Why Digital Currency Will Revolutionize Tax Collection
Why we will see trillions of digital currency transactions and the impact on tax.
In my experience, when it comes to digital currencies, most governments and in fact most people of the world currently fall into one of the following categories:
- Ignorant about digital currency
- Dislike (even disdain) digital currency
- Curious but skeptical about digital currency
This is not a criticism. In fact, I was once in a state of ignorance. We all start there when it comes to new technology. Furthermore, I can’t say that I blame people for feelings of disdain as there has been a lot of abuse, criminal behavior, technical issues, and negative publicity:
- Bitcoin was initially heavily used by criminals
- The controversial goal of disintermediating banks
- ICO scams and failures
- Hacks and losses of coins
- Private key management complexity
- The price volatility and most recent bubble
- The lack of adoption
- The speculation
- The scalability problems
All of these issues and the associated, overwhelming negative perception would seem to imply that digital currencies don’t have a chance of ever being valued and accepted by enterprises, let alone governments. I actually believe the opposite is true. I believe that all of the issues listed above are being addressed (which I leave as an exercise for the reader). I also see a growing population within government who are acknowledging the potential of digital currency (here is an example). I believe that if one takes a step back and examines the properties of digital currency, then one begins to see how extremely valuable they can be to our economic growth.
Before examining the properties, I first need to clarify something about my use of the term “digital currency.” I am not referring only to the new, non-government digital currencies that have come on to the scene such as Bitcoin, Ether, HBar, EOS, etc. I also include the possibility of a government issued digital currency. For purposes of this discussion, I consider anything having the following properties to be a digital currency:
- Immediate settlement
- Low cost transactions (fractions of a cent)
- Programmable money (aka smart contracts)
In terms of automating tax collection, I don’t particularly care which digital currency gets used. It could come from a government or it could come from the private sector. I can argue why I currently think Hedera (HBars) has the best technology and governance solutions. I can also argue why I don’t think a government issued digital currency will have all of the above listed properties, but neither of these arguments is important for this particular article. Instead, I want to focus on why the above listed properties will make digital currency economically valuable and why these properties can significantly improve tax collection. These reasons are among the reasons that governments will ultimately embrace digital currency.
Let’s take the first question… why are these properties economically valuable?
One example is micropayments.
The above listed properties finally make micropayments possible, and micropayments are perhaps the first way that digital currency will become popular. There are both pent-up and growing new demands for micropayments. Examples include:
- IOT transactions
- Personal data privacy
- Pay-as-you-go information consumption
- Monetizing personal information
Up until recently, the digital currency industry largely focused on using digital currency for transactions that today already occur. For example, we always heard the goal that Bitcoin will be successful once I use it every day to buy my coffee… or once Amazon accepts it. We were focused on using digital currency in place of fiat currency. This type of thinking for new technology is usually errant. Instead, digital currency will first get used for transaction types that don’t currently occur. Said differently, digital currency will allow for a whole new class of transactions called micropayments.
It makes sense that something new (digital currency) first gets used for something new (micropayments). Instead of existing businesses converting to use this new digital currency technology, we will first see new businesses created. Furthermore, it is much easier for new businesses to use new technology than for old businesses to switch to new technology. New transaction types will make digital currency popular, and then, later, old transaction types (today’s fiat transactions) can begin switching over to digital currency.
Trillions of transactions
In addition, digital currency transaction volume will be much higher than today’s fiat currency transaction volume. For example, today, a person executes a single, annual or monthly transaction to buy a subscription to a news website. Tomorrow, that person will execute 100 micropayment transactions per day in place of the single subscription transaction. We could see a 1000x (or more) increase in transaction volume as digital currencies become popular. I believe we will eventually see trillions of digital currency transactions per hour. Many of these will represent new contributions to economic growth. Countries around the world will quickly begin anticipating this. They will not only want to ensure they don’t stifle this innovation, but they will also want to know how to attract this economic growth to within their borders, which brings us to the topic of tax. Fair and efficient tax systems can be one of those attractions.
Tax policy and systems have of course evolved a lot over the decades, but the fundamentals were largely defined prior to cross-border trade. They haven’t changed much to accommodate computers, the Internet, and global trade. Now, they need to deal with digital currencies. EU Tax Commissioner Pierre Moscovic has said, “VAT [laws] are a quarter of a century old and no longer fit for purpose”.
We will experience trillions of digital currency transactions, and guess what? Most of these transactions will be taxable events. Of course, today we have tax software that has been built to calculate and remit taxes for fiat currency transactions. The question we can ask is whether or not we should use our existing tax systems to also handle digital currency transactions. I believe the answer is no. The technology and attributes that accompany digital currency give us the ability to significantly improve transaction taxes.
Digital currency settles immediately and is programmable money. Therefore, with digital currency we can accomplish something that has been tried many times with fiat currency but has always failed due to fiat’s friction. That is, split payments. With digital currency transactions, it is now relatively easy to program the transactions to calculate and send the tax portion of the transaction directly to the tax authority. No longer does the business need to calculate, collect, and remit the tax. This will have significant impacts. Imagine a tax environment where a business can opt in to a system where they don’t need to worry about determining, collecting, or remitting transaction tax… nor would they need to file a tax return. Tax compliance costs would plummet. Tax administration costs would decrease. Tax fraud would plummet. This is all possible and practical with digital currency.
Trillions of digital currency transactions are coming. This is a wonderful opportunity for improving our lives and economic growth. Just like the original iPhone, we can’t yet foresee why we want and need this new capability. Digital currency (aka, the Internet’s payment layer) will have a profound impact on our lives.