Virtual Corporations to Avoid Taxes

[tcmay@netcom.com (Timothy C. May)]

Here's an area that has long fascinated me: using corporate entities
as a way to bypass taxes on individuals.

Mats Bergstrom writes:

> > A PUSH FOR SURVEILLANCE SOFTWARE
> > By John Markoff
> 
> > A version of the legislation was first proposed in 1991 by the Bush
> > Administration at the urging of the Justice Department.  But unlike that
> > version, the new bill would limit the surveillance to public networks and
> > not include company phone systems --- private branch exchanges, or PBXs
> > --- or private corporate computer networks.
> 
> This is not fair! But couldn't a network provider hire all it's users for 
> 1 dollar a year and deduct the employees' communications expenses from 
> their salaries (making the net salary negative) thus keeping the network 
> corporate and private?

Indeed, anytime a distinction is made between the rights of
individuals and corporate entities, all kinds of "gaming" can occur.

To pick a truly devious example, in the same vein that Mats just
mentioned, consider that corporations don't pay taxes or even report
income on site-to-site transfers of goods, knowledge, etc. That is,
huge amounts of stuff can flow back and forth within the company and
not be treated as "income," because the various parts of the company
are treated as part of the whole....only the "net income" ultimately
gets taxed.

(I'm not suggesting any changes in tax law--trying to tax internal
flows would be ludicrous and impractical, as well as being unethical.)

Where it gets interesting is if a group of consultants--the
Cypherpunks, for example--instantiate themselves as a "corporation"
and do mutual consulting and helping....avoiding taxes all the way.
(Recall that plumbers and carpenters, for example, who do reciprocal
labor are technically supposed to report all income received, to
estimate the value of the labor received, etc.). 

Cyberspatial networks will allow "virtual corporations" to be formed
that can shelter a lot of activity that would otherwise be heavily
taxed! Kind of like a commune (which I suspect end up reporting very
little "net" income and almost no income at all for the individual
participants).

Individuals would surely want a "real" income to be extractable from
the system, and this "net" income would be fully taxable. But the
mutual help aspects would not be taxable as is now the case.

The best examples of such virtual corporations are _professional
partnerships_, as in legal partnerships, medical partnerships, etc.
The participants can exchange expertise, help each other, etc., all
without reporting the transactions as income (or as expenses, to
deduct from their income in other transactions). (Scenario: Create
similar partnerships for blue-collar workers, so plumbers, carpenters,
roofers, etc. can avoid taxes when they "trade" work.)

(I won't get into the interesting issues of how contributors
eventually extract income from such deals. There's always the
potential for shirkers, layabouts, cheaters, and other phenomena
well-known to commune folks. But the potential is there.)

I have a sneaking suspicion that all of these ways that corporations
can be used to limit taxes are the reasons for so many special laws
and taxes on corporations. Imagine that the entity described by Mats
Bergstrom is formed, and everyone gets paid their $1 a year.....then
the various government agencies (in the U.S., in this example) descend
upon the corporation and ask about the health care plans, the OSHA
compliance, the minority quotas ("What, you mean 97% of your so-called
"hackers" are white males?"), and on and on. And under Bilary's Health
Nationalization Plan, if the corporation has more than X employees
(where X is currently 50, I believe), it'll be instructed to fork over
about $5000 per year per employee, no matter their wages ($1 a year),
plus administrative expenses. Oh, and don't forget the minimum wage
laws!

Despite these problems, I see great opportunities for cypberspatial
corporations being used to shield participants against various taxes
and regulations. Foreign-based corporations, for example.

Techno-communes, anyone?


--Tim May


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Timothy C. May         | Crypto Anarchy: encryption, digital money,  
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