Public key encryption, income tax and government

[remail@tamsun.tamu.edu]

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

Consider: untraceable, anonymous transactions occur every day - not
through cryptography, but through simple cash purchases at the local
grocery store, gas station, department store, restaurant, and so on.
There are many occupations which primarily involve cash transactions.
Are these people immune from income tax?  Of course not.  The
government has many ways of extracting tax in these cases, ranging from
periodic audits with heavy penalties (which keep people honest) to
imputing income (as in the case of tip income by waiters), to fraud
investigations for those living beyond their means.

As I see it, cryptography may extend similar conditions to information
workers - programmers, architects, authors.  Naturally, since a
disproportionate number of those on the net fall into these categories,
this seems like a revolutionary development.  But from the larger
perspective, it is not a major change.

The fact is, information purchases are a small part of most people's
budgets.  If you add up all of what the average person purchases that
would fall into the general category of "information" - books,
magazines, newspapers, music, video - you probably won't exceed a few
percent of income.  Information, despite the hype, is not a dominant
part of our economy.

Particularly at the corporate level, the notion that cryptography will
allow widespread tax cheating seems especially questionable.  I don't
agree that the major force for tax compliance is government
surveillance of telephone and electronic communications.  Instead, the
corporations have to keep books which reflect their financial
transactions, and they have to make appropriate reports to the
government and investors.  To cheat they'd have to have two sets of
books, with all the concomitant risks.  It would be difficult to pass
on the illegal gains to shareholders because they wouldn't match up
with what was reported to the governments.  Perhaps the beneficiaries
in this scenario are the corporate officers?  This sounds like simple
fraud, and I doubt that the shareholders would allow their investments
to be jeapordized in this fashion.

Suppose I walk into IBM today and offer to go to work as a programmer,
for 10% less than they would normally pay me, as long as they pay me
"off the books", and pass on to me in cash the amount they would
normally have to pay to the government in payroll taxes.  Sounds like a
win-win situation, right?  Both IBM and I save money.  But naturally
IBM won't agree to this.  And it's not because they're afraid of
government bugging of their phones, which cryptography might overcome.
They know that there are many ways a scheme like this can be detected.

I don't think this will change once strong cryptography allows me to
make the same offer to IBM across the net.  Sure, my electronic
conversations with IBM will be private - but my conversations in the
example above were just as private.  The advent of cryptography will
not change the fact that violating the tax laws is a serious,
difficult, and very risky business.

Now, I don't know much about high finance, so it's hard for me to judge
what the effects would be of cryptographically-protected communications
with offshore banks.  Again, I am skeptical that the main barrier to
such widespread tax evasion that the government would collapse is the
government's ability to eavesdrop on electronic communications.  I was
under the impression that money transfers have used the Data Encryption
Standard for years, which is not known to be breakable, and yet
government has survived.

Summing up, the main change I see cryptography bringing is to extend to
information workers some of the same possibilities for anonymous,
private cash transactions that plumbers and shopkeepers have always
had.  Even then, big business will continue to operate under the
present rules.  I don't see this as a major change in society.

I might add that over-hyping of the changes due to cryptography is
actually counterproductive.  To the extent that law enforcement
believes these projections, the government will oppose simple
cryptographic technologies that do have an important role to play in
preserving privacy.

Hal Finney
hfinney@shell.portal.com


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