If you know the enemy and know yourself, you need not fear the result of a hundred battles.
If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
If you know neither the enemy nor yourself, you will succumb in every battle.
Sun Tzu, The Art of War
Cryptocurrency has become a mainstream investment. Tax authorities around the world are looking for ways to enforce taxation and identify tax evasion. Blockchain, the technology best known as the system underpinning bitcoin and other cryptocurrencies, enables secure transactions between strangers without a trusted third party and on an anonymous basis. We should not fail to consider that blockchain technology goes far beyond cryptocurrencies.
What conclusions can I draw about my observations of blockchain? Blockchain could help the world overcome the hatred of taxes. My contention is that the real enemy we hate is not the tax itself but the myopia of not being able to see where our hard-earned money goes once it gets away from us. This does not mean that other factors are necessarily absent. Other factors include fear, complexity, bureaucratic procedures, and compound interest, let alone behavioral economics findings.
Know the enemy: We do not hate taxes, we hate the lack of transparency.
If while living at the beginning of the digital revolution you hate taxes, then you better be happy that you were not there when Peter the Great imposed a tax on beards. Russians of the time had different reasons to hate taxes than the Bostonians in 1773 during the Boston Tea Party. Our reasons to hate taxes belong to our own time and place in history.
Historians from the future should go directly to watch “The Trouble with Trillions” episode of The Simpsons that shows how current people experience the tax system nowadays. The episode starts on New Year Eve when Ned Flanders files his taxes (calculated with extremely cautious deductions). When does that the average person file taxes? You guessed it! Last-minute of the last day. The Simpsons news report by Kent Brockman is illustrative:
Future taxpayers will not understand this chapter as children today don’t understand what a floppy disk and a VHS are. In that future world, automation will warrant that every taxable dollar is actually taxed and the bureaucratic procedures will be gone together with all the fear, and complexity of our tax system. However, it is uncertain whether transparency will be there. I am talking about transparency as a taxpayer’s right to follow the money. From “no taxation without representation” to “no taxability without traceability.” Sounds revolutionary, right? Revolutionary is what blockchain is doing.
To know the enemy, you must become the enemy: Transparency is possible where every taxpayer is a block that traces the tax revenue within a blockchain.
Blockchain is a decentralized solution for transparent real-time visibility of tax revenue. Imagine a giant spreadsheet that allows you to track every transaction made out of the tax revenue. Imagine that it is automatically updated every few minutes with the latest revenue movements. Now, here comes the fun: Imagine that the spreadsheet is not only stored by the government, instead it is in every taxpayer´s computer simultaneously, and with live updates. Just like you track my Amazon packages!
Traceability of the tax revenue is now centralized in the government that collects and spends. The system engenders from the disconformity of taxpayers who do not know where their money goes to political interference, discretionary spending, and corruption (on both sides, do not get me wrong). My proposal is a traceability system that would replace governmental trust for cryptographic proof.
Cryptographic proof gives blockchain the attribute of immutability. Every block of the blockchain subsequently verifies and confirms the information. That way, although every taxpayer is part of the system and can trace the data, none can independently intrude or alter the registered information. Going back to the Art of War, Chapter XIII - The Use of Spies taught us that when many unconnected spies are at work, none can manipulate the system.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Sofia Larrea is an international tax and transaction services professional in Boston.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.