Charles Delmotte (Michigan State; Google Scholar), Toward a Blockchain Driven Tax System, 43 Va. Tax Rev. __ (2023):

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. In particular, this Article explores enhancing tax efficiency by introducing blockchain technology in the tax administration and collection process.

The main elements that currently undermine the functioning of the system are (1) that tax payments are taxpayer-driven, (2) that payments occur after the taxable event, and (3) that the nature of one’s tax liability is highly complex. Because of these three problems, governments miss out on huge amounts of tax revenue, taxes are paid much later than the taxable event, and taxpayers spend huge amounts of money and energy to be (non)compliant. Blockchain technology kills not two but three birds with one stone – and solves these problems altogether. This Article will show that, under a blockchain-driven consumption tax, taxes are paid in an automated way that doesn’t rely on taxpayer initiative and in real time, i.e., simultaneously with the taxable event. Smart contracts enable programmed taxes that calculate the tax liability, further reducing compliance costs. This Article introduces cutting-edge developments in layer 2 technology to the literature to render the system energy-sustainable and retain privacy.

The current tax system was designed in a pre-digital era when financial institutions were manually operated and essentially paper-based. Amid consensus that the current tax system is outdated, this Article investigates a radically new way of levying, paying, and auditing taxes – whereby taxes are levied at the invoice level. This proposal slashes taxation costs, increases compliance, and enables lower overall tax rates, creating stronger governments and better-functioning economies.