My colleague Manoj Viswanathan has written a new article, “Tax Compliance in a Decentralizing Economy,” forthcoming in Georgia State University Law Review. This article reveals the threat to tax compliance that is posed both by new technologies that enable on-demand sharing of services and by blockchain technology that facilitates cryptocurrency (e.g., Bitcoin) transactions and other economic exchanges.
This issue is important because it anticipates, and argues for proactive action to avoid, a forthcoming tax-collection challenge. Too often, technology outpaces the law, and policymakers are forced to scramble retrospectively in an effort to curtail abuses enabled by the new technology. Professor Viswanathan’s article puts Congress and the IRS in the position to act now before the decentralization threat grows too big.
Specifically, Professor Viswanathan explains that much of the compliance infrastructure for the federal income-tax system depends on information reporting provided by centralized intermediaries (e.g., banks and employers) through whose possession payments travel. Information reporting by these centralized intermediaries has been highly effective at reducing the tax gap with respect to payments such as wages, interest, dividends, substantial gambling winnings, etc. In contrast, new technologies that bypass intermediaries and instead facilitate high-value peer-to-peer transactions enable potentially large amounts of money to change hands without being subject to information-reporting obligations. As more and more transactions are consummated through the decentralized economy and without the involvement of centralized intermediaries that are required to provide information reporting, taxpayers’ incentives to comply with the tax law and the IRS’s ability to enforce the tax law decline dramatically, as would our tax collections. In response, Professor Viswanathan proposes specific steps that Congress and the IRS can take to contend with this decentralization.
Anyone interested in the future of the economy and in the way in which our economy is being disrupted and transformed by technology will find Professor Viswanathan’s article both frightening and enlightening—frightening because of the significance of the potential threat that decentralization of the economy poses to the reported income-tax base, and enlightening because of the concrete recommendations about steps that Congress and the IRS can take to ensure that U.S. income remains correctly reported and appropriately taxed.