Tax Free In Cyberspace Only

[Vincent.Cate@FURMINT.NECTAR.CS.CMU.EDU]

Encryption will have a profound impact on society as we move further into
the information age.  In particular, some things that are currently taxed
will be very hard to tax in the future.

Encryption lets non-tangible things move around like the ghosts they
are.  Since this movement is ininvisible, it will be impossible to tax.
So things which can exist in cyberspace will tend to move around tax
free.  This will include things like:

   Securities     - stocks, bonds, mutual funds
   Savings        - cash
   Profits        - 
   Information    - newsletters, magazines, databases
   Software       -

This non-taxability comes from the fact that only the parties exchanging
something in cyberspace even need to know about the exchange - and they
can encrypt everything so that nobody else knows.  It also comes from the
fact that the entities involved in commerce in cyberspace can be located
anyplace in the physical world and there are many places that do not tax
companies.

Tangible things within the territory of some government will always be
taxable by that government.  This is especially true for things where
it is desirable to have a government issued "title".  Major tax
categories will still include:

   Real-estate    - land, houses, buildings, factories
   Vehicles       - cars, boats, planes
   Tangible goods - any objects bought or sold
   Fuel           - gas, diesel, jet fuel
   People         - poll tax
   Companies      - annual registration of corporations

Income for self employed information workers will be hard to tax.  
However, for a number of years yet, most incomes will still be taxed. 

So governments will have to rework their tax base.  National sales taxes
or VATs will probably be more common.  Taxes on dividends, interest,
capital gains, etc., will fade away.

This change will be difficult, and probably the technology will move 
faster than the governments can comfortably react.  Instead of adapting to
the changes, many governments will probably try to prevent them.  These
attempts will fail - probably not even slowing things down much.

The cyberspace economy will be very close to pure capitalism.  Regulation
of cyberspace trade will be impossible.  It will not be possible to even
determine if two parties are doing business, let alone to stop them.
Initiation of force in cyberspace should be less and less of a problem as
computer systems get more secure.  Impersonation is easily prevented with
digital signatures.

This new tax base may not let governments operate in the manner to which
they have become accustomed.  Each government will be faced with the
choice of either printing more money (causing painful inflation), or
making painful cuts in programs.  This will no doubt cause some protests
and unrest, but certainly need not result in anarchy. 

    -- Vince Cate


This file should end up in:

  ftp://furmint.nectar.cs.cmu.edu/security/cypheressay