By Ary Bandana, DIGITS Staff Writer

I want to talk about tax systems and blockchain. Now, it might be weird to try and combine, a government institution with an arguably rebel technology, but maybe together they can have some interesting outcome and bring about a super economy. I’m going to start off with a simple explanation of what taxes are and we are going to talk about Smart contracts and block rewards and mention the benefits to society.

Tax?

Let’s start with tax. Tax is a non-negotiable payment that is imposed on the public by a government organization. Tax is used to pay for national needs and government functions. Now, this concept of tax is fairly easy to understand, but the application of tax systems and the rates the public have to pay can get extremely complicated. So some accountants have dedicated their lives to helping others calculate their taxes. Failure to pay the correct amount of tax is met with a variety of penalties, and the tax calculation is a source of stress for many households. And if our entire economy was placed a blockchain, all taxes could be paid automatically. These would free up the public’s time, reduce the frictional cost to the government of collecting tax, and allow those accountants to do other productive tasks. Now smart contracts and block rewards can help achieve this win-win scenario.

Smart Contract?

But what is a smart contract? It’s a program containing a set of rules that aid transactions. The thing is, is that smart contracts are not necessarily new to crypto. If we look at some of the original blockchains like Bitcoin, Litecoin and even smaller crypto, we’re going to see that they’re also having a test done inside of them. What they first do is they get the sender address, they get the receiver address and they get the amount. They then take this information and they run it through a small contract that is embedded in the algorithm. And what this test does, it first makes sure that the sender has enough coins and then it’s going to reduce the sender’s balance by the amount increased the receiver’s address by that amount. And this is what happens in the normal crypto. We then get  Ethereum and Neo and these are a blockchain that can host smart contracts that can be created outside of the algorithm and they can allow for more input data and implement more complex logic.

How does this help in taxing?

And I mean, one thing that we could also start seeing in the future is addresses that are heterogeneous. And what that means is we can have different rules for different addresses. So companies and people can be treated differently depending on what address they use. But coming back to our economic blockchain, what we can just simply do is not only say who is sending it to, how much we sending it to, but why we are sending it. We can include a reason field. And I mean, some possible reasons in our economy could be the paying of salaries, which would then filter with a marginal income tax. It could be for goods and services, which we can then filter with a value-added tax to a smart contract. We could have the reason for donations which then can be filtered with a zero tax contract, or we can even have asset disposal where we can filter the capital gains tax. Now, these are just a few possible reasons. And in the economy, there are way more that the system will need to cater for. But just imagine all the data that we would be getting from this and how it will help us when we do financial planning in the government.

Now, what could be even better is if we start combining this data with GPS. So every time you make a transaction, we also then capture your GPS and then we can see which areas of a city are most economically active. And we can also check out more in-depth things like, you know, which neighborhood is buying the most Nasi Goreng. Now, if you think that this is a little bit creepy, with all the surveillance and that whole big brother is watching you. You’re right. But everyone will have access to this data, not just the credit card companies and the government, but entrepreneurs will also have access to it. And they can use this information to better plan their businesses. Also, what would be really cool is if the miners are the people you know, and they own this whole network infrastructure. And then the block rewards that we spoke about could almost act like a pseudo universal basic income.

Let’s back up and returned to looking at taxes. Some taxes are deducted at source. For example, most salaries received on a net of tax with the company then pays the government. A sales tax is also generally included in the price in some countries. But in both these cases, two transactions have to be made and the calculations have to be done manually. And these are the easy ones. We don’t have time to go into the complicated tax law that is forever changing due to due to them closing loopholes that have been previously exploited by very smart people who can hire lots and lots of accountants. And because of this, governments spend billions on their tax collecting institutions and are forever investigating someone who is trying to dodge their tax bill. And that’s a problem. Tax is the citizen’s responsibility. And some citizens either make mistakes or they take chances and try and hold some back. And we can’t be naive, people will try and game the system. So we will need to implement some sort of monitoring software that uses machine learning and pattern recognition to catch anyone who gives the wrong reason for their payments to reduce their tax. For example, if you have a company and you’re giving monthly amounts to people that are online with an average salary, but you’re labeling it as donations, then the system can be O OH! We need to throw up a red flag. And what government can also do is they can reward other firms to inspect a blockchain and notify them of any unusual activity.

Conclusion

So let’s talk more about these whole benefits to society. As I said, fewer collection costs mean the government can ask for less tax and still get the same amount of money. More economic data will allow for better financial planning and urban development. More transparency will highlight criminal activity and attempts at tax evasion. And all of this should result in a more efficient economy that results in a wealthier society.

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Frankenfield, Jake. (2019). “Smart Contracts”. Retrieved  from https://www.investopedia.com/terms/s/smart-contracts.asp 14 July 2019

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