Bitcoin doesn't make taxation impossible by any means, but adoption of it in a country would require changes to the balance of taxes and how they are managed.
The most problematic tax to enforce in a Bitcoin-heavy world is obviously the income tax, but income taxes are already very hard to enforce fairly. We hear about unfairness in income tax application almost every weak thanks to, eg, the disparity between "income" and "capital gains" - a distinction that makes no economic sense and results in rich people paying less effective tax than poorer people. There are about a million different ways to hide or recast income even in todays system that offers almost no privacy at all.
So if a society adopts Bitcoin, does that mean calling time on the income tax? Quite possibly. Does it mean shrinking the tax revenue? Not necessarily. Whilst some taxes are harder to collect with Bitcoin others would be easier, for example, sales taxes. You can incentivize citizens to report transactions to the tax authority to get a rebate against the collected tax. When your own customers are automatically reporting all transactions and are incentivized to do so financially it becomes a lot harder to avoid reporting all your sales, and a lot of expensive tax collectors could be replaced with software.
There are probably a variety of other ways you could come up with to innovate in the tax space. Governments will instinctively fear financial privacy of any kind because they are typically run by lawyers whose first idea for "stop people breaking the rules" is more laws and more monitoring. People with knowledge of software and cryptography need to help them see ways to both preserve citizens privacy and still collect a stable tax base.
The most problematic tax to enforce in a Bitcoin-heavy world is obviously the income tax, but income taxes are already very hard to enforce fairly. We hear about unfairness in income tax application almost every weak thanks to, eg, the disparity between "income" and "capital gains" - a distinction that makes no economic sense and results in rich people paying less effective tax than poorer people. There are about a million different ways to hide or recast income even in todays system that offers almost no privacy at all.
So if a society adopts Bitcoin, does that mean calling time on the income tax? Quite possibly. Does it mean shrinking the tax revenue? Not necessarily. Whilst some taxes are harder to collect with Bitcoin others would be easier, for example, sales taxes. You can incentivize citizens to report transactions to the tax authority to get a rebate against the collected tax. When your own customers are automatically reporting all transactions and are incentivized to do so financially it becomes a lot harder to avoid reporting all your sales, and a lot of expensive tax collectors could be replaced with software.
There are probably a variety of other ways you could come up with to innovate in the tax space. Governments will instinctively fear financial privacy of any kind because they are typically run by lawyers whose first idea for "stop people breaking the rules" is more laws and more monitoring. People with knowledge of software and cryptography need to help them see ways to both preserve citizens privacy and still collect a stable tax base.
You can replace most income tax with a goods and services tax. Merchants collect it at point of sale and anyone offering services like a plumber collects the tax when they provide the service. Consumption axes are a lot fairer than income taxes. So are land taxes btw. So if you buy something with btc the merchant collects the extra in the price.
