I’ve spent the last week experimenting with Bitcoin. Like with any new technology that fundamentally shifts perspectives, there are both zealots and luddites, there are Pollyannas and there are Valentis.

I will be returning to deeper analysis in a series of posts. For now, I will just say that it stands beyond a shadow of a doubt that distributed cryptocurrency is here to stay. Its use case is so hands-down attractive that it beats the legacy banking and transaction systems on walk-over on point after point. What bank holidays? What frozen assets? What taxes? What bank fees? All these are concepts that become as irrelevant and anachronistic as, say, the union rules of stablekeepers.

It may not be Bitcoin that comes out as the ultimate cryptocurrency standard, but that doesn’t matter, just like it doesn’t matter if we use BitTorrent, OneSwarm or something more resilient for distributed file sharing. It’s the file sharing on the conceptual level that is interesting, not BitTorrent. The same thing goes for distributed cryptocurrency.

The “aha!” moment you experience when you transfer a few bitcents to somebody on the other side of the planet, and they have it instantly, without any single being knowing that you just sent that money or that the receiver got it, and with no single being being able to stop you from doing the transaction with anything less than physical restraint in your home — that feeling is profound. As are the ramifications. In this post, I will focus on the political implications, and subsequent posts will go deeper.

The use case is limited by the networking effect for now. You can’t use Bitcoin for, well, anything practical. But as I said, I’ll be returning to that.

From a political perspective, this development means that taxation and welfare systems must be rethought and rewired considerably and immediately.

Rethinking taxes in a world with cryptocurrency

Cryptocurrency brings new challenges to the table. The government can’t see the wealth of an individual, nor their inflow or outflow of funds, not with any amount of applied force.

I know a lot of individuals in government will react with normalcy bias to this statement and say “but we have to!”. It doesn’t matter if you have to. You can’t. Period.

This means that neither taxes nor social support systems can be based on income or wealth. It doesn’t matter if only 5% of the population use cryptocurrency; the tax morale is dependent on a sentiment in the general population that everybody is pulling their own weight and that there is a significant risk associated with trying to get a free ride. When just a tiny portion use cryptocurrency, this breaks down and snowballs.

We’ll arrive at this point within a decade. There is no time for ostriching.

So taxation first, then. Taxes can neither be based on income nor on wealth. All income taxes go out the window, both those that the employer pays and those that the employee pays. (As a positive side effect here, illicit untaxed work ceases to exist by definition.)

This leaves us with a couple of other things we can tax. We can tax land, like they did in the 1800s. But then, isn’t that, like… 1800s? What else is there? We can tax buildings, homes, cars, fuel… all very impopular tax targets. Very much so indeed.

Oh, and we can tax consumption.

The value added tax (VAT) is already one of the largest sources of revenue for the European governments. It is different from a sales tax in that it is applied to every step of the way in the sales chain: assuming we have a VAT of 25%, the original manufacturer adds this tax to his wholesale price. In the next step, the retailer gets this tax back from the government (“inbound VAT”) when buying from the manufacturer, but needs to add 25% tax on his own outgoing price (“outbound VAT”).

This has the nice effect of adding an incentive for every step in the chain to report taxes, as they will want their inbound VAT back.

Using numbers from Finland and France, if we roughly double the VAT, we can abolish all other personal taxes. The tax pressure would be the same, as would the governmental income: it would just be based on consumption and not on income. Usually, these correlate to a high enough degree.

This has two other nice side effects: first the obvious advantage of abolishing personal taxation. No individual going about their daily business needs to have anything to do with the Tax Authority again, ever. It’ll just be a thing for corporations (although the tax is taken from personal consumption, corporations collect it, just like today).

The second advantage is that all the infrastructure and bureaucracy already is in place. We just have to adjust a percentage. Once that is done, a whole lot of bureaucracy (the part with all the other taxes) can just go out the window.

But there are also drawbacks, of course. The major one is that this means taxation is entirely flat. It would hit hard against the least fortunate, which is something we want to avoid. Progressive taxation is generally seen as a good and fair aspect of a functioning society.

The normal way of doing this would be to have a basic tax deduction. But we can’t do that with VAT. We can’t argue that the kiosk clerk should deduct the VAT from the bottle of coke because here, look at this certificate, I still have some part of basic deduction left. So we’ll need to turn it the other way around.

Rethinking welfare in a cryptocurrency world

Welfare systems have always been based on a lack of income, a lack of wealth, or both. So when you can’t measure or inspect any of them, what do you do?

I would argue that you only have two options: you can give welfare to nobody or to everybody. Since giving it to nobody isn’t really an option, all that remains is to give it to everybody, completely without condition. The basic unconditional income case. Citizen’s salary.

This kills two birds with one stone, as it also solves the progressive taxation case: a basic unconditional income for every citizen is basically the same thing as a basic tax deduction before taxes start to apply plus a guarantee that you have minimum sustenance. We already have those two anyway.

This also has the nice side effect of killing the need for all other welfare systems, from unemployment benefits to student loans, and the bureaucracy that comes with them.

Some people argue that a citizen’s salary will kill the incentive to work at all. I have previously explained why this is hogwash. Short version: GNU/Linux and Wikipedia.

Conclusion

Cryptocurrency is coming. It could be Bitcoin, it could be something else, it could be a new trading framework that incorporates many cryptocurrencies. The important thing is that in a decade’s time, governments will have lost the ability to look into their citizens’ wealth and income.

This, in turn, means that no taxation or welfare can be based on wealth or income.

I argue that the proper way to tackle this problem from an information policy perspective is to shift the taxation base entirely to consumption and therefore shift all income tax to VAT. To keep taxation progressive, and to keep welfare systems functional, you will also need to combine it with a basic unconditional income for every citizen that amounts to some level of minimum sustenance.