

A good analogy to this in our current society is the enforcement
of copyright laws.  Most people buy paperback books instead of
xeroxing them because they are reasonably priced and it isn't
worth the aggrevation.  If paperback books cost $100, this would
no longer be the case.  Most people buy computer software priced
under $100 instead of copying it from a friend because they get a
nice set of bound printed manuals.

Network shopping services which use strong crypto and
non-standard DigiCash protocols to avoid a painless VAT will have
poor propagation, limited access, negative PR, and few customers.
It's like trying to set up your machine on the Internet without
using TCP/IP.  Few people will take the trouble to talk to you
and you won't be able to talk to anyone else. Sure you could do
it, but why bother?

 > Unless of course some "escrow" system is mandated, and
 > independent schemes are extirpated ruthlessly. Not a pretty
 > sight.

Neither of these things will be necessary to get the majority of
the population to use the default means of doing things.  You
greatly underestimate the power of human sloth.

 > In the crypto anarchist future I envision, this will never
 > happen. Mike and his friends are of course free to donate
 > some or all of their earnings to provide a "guaranteed
 > annual income" for others, but not me.

Again Tim and his friends are free to conduct all their
transactions via unbreakable protocols of their own construction,
avoid all taxes, and do business only with others who cooperate.
As long as the percentage of similarly minded individuals is
appropriately small, it has no real effect on society and
probably costs a lot less than an enforcement agency would.

Of course Tim won't be watching HBO or Showtime, shopping with a
major credit card, or helping his broker churn his account at
Smith-Barney.  Not my problem.

You are never going to get the majority of people in this country
to agree to design the default protocols for commerce on the Net
with the specific intent of making it possible for people to
avoid taxes using strong cryptography.  You'd have more luck
persuading them to tear up their health insurance or burn down
their houses.

 > Huh? This paragraph does not compute.

I seem to have accidently deleted a word somewhere.  Oh well.

 >> Thus strong crypto, egalitarianism, less government, and
 >> tolerable taxes can all live happily together in our future.

 >In your dreams.

Many good ideas have started with dreams.  Benzene rings, for
instance.

-- 
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $

Not that I wanted to get in to this, but Mike was begging for it.

Mike Duvos says:
> The theoretical possibility of untraceable cash systems and the
> absence of legal sanctions against those who use them do not
> imply that such systems will become the standard in the future.
> Even in the obnoxious political climate which prevails in this
> country today, strong crypto is in the hands of only a few
> percent of the citizens.  In a society with a "user-friendly"
> government, most people wouldn't even be interested.

Ahem.

If I told you that I could save you tens of thousands of dollars a
year just by using some simple to use software, would you do it? Well,
if you had some simple to use software system that allowed you to
escape from the above ground economy, you could personally save tens
of thousands a year.

> If given a choice between ordering a pizza by clicking ones air
> mouse while tuned to the Pizza Channel, and ordering one via
> Tim's Strong Crypto Pizza Service in order to avoid a small VAT,
> most people will choose the easy way.

1) What makes you think the VAT will be small? Assuming that you have
   to pay for a government the size of the current one, only using
   VATs, you are going to have to take about half the cost of all
   goods and services in accumulated VAT by the time the goods hit the
   consumer. (This is for the obvious reason that the government
   spends half the GDP in the US.)

2) What makes you think it will be inconvenient? I know of two pizza
   places in Manhattan where they very likely don't pay taxes and
   where you can also buy drugs. (No, I'm not going to tell you where
   they are, and no, I don't buy drugs from them. I don't go telling
   the police such things, however.)

The underground economy in the U.S. is huge -- enormous, in fact. Most
of us interact with it every day without even realizing it. As a small
example, the clothing manufacture industry in New York survives on
illegal factories running almost entirely underground. Ever tip a
waiter in cash? Ever pay for a haircut in cash? Ever make a purchase
from a Mom & Pop grocery in cash?

> Again Tim and his friends are free to conduct all their
> transactions via unbreakable protocols of their own construction,
> avoid all taxes, and do business only with others who cooperate.
> As long as the percentage of similarly minded individuals is
> appropriately small, it has no real effect on society and
> probably costs a lot less than an enforcement agency would.

There are tens of millions of people completely evading taxes now, and
the percentage of the population who underreport or patronize services
that underreport aproaches 100%.

> Of course Tim won't be watching HBO or Showtime, shopping with a
> major credit card, or helping his broker churn his account at
> Smith-Barney.  Not my problem.

Tim will likely pay his broker to churn his account in Switzerland and
do just as well. He'll have a credit card from a bank in the Bahamas.
He'll probably do just fine watching HBO and Showtime, too.

Perry

Perry E. Metzger <perry@imsi.com> writes:

 > Not that I wanted to get in to this, but Mike was begging
 > for it.

 > If I told you that I could save you tens of thousands of
 > dollars a year just by using some simple to use software,
 > would you do it? Well, if you had some simple to use
 > software system that allowed you to escape from the above
 > ground economy, you could personally save tens of thousands
 > a year.

I am not convinced such software exists, that most major
businesses would offer to interface with it, or that it would of
necessity be "simple" or "easy to use".  Once standards are
created for commerce over the Net and the collection of the VAT,
you are pretty much locked into using them if you wish to do
business with any vendor of significant size.

 > What makes you think the VAT will be small?

Bear in mind we are talking about a Utopian society of the future
with a downsized government.  Trying to support the current level
of wasteful government spending from a VAT would send people
fleeing for the borders.

 > What makes you think it will be inconvenient? I know of two
 > pizza places in Manhattan where they very likely don't pay
 > taxes and where you can also buy drugs.

I know of some places on the Internet where I can chat with
people using a version of Unix talk which encrypts.  But if I
want to talk to some random person, I am probably stuck with
using the default version which does not.  I have little hope of
convincing people to make the encrypted one a standard, in spite
of the fact that all they would have to do is spend a few minutes
to FTP it.

Encrypting everytime I use "talk" is therefore somewhat
inconvenient.  A complete escape from the above-ground economy in
a society heavily dependent on electronic transactions would be
even more so.  Again, you are free to try, but most people
probably won't bother.

 > The underground economy in the U.S. is huge -- enormous, in
 > fact. Most of us interact with it every day without even
 > realizing it. As a small example, the clothing manufacture
 > industry in New York survives on illegal factories running
 > almost entirely underground. Ever tip a waiter in cash? Ever
 > pay for a haircut in cash? Ever make a purchase from a Mom &
 > Pop grocery in cash?

The size of the underground economy is largely a function of the
repressive and outrageous monetary and tax system we have in this
country. When families can barely make ends meet with all the
adults working multiple full-time jobs, there is an enormous
incentive to shave costs.

In a society where taxes were managable, and put to a use all
citizens felt was worthy, such forces would be much less and
there would be enormous peer pressure on individual citizens to
do their fair share.  Kind of like the days when income tax was
two percent and functioned on the honor system.

Just decriminalizing drug use and the sex industry would get rid
of a very large chunk of the underground economy.

 > Tim will likely pay his broker to churn his account in
 > Switzerland and do just as well. He'll have a credit card
 > from a bank in the Bahamas. He'll probably do just fine
 > watching HBO and Showtime, too.

The majority of US citizens who use local financial services and
get their cable TV through a wire from the street will generate
all the revenue we need.  We could even give Tim a guaranteed
annual income.

-- 
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $

Mike Duvos says:
> Perry E. Metzger <perry@imsi.com> writes:
> 
>  > If I told you that I could save you tens of thousands of
>  > dollars a year just by using some simple to use software,
>  > would you do it? Well, if you had some simple to use
>  > software system that allowed you to escape from the above
>  > ground economy, you could personally save tens of thousands
>  > a year.
> 
> I am not convinced such software exists,

Of course it doesn't exist yet.

> or that it would of necessity be "simple" or "easy to use".

Thats a simple matter of programming, not a matter of infeasability.

> Once standards are created for commerce over the Net and the
> collection of the VAT, you are pretty much locked into using them if
> you wish to do business with any vendor of significant size.

I'm not certain you understand the tremendous economic pressure that
taxes bring to bear.

>  > What makes you think the VAT will be small?
> 
> Bear in mind we are talking about a Utopian society of the future
> with a downsized government.

Since such a society is unlikely to show up any time soon, I'd say
that the odds of my scenario of the future coming true exceed the odds
of your vision of the future coming true.

>  > What makes you think it will be inconvenient? I know of two
>  > pizza places in Manhattan where they very likely don't pay
>  > taxes and where you can also buy drugs.
> 
> I know of some places on the Internet where I can chat with
> people using a version of Unix talk which encrypts.  But if I
> want to talk to some random person, I am probably stuck with
> using the default version which does not.

> I have little hope of convincing people to make the encrypted one a
> standard, in spite of the fact that all they would have to do is
> spend a few minutes to FTP it.

Well, not for long. The IETF Working Group on IP security has just
come to consensus on an IPSP protocol -- in the not that distant
future it won't be necessary to alter any applications software in
order to have it operate over an encrypted channel.

> Encrypting everytime I use "talk" is therefore somewhat
> inconvenient.  A complete escape from the above-ground economy in
> a society heavily dependent on electronic transactions would be
> even more so.

Thats not a valid analogy. There are tens of millions of people in the
underground economy right now -- in a society already highly dependant
on electronic transactions. There is no economic incentive for most
people to encrypt their talk sessions -- but there is a great economic
incentive to evade taxes.

> In a society where taxes were managable, and put to a use all
> citizens felt was worthy, such forces would be much less and
> there would be enormous peer pressure on individual citizens to
> do their fair share.

And if my grandmother had wheels she'd be a bicycle. It isn't
happening now -- the trend is towards larger taxes, bigger government
and more repression, not less. You can't wave a wand and have your
vision implemented -- nor is there anything you could personally do
towards implementing your vision. On the other hand, the only thing
standing between my scenario and reality is someone hacking for about
six months, and some offshore banks deciding to go into the business.

Perry

> 
> Not that I wanted to get in to this, but Mike was begging for it.
> 
> Mike Duvos says:
> > The theoretical possibility of untraceable cash systems and the
> > absence of legal sanctions against those who use them do not
> > imply that such systems will become the standard in the future.
> > Even in the obnoxious political climate which prevails in this
> > country today, strong crypto is in the hands of only a few
> > percent of the citizens.  In a society with a "user-friendly"
> > government, most people wouldn't even be interested.

> If I told you that I could save you tens of thousands of dollars a
> year just by using some simple to use software, would you do it? Well,
> if you had some simple to use software system that allowed you to
> escape from the above ground economy, you could personally save tens
> of thousands a year.

For large numbers of Americans, the answer is yes. Even if the
system of government that they were supporting was a screwed up as
our current one. Add to this the possibility that the government
mandate also include a requirement that when conducting a transaction
with somebody who is not paying the tax, you charge them a little
extra and this amount will go higher. (If both the buyer and seller
are paying the tax, then X% of the money exchanged goes to the
government. If only one is then 2*X% of the money exchanged goes
to the government.) Identities could easily be set up so that
reputation is not transferable between a tax paying organizations
and their evading pseudonyms. And that's if government doesn't
improve as it enters cyberspace.

Imagine if the government stopped trying to force people to join it.
Or imagine if they tied decision making power to how much you pay in
taxes. The more you pay, the more say you get. After accepting the
idea that government is a product by which you get the warm fuzzies
of giving to society, government could make itself into a more
desireable product by undertaking changes like these. The
possibilities are endless in this reguard. Its very easy for me to
imagine a government in cyberspace which is substantially more
successful at collecting taxes than the IRS.

JWS

solman@MIT.EDU writes:

[other excellent stuff elided]

 > Imagine if the government stopped trying to force people to
 > join it. Or imagine if they tied decision making power to
 > how much you pay in taxes. The more you pay, the more say
 > you get. After accepting the idea that government is a
 > product by which you get the warm fuzzies of giving to
 > society, government could make itself into a more desireable
 > product by undertaking changes like these. The possibilities
 > are endless in this reguard. Its very easy for me to imagine
 > a government in cyberspace which is substantially more
 > successful at collecting taxes than the IRS.

The notion of government as a product which must compete on an
equal footing with others in society definitely wins "Nifty Idea
of the Week" in my book.

Reminds me of something TS Eliott once said.  "If only we had a
system so perfect it did not require that people be good."
Perhaps "government in cyberspace" will be the first working
example of this paradigm.

-- 
     Mike Duvos         $    PGP 2.6 Public Key available     $
     mpd@netcom.com     $    via Finger.                      $

mpd@netcom.com (Mike Duvos) writes:
[...]
> Network shopping services which use strong crypto and
> non-standard DigiCash protocols to avoid a painless VAT will have
> poor propagation, limited access, negative PR, and few customers.

Wanna bet?  All it would take is one entity to set up a service of
converting untracable digicash tokens into the appropriate tracable tokens
under the name of a pseudo-account at the service.  Now I can use my
digicash tokens for everything under the regulated system, _and_ I can use
them at digicash-only services...

jim

On Wed, 3 Aug 1994, Timothy C. May wrote:
> > secret police organizations like the IRS.  A VAT would do the
> > trick nicely and could be easily built into the DigiCash system
>                    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
> > of the future.
>   ^^^^^^^^^^^^^^
> Not the untraceable cash systems most of us are interested in, that's
> for sure. Since transactions between "Alice" and "Bob" are invisible
> to outsiders, and they may not even know the identity of the other,
> then it's hard to imagine how the Tax Man interjects himself.
Which is a good reason to tax only property and government services.  
Yes, I am a communist Libertarian, and favor a 1%ish 100 year tax on 
land, water, and sky.(but not the information content of the land or 
wood, so a house is the same as a field is the same as a skyscraper).

Berzerk.

Taxation should be small, uniform, and applied to transactions
   and never to the earnings of individuals.  

The earnings of individuals, however, _are_ exactly one sort of
transaction tax.  If you wish to make an exception for personal
income, then you wish to make an exception out of every transaction
where one of things exchanged is labor.  Therefore, you would have to
have a certificate which said "this is labor being exchanged."  My
suspicion is that the amount of the economy performed as labor would
skyrocket.

Either you tax each and every motion of money or you require an
intrusive anti-privacy system in order to determine taxability.  I can
tell you now, large interbank transfers aren't going to be taxed.
Intra-corporate transfers aren't going to be taxed.

In order to tax transactions you have to know what the transactions
are.  A transfer of money is not always a transaction.  The simplest
case is where I move money from an account at one bank to an account
at another.  That's merely a transfer; there is nothing exchanged.

   A VAT would do the
   trick nicely and could be easily built into the DigiCash system
   of the future.

Such a "compromise" (read, sell-out) could technically be built into a
transfer scheme.  Requiring VAT on all transactions through this
scheme would effectively restrict it to consumer level sales.
Businesses wouldn't use it for wholesale transfers, and individuals
wouldn't use it amongst themselves.  Thus there would be alternate
ways of transferring money, and these ways could be used to settle
transactions.

   If individuals wish to go to the trouble of
   avoiding taxes setting up secret businesses that encrypt all
   transactions, more power to them.  The small number of people who
   will bother to do this will not have any real impact on taxation.

Really?  It would be small?

Suppose we assume unrestricted encryption, as you suppose.  Assume the
USA for purposes of discussion.  Further suppose that's it's really
easy to set up a digital account, denominated in dollars, in a non-USA
jurisdiction, say, China.  All the transactions are encrypted, and
China's not talking to USA authorities--they don't have to.

I think the interesting question here is how soon the USA government
has to change its regulations because so much business (and hence
capital) has left the USA.

When capital flight for the individual is easy (and it's not right
yet), expect to see rapid changes.

Eric