Digital currencies and ledgers make Taxation 2.0 possible
The digital economy, in which each person is granted with a digital identity and dedicated digital currencies and registries are used where interactions are constantly taking place in real time, could be a golden opportunity for tax administrations around the world to gain tremendously in efficiency and fairness. We’re going to talk about VAT here, as well as new government taxes and benefits that could see the light of day.
Towards a generalization of source tax collection?
The “in real time” concept that characterizes the digital economy translates to “source tax collection” from a tax point of view, that is, as soon as the action on which the tax is levied takes place, for example as soon as you buy something. Income tax has been levied in Germany as a withholding tax for decades, i.e. as soon as salaries are paid. Sales tax accounts for a significant portion of government revenue in most States. There are also other specific excise taxes, such as on petrol or tobacco. What I will explain here also applies to these. For the sake of simplicity, I use the term VAT. Here we will use the concept of real-time payments with impermanent currencies.
Representation of the author
The tax administration collects a payment for each transaction it relates to, depending on the interacting parties, the product or service consumed, and the amount. For example, buying a postage stamp does not result in payment of VAT.
One could then imagine that the Irish State would pre-empt the prefix “IE” in the taxonomy of digital currencies, so that any currency whose name begins with “IE” would be a currency used by the Irish public administration or, be it for benefits or taxes. For example, we would have “DE” in Germany or “JP” in Japan. The Irish tax administration would therefore create the IEVAT to automatically collect VAT on goods and services consumed on Irish soil. This currency would be impermanent. Billions of smart contracts would encode the distribution of payments for each good and service: a pack of milk bought from Tesco in Tullamore would result in a different distribution of payments than the same pack of milk bought from Joyce’s supermarket in Galway. We see it again here, products need to be equipped with a digital identity so that the smart contract automatically knows which VAT rate to apply according to the product category. VAT would be systematically deducted at source in an extremely precise, efficient and automatic manner, and IEVAT flows would be used to simplify tax administration accounting automatically and in real-time according to the impermanent currency principle. There will be no more payment delays or defaults, the calculation of amounts will be done automatically by smart contracts, accounting will be largely automated and anyone who can view the payments in a specific register, for example a point of sale, will immediately know what IEVAT stands for.
Representation of the author
Individualized taxation becomes possible
Now let’s explore further the use of digital identities and smart contracts to see how these new tools will allow for a big leap in accuracy and transparency of taxation. In near-future payment systems, the principle of “who buys what?” would make certain prices vary depending on the characteristics of the buyer’s digital identity. Please note that these are only suggestions aimed at further explaining the “Taxation 2.0” concept and showing the potential impact of digital currencies and ledgers.
Here are some opportunities for government taxes and benefits that could emerge thanks to digital currencies and registries:
⦁ My BMI (body mass index) has an exponential impact on the tax levied on the sugary and fatty food products I buy.
⦁ If I am not vaccinated against Covid, I pay a certain tax every month, as briefly introduced by Greece in the winter of 2021–2022.
⦁ If I own my own home, property tax will be automatically deducted every month.
⦁ If I own a car, I pay a new road tax that depends on the mass of my vehicle and where I live (the more populated, the higher the road tax).
⦁ If someone does not receive a money transfer from an employer currency registered with the Ministry of Economy in a given month, he/she will automatically receive unemployment benefit accordingly.
⦁ Unemployment benefit, child benefit and all other social benefits (housing, family, old-age, social, disability allowances) could also be gradually coded so that they are automatically paid to entitled recipients, which, for example, would enable people who should receive benefits and are not receiving them in the current situation to get them automatically.
⦁ A tax on bandwidth usage and online data storage could be introduced and required of all internet-connected objects, otherwise they would not function.
The alliance of digital identities and currencies would make it possible to significantly individualize taxation, thus gaining legitimacy and transparency, but also to broaden its base, which is a crucial lever for increasing tax revenues. In my opinion, every tax administration should aim to fully automate tax collection in the next ten years or so, which would eliminate the need for income declarations, to systematize withholding, to individualize taxation and to make it significantly more transparent, fairer, more accurate and more effective, and to make our consumption more sustainable. Social benefits must also be paid out automatically. Each ministry or public body will administer its own currencies, for example in Germany DEALGI, DEALGII, DERENTE, DEKINDG etc. for social benefits and DEKKDAK, DEKKAOK, DEKKHKK, DEKKTKK, DEKKBKK, DEKKAUD, DEKKBAR etc. for health insurance companies. Public authorities and companies will manage a whole range of dedicated digital currencies and in return contribute to the emergence and continuous development of the digital economy.
Representation of the author; neither the Charité nor the DAK Gesundheit currently offer or participate in such a system
Proposal for an individual inner city toll
What is Ignite?
Ignite is a proposal for a dynamic urban tolling system, the calculation of which is performed in real time using multiple data about the vehicle (number of passengers, manufacturer information on CO2 emissions) and the external environment (traffic conditions, air quality) coming from oracles or digital registers. Unlike the congestion charge in London, for example, which is always the same, Ignite is calculated in real time, adapted to each journey and presented to drivers before, during and after the journey in the form of a proof of calculation. Because Ignite is fair, accurate, transparent, and individualized, it has a better chance of being accepted by taxpayers than a flat tax, which can be unfair and subjective.
How is Ignite calculated?
Ignite is dynamically calculated based on six criteria:
⦁ the number of people present in the vehicle (including children and babies)
⦁ the current air pollution index in the city
⦁ the current road traffic congestion index in the city
⦁ the CO2 emission index of the vehicle in the urban cycle
⦁ the municipality coefficient (see below)
⦁ any tolls (tunnels, etc.)
A “municipality coefficient” (an integer between 0 and 10) used to calculate Ignite is set by each municipality at the inception of the system and then at each election. The higher this coefficient, the lower the Ignite toll and vice versa.
Calculation example
The variables in the formula would be as follows:
⦁ Number of people: n
⦁ Vehicle CO2 emission index: e/ea
⦁ Air quality index: q/qa
⦁ Congestion index: d/d
⦁ Municipality coefficient [0–10]: c
⦁ Toll: p
Ignite = ((e/ea + 0.1) x q/qa x j/ja)2/2(n+c+2025-year) + p
Example without considering the year:
⦁ Number of people: 3
⦁ Vehicle CO2 emission index: 122/100 = 1.22
⦁ Air quality index: 36/50 = 0.72
⦁ Congestion index: d/d = 135/100 = 1.35
⦁ Municipality coefficient [0–10]: c = 4
⦁ Toll: p = 0
Ignite = (1.32 x 0.72 x 1.35)2/27 + p = 1.6461916416/128 + 0 = €0.0128608722/km
Here you can see how digital currencies can be used for micro-transactions, how digital identities can be used by machines and that the complexity of a smart contract can go far beyond a simple exchange of money or goods.
Here is some additional information about the system:
⦁ Ignite is automatically charged by the municipality when the vehicle leaves the city, based on the number of km driven in the city and the calculation shown above.
⦁ Ignite will be charged to the driver of the vehicle, who may charge it to fellow passengers, particularly in the case of taxis or private taxi services (Uber, Lyft, etc.).
⦁ The driver is automatically informed of the amount debited before her ride (estimate), during and after the ride.
⦁ Ignite does not apply to rides less than 100 meters and for use of vehicles in the professional sector (tradesmen, nurses, etc.), with the exception of taxis and taxi services with private cars.
⦁ In Ignite, the collection and allocation of amounts to municipal funds is carried out in a very transparent and reliable way using a digital register.
⦁ City administrations could use the amounts collected to e.g. develop the public transport network, build parks, plant trees; they could also allow citizens through a permanent online referendum to vote on the projects in their community they would most like to have Ignite funded.
The benefits of Ignite
Ignite offers several advantages depending on the participant:
⦁ Thanks to a digital register, Ignite is calculated, collected and allocated transparently and fairly in euros or in a stable government token: everyone pays in real time according to their environmental impact.
⦁ Local authorities can use Ignite to fund their road infrastructure, public transport or other projects of common interest.
⦁ Ignite is collected in real-time by the city government.
⦁ Impermanent currencies named after the cities, e.g. IEH91V0HR for Galway, Ireland, could add a certain traceability to the system, according to the motto: I pay regularly in IEH91V0HR, then I probably live in or next to Galway.
⦁ Ignite is an incentive system that deters citizens from taking their car when air quality is poor and/or congestion in a community is high, and encourages them to travel together or without a car.
⦁ The formula might differ from the above suggestion. For example, the density of the community or certain data of the digital identity of the driver could be taken into account in the calculation, for example: Ignite will be higher or lower if I live in the city itself.
Source: Google Maps, with additions by the author
How might Ignite be introduced?
The implementation of Ignite could be favored by the following measures:
⦁ The municipality could make public transport free (because funded by Ignite).
⦁ Drivers whose vehicle is equipped with the Ignite system would pay less because more criteria that reduce the Ignite toll could be taken into account in the calculation; drivers without the Ignite system would pay a fairly high lump sum such as is currently the case in London.
⦁ Ignite could be introduced at a low level, say pennies per trip, by setting a high municipal coefficient for example.
⦁ Multiple communities or even entire regions could adopt Ignite at the same time, as drivers would likely avoid a single city with Ignite.
⦁ The expected environmental benefits and the resulting impact on the quality of life of the residents could be described by the participating municipalities in the media.
⦁ The innovative aspect and relevance of the model in our increasingly polluted and congested cities could also be highlighted.
