Delmotte: The Promises And Pitfalls Of A Blockchain Driven Tax System

Charles Delmotte (NYU; Google Scholar), The Promises and Pitfalls of a Blockchain Driven Tax System:

Policymakers and international organizations such as the OECD defend new tax measures to increase tax compliance and decrease tax competition and tax evasion. The proposed new policies often change the nature or distribution of tax liabilities, for instance by changing the rate structure, introducing new taxable events, or redistributing taxing rights. In a divided political landscape, this article suggests another approach to simplify taxes and raise compliance. This article doesn’t intend to touch upon what we owe the government, but only regards how we execute the existing set of tax rules. Moreover, I will explore enhancing tax efficiency by altering the technological design that undergirds the tax system – by relying on blockchain technology.

The main characteristics that currently undermine the functioning of the system are that tax payments are taxpayer driven, that payments occur after the fact, and that the nature of one’s tax liability is highly complex. Because of these three problems, governments miss huge amounts of tax revenue, they are paid much later than the taxable event, and taxpayers spend huge amounts of money and energy to be (non)compliant. Blockchain technology can hit not two but three birds with one stone – and solve these problems altogether. This article will show that, under a blockchain driven consumption tax, taxes are paid in an automated and automatic way – one that doesn’t rely on taxpayer initiative, in real time, i.e., simultaneously with the taxable event. Compliance costs can be radically reduced both for taxpayers. This article also reveals the costs of transforming to a blockchain-driven tax, and deals with the energy-consumption problem, the last-mile problem, the issue of false entry and the related concern of taxpayer privacy.

The current tax system was designed in a pre-digital era, where financial institutions were hand-operated and essentially paper driven. Amid consensus that the current tax system is outdated, this article investigates a radically new way of levying, paying, and auditing taxes – whereby tax payments become a by-product of each transaction and are integrated within the business operations. If specific costs are borne and the proper technological choices are made, the blockchain driven tax would slash the costs of taxation, increase compliance, and enable lower overall tax rates, creating both stronger governments and better functioning economies.