America Needs a Trustless Automatic Taxation System

The United States needs a trustless and automatic system of tax collection. An automatic tax payment system will be fairer and more effective than the mess we have now.

America has two tax systems. There is an automated tax collection system for the working and middle classes and a voluntary tax payment system for the wealthy.

The levies paid by the working and middle classes are withholding or retention, and sales taxes. The government collects a withholding tax from your salary before you receive the money. Authorities usually collect sales taxes at the point of sale.

Why Automatic Taxes are better

Withholding and sales taxes are easy to collect because they are simple and trustless. The money goes directly to the government through an automatic mechanism so paperwork and bureaucracy are minimal.

Trustless means that nobody needs to trust that people will pay their taxes. Algorithms automatically collect the taxes before the taxpayer gets the money. Most people do not think about sales or withholding tax because they never see the funds.

Trustless taxes discourage tax evasion because there are few opportunities to evade them. Most people cannot evade trustless taxes because they get no chance to do so. Many taxpayers will never even think about trustless taxes which reduces the incentive for evasion.

The Problem with Voluntary taxes

The capital gains and income taxes paid by the wealthy, investors, and the self-employed are trust-based voluntary taxes.

The problem with voluntary taxes is we have to trust the taxpayer to pay them. A voluntary taxpayer always has the option of not paying, delaying payment, or making a partial payment.

That gives a self-employed person a huge tax advantage over a salaried employee. A self-employed person always has the option to delay his or her voluntary tax payment.

This gives self-employed people and investors a higher income effective because they can spend more of their money. If an unexpected expense comes up they can delay the tax payment and use that money to cover it. Likewise, if an opportunity appears, the self-employed can use the tax payment money to take advantage.

The investor or self-employed person can get away with this because the IRS will leave him or alone if he or she pays the tax late with a penalty. A partial tax payment will usually keep the IRS happy.

Since it usually takes the IRS several months to realize somebody has not paid her taxes. Voluntary taxpayers receive a “grace period” salaried workers do not have. If a payment is two weeks late — the IRS will not care. The IRS charges a late fee for most delayed payments.

How the Voluntary Tax System Perpetuates Income Inequality

Therefore, the voluntary tax system perpetuates income inequality by giving the voluntary taxpayers a huge advantage. A self-employed contractor can spend all of his or her money. An employee cannot.

American workers now pay twice as much in taxes as the wealthy because of the voluntary tax system, Bloomberg writer Ben Stevenson calculated. Stevenson estimated that an emergency room doctor who made $300,000 a year paid around $80,295 in federal income taxes in 2017.

Meanwhile, a wealthy heir with a $300,000 annual income paid $41,742 in taxes in 2017 — if he played World of Warcraft all day. By not working, the heir gave himself a $38,553 year “tax cut,” Stevenson calculated. Obviously, the heir has $38,553 in extra cash to invest and make himself richer.

The heir paid no payroll tax (a $12,236 year savings) and a 14% effective rate in 2017 by not having a “job.” The doctor paid a 34% effective tax rate (including $12,236 in payroll taxes) for the “privilege” of holding a job.

A tax system that penalizes many people for working makes no sense. Yet that is exactly what America has.

The current tax system perpetuates income inequality because the more you make; the greater the tax advantages you receive. A rich person who makes several million dollars a year from investments pays a 14% effective tax rate on them. That person has a higher after-tax income and more money to invest.

To make inequality worse that tax is voluntary so the rich person decides when to pay the taxes. If she hears about a great opportunity in the market, the rich person can delay her taxes and spend the cash to buy that stock. She makes more money and pays a small penalty for paying the tax late.

How a Trustless Blockchain-based Automatic Tax System would collect more Money

Trustless automatic collection is the best way to equalize the tax system. The technology to collect taxes on investment income as someone generates it exists right now. Blockchain software constructions called Smart Contracts; or decentralized apps (Dapps), can be built into financial instruments like stocks, bonds, annuities, derivatives, and cryptocurrencies.

The Smart Contracts, or Dapps, can be programmed to pay the Treasury a percentage of the funds generated as taxes. For example, a stock Dapp, would pay a percentage of dividends to the Treasury.

We can raise more money if a smart contract paid a transaction tax every time someone sold a security or equity (stock). Supporters estimated that The Robin Hood Tax (sales tax on investments) could raise $300 billion a year in the United States.

Smart Contracts are the key to Automatic Taxation

Programmers can easily write the Robin Hood Tax into stock, bond, derivative, private equity, or annuity smart contracts. The smart contract will automatically collect the tax at the time of sale. They can write a similar automatic tax into mortgages to collect real estate transaction taxes (sales taxes on property).

A cryptocurrency can be programmed to pay a tax on every transaction. Smart contracts for properties or intellectual property agreements can automatically collect taxes on rent or royalties payments.

Blockchain-based patents, licensing agreements, business licenses, mortgages, sales contracts, employment contracts, and corporations that automatically pay collect from the funds they generate are feasible. The government will write the taxes into the smart contracts used to create those relationships. Smart contract mortgages that automatically pay property taxes are also possible.

Trustless Automatic Taxation will be Cheaper and easier

Blockchain-based trustless automatic taxation will be cheaper and simpler than the current system.

America will need no massive IRS bureaucracy because taxes are automatic. The only tax evaders will be a tiny number of professional criminals. For example, drug dealers that use cash. The U.S. Treasury can easily end that evasion by eliminating paper cash.

Most people will have no incentive to evade taxes, which will eliminate most tax evasion and the need for the IRS. Taxpayers will save money because few people will go to prison for evasion.

There will be no need for tax preparation, tax accountants, and tax lawyers. Therefore, the wealthy will save money. No investor or entrepreneur will have to waste several days on tax-related paperwork each month.

Many wealthy people will probably gladly trade all their tax hassles for simple trustless automatic taxation. Some rich taxpayers will willingly pay a higher rate for the pleasure of firing their accountant and tax attorney. Many wealthy people might make more money by eliminating tax-related expenses.

Tax returns will become a thing of the past because of trustless automatic tax collection. Unfortunately, some jobs such as the tax accountant, IRS agent, tax preparer, and tax attorney will disappear.

I imagine that few Americans will shed any tears if they see ex-IRS agents flipping burgers or former tax attorneys driving Uber. Accountants might find work teaching high school math, which is a respected and socially beneficial profession.

Trustless Automatic Taxation is Inevitable so is a long bloody struggle to implement it

Trustless automatic taxation is inevitable because of its inherent advantages. Unfortunately, it will take a long and bloody struggle to make automatic taxation a reality.

Implementing a trustless automatic tax system will be a titanic battle. All the pests that profit from our tax system; trust-fund heirs, real estate developers, realtors, investors, IRS agents, investment bankers, pundits, second-rate academics, investment advisors, tax advisors, financial advisors, government contractors, third-rate economists, accountants, lawyers, tax preparers, lobbyists, hack journalists, think-tank intellectuals, charity administrators, professional fundraisers, politicians, U.S. Senators, and Congressmen, will fight like hell to preserve the status quo.

That struggle will be worth it because trustless automatic taxation will be more effective. Such a system will raise more money and reduce income inequality.

This commentary first appeared at Market Mad House, please visit us to see more of the incredible possibilities of blockchain.