Bitcoin and Taxation: Government On A Bitcoin Standard

How will governments function in a world that has transitioned from fiat to hyperbitcoinization? This is a question that I have thought about recently, and I wanted to think through what happens to governments on a Bitcoin standard. The questions I have are the following: how will governments fund themselves? How do your taxes work in a digital landscape, and how will governments respond to this dilemma?

How Will Governments Fund Themselves?

Most hardcore Bitcoiners probably could care less about what happens to the government on a Bitcoin standard. I would venture to say that they would want all governments to crash and burn. I sympathize with that point of view, but I am also a realist. The average person wants the government around because they have been conditioned to believe it brings a sense of order and protects its citizens. I think it is the opposite, but this isn’t a majority view.

Governments of different sizes and configurations have existed for thousands of years and will likely still be around when hyperbitcoinization is realized. So how will governments fund themselves when the power to create money on a whim has been irrevocably taken away from them?

In the West, governments primarily tax income as a major source of revenue because they have the ability to surveil most transactions through payment rails controlled by the Federal Reserve, banks, and through the threat of force and imprisonment. This has worked for them for a long time, but this will no longer be possible on a Bitcoin standard.

The very nature of Bitcoin makes the tracking of the income of every economic participant virtually impossible and very time-intensive, especially when privacy tools such as coinjoins and lightning are thrown into the mix. You can start to understand why governments don’t like Bitcoin, it takes away their power.

Without the power to wantonly tax individuals, governments will be forced to develop methods to generate revenue to sustain themselves. More on that later.

The Bitcoin Economy Of The Future

Imagine a future where everyone buys and sells goods peer to peer using Bitcoin. This, by default, would be a tax-free economy. Currently, there is no line of code in the Bitcoin protocol that can calculate sales tax when you buy goods, and no Bitcoiner would even consider creating something like that unless they want to be tarred and feathered as simp for the government.

I don’t even know if that is technically possible to do, to be honest. Nobody likes paying taxes and wouldn’t shed a tear over not having to pay them anymore. This creates another dilemma for governments around the world. If they can’t tax income and they can’t effectively tax consumption, what alternatives do they have to sustain themselves?

There is no simple answer to this. I think our whole concept of what government is and how it relates to its people will have to radically shift from a top-down concept to a more decentralized customer service model. This is more in line with the libertarian worldview of what the state should look like, where governments are voluntarily funded by their citizens instead of being compelled to fund it through the barrel of a gun.

Under this model, governments will have to be much smaller than they are today as they would have to be mindful of revenues versus outlays, just like any business would. If the governments are good fiscal stewards of their Bitcoin treasuries, citizens will be far more likely to reward governments with continued support. This form of a signal of support has more influence than voting. The ability to withhold funding will make politicians more responsive to the people.

Elections could still be held as this wouldn’t have to change. Political parties would have to show they are good stewards of capital, or the government wouldn’t get voluntarily funded and would naturally fall from power in the next election. This is a world that I think we should be working towards, as it will make the world a safer place for everyone.

How Will Governments Respond To This Emerging Challenge?

While this might sound like music to our ears, politicians hate the idea of Bitcoin or having to be responsive to the citizenry. They have it pretty good right now as it is. They get to tell people what to do, get good benefits, and get reelected even if they break their promises—no wonder they never want to leave office.

In America, incumbents get reelected north of 90 percent. Did you know in the House of Representatives, the reelection of incumbents has never dipped below 85 percent? So you only have 15 percent of being voted out in the next election. Who doesn’t like those odds? This is why nothing changes. We get the same people in office year after year because they know how to play the game and grease the right palms, all thanks to the fiat money printer.

If you want to see all the BS the federal government spends on their depreciating fiat dollar, check out the Citizens Against Government Waste website. This will give you a good idea of the crap that is being funded in your name.

So, knowing this, do you think they will willingly give up all this power, prestige, and influence? I don’t think so. They will employ various tricks to either capture Bitcoin for their benefit or make it so cumbersome that people won’t use it.

I fear that Bitcoiners have already fallen into one of their traps with the Bitcoin ETF. I sincerely believe this was a wrong move and can tremendously slow down the adoption of Bitcoin in the US. Sorry to say, but most people want quick and easy regarding anything in life, even Bitcoin.

Answer this question: Why would those with very little knowledge of Bitcoin learn the ins and outs of self-custody, and why is it important when they can “own” Bitcoin in their retirement account? 9 out of 10 people are going to choose this option. As long as they see their retirement portfolio rise because of Bitcoin, they will gladly oblige to having large custodians like Blackrock hold their Bitcoin, not understanding how dangerous third-party custody really is to Bitcoin.

At least we have a chance with Bitcoin to improve the world. Let's hope people take the opportunity to achieve real freedom. 

This is a guest post by Robert Hall. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.