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Re: Crypto & Taxes [WAS Re: Cybersecurity]

On Sun, 15 Oct 1995, Michael Froomkin wrote:

> On Sun, 15 Oct 1995, Duncan Frissell wrote:
> > On Sun, 24 Sep 1995, Rick Busdiecker wrote:
> > > I'm guessing that you're talking about the fact that fully applied
> > > crypto (e. g. fully anonymous digital cash) makes it essentially
> > > impossible to base a tax system on income.
> > Yep.
> [....]
> Hold on.  This is more "factoid" than "fact":  recall that income is PAID 
> by people as well as EARNED by people.  Most payers have easily 
> detectible physical presence and assets that can easily be attached by 
> regulators.   It will be a cold day before, e.g., my employer agrees not 
> to report my earnings.  And the same is true for most employers in most 
> industries.  

Were I an overseas employer, I would be quite happy to work in a 
"disinterested" jurisdiction and hire American workers to telecommute and 
issue their pay blindly to the number only or crypto bank account of their 
choice and promptly encrypt or lose the records.

Remember, there is an incentive for employERS as well as employees to 
flee the tax system of a nation that is manipulative of it.  Employers 
who work in tax free ways will be able to pay their employees less, quite 
a bit less.  Given a 32% tax rate, an employer with the advantage of no 
income reporting on employees will easily be able to drop a given salary 
25% and attract employees quite easily.

Who are you going to work for?  The publisher who is based in New York 
and reports all payments, or the publisher who works in the Cayman 
Islands, reports nothing, and merely sells the manuscript to the big name 
publisher in New York after purchasing it blind from you?

> And if it ever stops being true, we'll just get VAT, and VAT inspectors.  
> So the line about death and taxes remains as true as ever, crypto or no.

I believe it will be extremely hard for VAT inspectors, in future, to 
determine one of a few things needed to assess VAT taxes.

1> Identity of employers within their jurisdiction
2> Identity of employees within their jurisdiction
3> Who is working "IN" their jurisdiction
4> Who is a U.S. citizen

How can you say that the 2 meg random data file that Mr. X sent to 
Publishing Company B is worth $2mil?  That the encrypted letter to client 
Q is the sum of legal work worth $80,000 in services and research?  These 
are particularly difficult to determine when the bank transaction are 
made with truely anonymous e-cash and overseas accounts.  It's simply not 
possible unless:

1>  The state has enforced toy crypto
2>  The strong crypto the parties use is broken
3>  The parties tell.

At some point, the only thing your going to be able to tax is "Goods."  
As in solid and measureable.

When this is true, the most profitable venture in the United States will 
be retail smuggling.  And as taxes are raised again and again, compliance 
will drop and drop until the largest portion of the national budget will 
be enforcement of the Value Tax Reform and Retail Laundering and 
Terrorism Act of 2002.

Again, the more difficult it gets to do business in the United States 
without taxation far out of proportion to other nation states, the fewer 
companies will stick around.  I might add that as technology progresses, 
fewer and fewer companies will NEED to work in the United States.

What I have not discussed here are the various political problems 
involved.  I admit they exist, but I haven't quite come to a conclusion 
of how the balance between government self preservation and blind 
and secure transactions will balance out.  I believe in part it rests on 
how much the United States will be willing to abide by various 
constitutional provisions.  Americans are going to have to decide if 
they really believe in free speech and freedom, a question which has 
begun to surface quite obviously of late.

It will literally take a dictatorship to enforce taxation in any real 
way in 15 years, if not sooner.  VAT, income, sales tax, or otherwise.

> A. Michael Froomkin        | +1 (305) 284-4285; +1 (305) 284-6506 (fax)
> U. Miami School of Law     | [email protected]
> P.O. Box 248087            | http://www.law.miami.edu/~froomkin
> Coral Gables, FL 33124 USA | New address, but it's still just as hot here.

"In fact, had Bancroft not existed,       potestas scientiae in usu est
Franklin might have had to invent him."    in nihilum nil posse reverti
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