Bitcoin, Taxation, and the Systemic Necessity of Allowing Privacy

Posted on Nov 30, 2015 by Rick Falkvinge

As you start using bitcoin, you start questioning the nature of money – or the nature of central bank money, anyway. If you go deeper down the rabbit hole, you discover that central-bank money and the formation and power of government are closely linked – you start to discover origins of money, origins of large-scale bank fraud, and the origins of taxation. Perhaps most interestingly, you start to see the pattern that a system that doesn’t allow privacy will fail at the systemic level, for people will always carve out privacy for themselves.

Very few people I know had any real reason to question the nature of money and banking before they encountered Bitcoin. Conversely, few people who have encountered and examined bitcoin have done so without asking a few questions about the nature of money that becomes very embarrassing for the central bank system and fractional-reserve currencies. You run into details like the reason for the Dutch Florin being the world trade currency of choice for a large period of historic time – the reason being that the Bank of Amsterdam was trusted to not cheat on its ledgers, trusted to not run a fractional-reserve scheme like others would. You run into details like the origins of fractional reserve banking, and that it was basically made legal to avoid a systemic collapse as everybody was doing it. You gradually come to see how intertwined the concept of money is – regarded as an abstraction of value – with governmental ability to tax the value that the same government abstracted into a currency.

You also run into the origins of taxation in the post-Roman world. How villages accepted the nobility and crown to rule on disputes about who owned what, but once they had given the power over the ledger away to said nobility – meaning they had surrendered the authority to say who owned what – that nobility would also start saying that they should have some of the dispute proceeds. Indeed, in the ancient laws of Æthelberht (“Noble Bert”), we find that the original taxation in the UK was a cut of all dispute resolution payments. Later English taxation to afford “protection money” to Viking raiders – to pay the Danegæld – was through a tax on land, again falling back on governmental control of the ledger.

We see similar records in France, even though all pre-1789 taxes were abolished and most records lost in the process de la République: there are records of a land tax known as the taille in the Ancien Régime, imposed on each household based on its land ownage – as determined by the government ledger of land ownage, of course.

Governmental control of the ledger, of dispute resolution, was and is the key to governmental taxation, at least post-Rome. This brings all kinds of interesting understanding to just how big a game-changer bitcoin is.

This also leads to curiosity about how things worked before Æthelberht and in Rome. We find immediate lessons of history to apply to the modern era: part of the reason why Rome collapsed was that it didn’t respect and understand the need for privacy, from a taxation perspective.

Roman taxation was originally based on headcount, a flat so-called poll tax. Basically, if you had a head, you paid the tax. But as centuries passed, productivity fell – and privileges rose. According to historian Joseph Tainter, “those who lived off the treasury were more numerous than those paying into it.” This created a scenario by the 4th century where Roman farmers would abandon their fields to live off of grants instead. All the time, the need for more tax revenue increased – not the least to feed the enormous Roman army enforcing the Pax Romana.

By the 5th century, the emperor Valentinian III declared a sales tax or a transaction tax of 4%. Seeing how it was routinely ignored, the emperor further ruled that no transactions may take place at all without a tax collector physically present at the sale, in order to collect the tax. Thus, the Roman emperor of 444 C.E. decreed that privacy of economy, of financials, and of transactions, were second to the government’s need to collect taxes.

This one decree maybe can’t be said to have been the straw that broke the camel’s back on the old Rome, as a lot of things went bad at the same time, but the transaction tax was certainly one of the straws in the bale that broke Rome. People in general started seeking protection from barbarians instead to retain their privacy of transactions (and, by extension, their money – even if a 4% sales tax isn’t uncommon by today’s standards), and therefore, the system fell.

We learn the same lesson from a more recent example with the East German Stasi: a system that doesn’t tolerate privacy is a system that won’t survive, for people will carve out spaces of privacy at any cost because of human nature, and if the governmental system doesn’t tolerate that, it will fail.

The takeaway of history’s merciless lessons is that people will always carve out privacy for themselves, and a consequence of that is that any system that doesn’t allow for privacy will fail, because human nature won’t allow it to work.

It remains to be seen if today’s bureaucrats will be humble enough to learn this from history. Sadly, the only thing we seem to learn from history is that we are incapable of learning from history.

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  1. BenjaminGustafsson

    Bitcoin is the perfect open ledger for the state. Simply require everyone to report their bitcoin address, and the addresses they trade with (know your customer-laws) and sales taxes will then be calculated automatically using the open ledger. The nonviolent penalty for not reporting a Bitcoin address could be losing citizenship. I think Bitcoin is the end of privacy. Everyone will know what everyone else does because all addresses will be revealed on flashback

    5 years ago
    1. Falkvinge

      You’re making an important assumption in the wording “their bitcoin address”, implying the singular form. An individual can have any number of addresses – millions. More importantly, there’s no way to tell how many they have.

      Therefore, the concept falls apart early.

      That said, there is a whole new layer of trackability that we’ve only started to understand.

      5 years ago
      1. BenjaminGustafsson

        Let me correct myself. “Simply require everyone to report all their bitcoin addresses.” Make it illegal to receive a payment without registering the identity of the payer with the government. All anonymous payments must immediately be transferred to the government to avoid fines.

        5 years ago
  2. Jacob Hallén

    As I have said before, the nation state will defend its taxation at any cost. As long as bitcoin is a fringe activity, it will be tolerated. When it becomes mainstream, it will be outlawed. It will become illegal to convert fiat currency to bitcoin and vice versa. Since you are required to pay taxes in fiat currency, going bitcoin only will not be an open avenue.

    5 years ago
    1. ekkis

      the genie’s out of the bottle. if btc goes mainstream it will be because large masses of the world’s population will have understood the enormous advantages of using it. at that point, outlawing it will simple create a vast black market. since btc can always be sold for fiat (even through the black markets), taxes can continue to be paid for such situations where they can’t be avoided, but will be satisfied by means of the then ersatz currencies issued by those who demand its payment, which I should add, will likely be to the great satisfaction of the payers, for they’ll be profiting closing their debts in highly devalued currencies, much like governments do today

      5 years ago
    2. Falkvinge

      You’re defacto already allowed to pay taxes in bitcoin. If you’re behind on taxes, the government will forcibly collect what it can, and at that point, it accepts anything of value, bitcoin included.

      So you can pay taxes in bitcoin already, as long as you’re prepared to take the scenic route to do it.

      5 years ago