Excerpts from a 1997 book that seem relevant to cryptocurrency


#1

Excerpt 1:

"After the turn of the millennium, much of the world’s commerce will migrate into the new realm of
cyberspace, a region where governments will have no more dominion than they exercise
over the bottom of the sea or the outer planets. In cyberspace. the threats of physical
violence that have been the alpha and omega of politics since time immemorial will
vanish. In cyberspace, the meek and the mighty will meet on equal terms. Cyberspace is the ultimate offshore jurisdiction. An economy with no taxes. Bermuda in the sky with
diamonds.

When this greatest tax haven of them all is fully open for business, all funds will
essentially be offshore funds at the discretion of their owner. This will have cascading
consequences. The state has grown used to treating its taxpayers as a farmer treats his
cows, keeping them in a field to be milked. Soon, the cows will have wings.

Like an angry farmer, the state will no doubt take desperate measures at first to
tether and hobble its escaping herd. It will employ covert and even violent means to
restrict access to liberating technologies. Such expedients will work only temporarily, if
at all. The twentieth-century nation-state, with all its pretensions, will starve to death as
its tax revenues decline.

When the state finds itself unable to meet its committed expenditure by raising tax
revenues, it will resort to other, more desperate measures. Among them is printing
money. Governments have grown used to enjoying a monopoly over currency that they
could depreciate at will. This arbitrary inflation has been a prominent feature of the
monetary policy of all twentieth-century states. Even the best national currency of the
postwar period, the German mark, lost 71 percent of its value from January 1, 1949,
through the end of June 1995. In the same period, the U.S. dollar lost 84 percent of its
value. This inflation had the same effect as a tax on all who hold the currency. As we
explore later, inflation as revenue option will be largely foreclosed by the emergence of
cybermoney. New technologies will allow the holders of wealth to bypass the national
monopolies that have issued and regulated money in the modern period. The state will
continue to control the industrial-era printing presses, but their importance for controlling
the world’s wealth will be transcended by mathematical algorithms that have no physical
existence. In the new millennium, cybermoney controlled by private markets will
supersede flat money issued by governments. Only the poor will be victims of inflation.

Lacking their accustomed scope to tax and inflate, governments, even in
traditionally civil countries, will turn nasty. As income tax becomes uncollectable, older
and more arbitrary methods of exaction will resurface. The ultimate form of withholding
tax–de facto or even overt hostage-taking will be introduced by governments desperate to
prevent wealth from escaping beyond their reach. Unlucky individuals will find
themselves singled out and held to ransom in an almost medieval fashion. Businesses
that offer services that facilitate the realization of autonomy by individuals will be subject
to infiltration, sabotage, and disruption. Arbitrary forfeiture of property, already
commonplace in the United States, where it occurs five thousand times a week, will
become even more pervasive. Governments will violate human rights, censor the free
flow of information, sabotage useful technologies, and worse. For the same reasons that
the late, departed Soviet Union tried in vain to suppress access to personal computers and
Xerox machines, western governments will seek to suppress the cybereconomy by
totalitarian means."

Excerpt 2:

"In almost every competitive area, including most of the world’s multitrilliondollar
investment activity, the migration of transactions into cyberspace will be driven by
an almost hydraulic pressure-the impetus to avoid predatory taxation, including the tax
that inflation places upon everyone who holds his wealth in a national currency.

You do not need to think long about the megapolitics of the Information Age to
realize that predatory taxes and inflation of the kind imposed as a matter of right by the
wealthiest industrial countries upon their citizens will be preposterously uncompetitive on
the new frontier of cyberspace. Soon after the turn of the millennium, anyone who pays
income taxes at rates currently imposed will be doing so out of choice. As Frederic C.
Lane pointed out, history shows that on 'the frontiers and on the high seas, where no one
had an enduring monopoly in the use of violence, merchants avoided payment of
exactions which were so high that protection could be obtained more cheaply by other
means." The cybereconomy provides just such an alternative. No government will be
able to monopolize it. And the information technologies comprised by it will provide
cheaper and more effective protection for financial assets than most governments ever
had reason to provide.

Remember, each $5,000 of annual tax payments paid over forty years slashes
your net worth by $2.2 million, assuming you could realize just a 10 percent return on
your capital. At a 20 percent return, the compound loss balloons to about $44 million.
For high-income earners in a high-tax country, the cumulative losses from predatory
taxation over a lifetime are staggering. Most will lose more than they ever had. This
sounds impossible, but the mathematics are clear. It is something that you can confirm
for yourself with a pocket calculator. The top 1 percent of taxpayers in the United States
pay an average of more than $125,000 in federal income taxes annually. For a fraction of
that amount, $45,000 a year, one would be welcome to live under a private tax treaty in
Switzerland, and enjoy law and order provided by what is arguably the most honest
police and judicial system in the world.

From this perspective, the additional $80,000 a year of income tax paid above that
generous level might well be classified as tribute or plunder. Forty-five thousand dollars
is certainly a substantial payment toward the maintenance of law and order, considering
that police protection is meant to be a public good. In theory, public goods can be
extended to additional users at a marginal cost of zero. The Swiss are glad to have you
pay a negotiated fixed tax of $45,000 (50,000 Swiss francs) per year because they make
an annual profit of $45,000 on every millionaire who signs up.

Compared to the Swiss alternative, the lifetime losses from paying federal income
tax at U.S. rates would be $705 million for an investor who could average a 20 percent
rate of return. But remember, that assumes an annual tax payment of $45,000.

Compared to a tax haven like Bermuda, where the income tax is zero, the lifetime loss for
paying taxes at American rates would be about $1.1 billion. You may object that an
annual return of 20 percent is a high rate of return. No doubt you would be right. But
given the startling growth in Asia in recent decades, many investors in the world have
achieved that and better. The compound rate of return in Hong Kong real estate since
1950 has been more than 20 percent per annum.

Even some economies that are less widely known for growth have afforded easy
opportunities for high profits. You could have pocketed an average real return of more
than 30 percent annually in U.S. dollar deposits in Paraguayan banks over the last three
decades. High Investment returns are easier to realize in some places than others, but
skilled investors can certainly achieve profits of 20 percent or more in good years, even if
they do not consistently match the performances of George Soros or Warren Buffet.
Obviously, the higher the rate of return that you could earn on your capital, the
greater the opportunity costs that predatory income and capital gains taxes impose. But
the conclusion that the loss is huge, indeed greater than the total amount of wealth that
you may ever accumulate, does not depend upon your being able to achieve outlandish
rates of return. Some mutual funds operating in the United States have averaged annual
gains of more than 10 percent for more than half a century. If you could do no better than
that and you are among the top 1 percent of American earners, then your net worth is
reduced by more than $33 million just by the income tax you pay in excess of $45,000
annually. Compared to a jurisdiction without income tax, the loss is $55 million.

If the profit-maximizing assumptions of economists are correct, as we believe
they generally are, one of the more certain predictions you could make is that most
people would act to salvage $55 million if they could. That is our prediction. When the
black magic of compound interest becomes more clear in the minds of successful people
in high-tax countries, they will begin to shop in earnest among jurisdictions, just as they
now shop for automobiles or compare rates on insurance policies. If you doubt it, merely
stop people at random on the streets of New York or Toronto and ask whether they would
move to Bermuda for $55 million.

The question answers itself. The quandary it poses is reminiscent of that Mark
Twain imagined in deciding whether he would prefer to spend the night with Lillian
Russell stark naked or General Grant in full dress uniform. He did not deliberate long.
Residents of mature welfare states, particularly the United States, may be slower on the
uptake, but only because they are not yet aware of the choice they face. In the fullness of
time, they will be. You or anyone motivated by the desire to live a better life will see the
attraction of reducing the losses you suffer from predatory taxation. You need merely
lodge your transactions in cyberspace.

This will, of course, be illegal in many jurisdictions. But old laws seldom can
resist new technology. In the 1980s, it was illegal in the United States to send a fax
message. The U.S. Post Office considered faxes to be first-class mail, over which the
U.S. Post Office claimed an ancient monopoly. An edict to that effect was issued
reiterating the requirement that all fax transmissions be routed to the nearest post office
for delivery with regular mail. Billions of fax messages later, it is unclear whether
anyone ever complied with that law. If so, compliance was fleeting. The advantages of
operating in the emerging cybereconomy are even more compelling than sidestepping the
post office in sending a fax.

Widespread adoption of public-key/private-key encryption technologies will soon allow many economic activities to be completed anywhere you please. As James
Bennet, technology editor of Strategic Investment, has written: Enforcement of laws and
particularly tax codes has become heavily dependent on surveillance of communications
and transactions. Once the next logical steps have been taken, and offshore banking
locations offer the services of communication in hard RSA-encrypted electronic mail
using account numbers derived from public-key systems, financial transactions will be
almost impossible to monitor at the bank or in communications. Even if the tax
authorities were to plant a mole in the offshore bank, or burglarize the bank records, they
would not be able to identify depositors.’

To a degree that has never before been possible, individuals will be able to
determine where to domicile their economic activities and how much income tax they
prefer to pay. Many transactions in the Information Age will not need to be domiciled in
any territorial sovereignty at all. Those that do will increasingly find their way to places
like Bermuda, the Cayman Islands, Uruguay, or similar jurisdictions that do not impose
income taxes or other costly transaction burdens on commerce."

  • James Dale Davidson, William Rees-Mogg,The Sovereign Individual,1997.

There are a lot of interesting predictions in this book. They have a concept of “return on violence” that makes a lot of sense.

My own short summary of the “return on violence” concept: In the Hunter-Gatherer Age, there was a low return on violence. Violence, as a means of material profit, was not very good because it was often easier to just retreat and go somewhere else if there was a conflict. In the Agricultural Age and Industrial Age, there were very high returns on violence. Control over the best land, resources, and the means of production became extremely important. Farmers and factor owners needed protection and protectors could make a lot of money protecting and controlling physical resources. The Information Age (including the internet, encryption, and “cybermoney”) is decreasing the return on violence by making it easier to move in response to violence and brings down the cost of protection. (For example, if a software company is being treated unfairly, they can just move elsewhere. Eventually the big software companies will just move to the most favorable jurisdictions, like Ireland, and jurisdictions have to start competing for software companies.) When returns on violence are high, a large warrior-managerial class can be supported. When returns on violence are low, it can’t. The governments of big developed countries have gotten used to getting very high returns and that is about to change.

I would recommend reading the entire thing. I thought the “cybermoney” stuff was particularly interesting being written in 1997. The authors did not think cybermoney would be created and adopted because of smart contracts or “the internet of things” or porn or drugs. They thought cybermoney would not have to do much of anything besides serve as a destination for offshore wealth.

One important thing to remember is that there is a good chance that many governments will turn against cybermoney and any person, any company, or any technology that has anything to do with allowing people to “exit.”