The Panama Papers Tell Us Nothing and We Have No Solutions

What exactly do the Panama Papers tell us? Nothing, absolutely nothing. There is nothing surprising in the Panama Papers at all.

The Guardian have made a good job of the whole shock horror, class war, what about the poor millenials thing, but ultimately there is very little to say.

Is anyone surprised that wealthy people like to keep hold of their money? That maybe they don’t see handing it over to an incompetent State as the best option available to them? Or that crooked tyrants from Russia to China to Africa and even Icelandic Premiers use these tax schemes? The answer to all these questions is no! Not a single person should be surprised by any of this.

One interesting aspect to this story, that Nico raised in his post, is why this leak occurred, who was behind it and who benefits from it. It certainly isn’t Dave the Lorry Driver from Dagenham…

Of course something must be done about the Panama Papers and all this tax haven stuff. If something isn’t done what about the children..?

There have been calls for greater transparency, light is the greatest disinfectant and all that… It’s not by the way, I believe Dettol is… Either way, ‘transparency’ is a typical look at John with the new BMW, not at me policy. Transparency is a ‘great idea’ if it just applies to large corporations and the rich… But imagine if we all had to be transparent. Imagine if we all had to reveal what we were earning. How difficult would it be to work out that Steve and Janice across the road were living off their credit cards? I mean, a big house, two new cars, 3 kids, a holiday in Lanzarote and only earning 40k. Who are they kidding..?

Transparency is a terrible idea because it means the end of privacy and absolutely everyone has something to hide. The only proven method of reducing evasion and avoidance are flatter, simpler, lower taxes. Russia implemented a flat tax of 13% in 2001 that has been very successful, it even increased revenues God forbid… The reason flatter, simpler, lower taxes work is because they reduce the need to avoid or evade tax — the risk is no longer worth it. They also make it far easier for authorities to administer and enforce them — just look at Estonia.

No one I’ve seen however is suggesting we move to flatter, simpler, lower taxes. There are obvious reasons why no one is suggesting this. It would entail a significant reduction in the size of the British State. And as we know our money is the cocaine our State thrives on…

However we could move to a flatter, simpler system that removed all other taxes, even if that meant we had for example a two rate system based on income of 40% and 60%. Now those rates may not be high enough to cover the largesse of the British State, but even if we had to set the rates higher it would still solve a lot of problems.

Despite the obvious logic of a simpler tax system it hasn’t happened and doesn’t look like it will. The reasons for this isn’t necessarily obvious at first. However it’s rather simple, it’s all to do with image. The reality is our government and politicians like and benefit from our complicated tax system. It’s politically convenient and it looks good — it looks progressive. On the one hand politicians can claim they’re redistributing wealth via taxes and at the very same time they can leave open or create various loop holes to keep their system ‘competitive’.

There is also a myth that persists which states that you can tax a legal entity. When I say legal entity I of course mean a company, it’s why we have Corporation Tax and Sales Taxes. We like to pretend we can tax companies. I mean we can’t just let them do their evil work here and not pay any tax, that would be outrageous!! Sadly though all taxes ultimately fall on the individual — higher costs, lower wages, etc, etc…

The reason we have taxes like Corporation Tax is because it looks good, it seems fair. Companies must contribute something to our green and pleasant land… However as most contractors know, myself included, our ‘companies’ pay all the taxes and we pay as little as we can as individuals. This though is simply an accounting trick, a little bit of magic. I am the one who goes out and earns all the money for my company, every penny of tax paid by my company comes out of my labour. The legal entity doesn’t just magic the money and tax out of thin air, I have to work for it, it’s not as if I work for Goldman Sachs…

A simpler system would just tax the income I take from the company. Then there would be little need for any trickery and company directors would pay the same amount of tax as the company cleaner.

There is though another reason governments like our current tax system. It obfuscates how much Tax we actually pay. People don’t notice tax so much when it’s 20% here on your income, 20% on the TV you just bought and 10% in ‘National Insurance’. Our current system reduces the direct impact of our State’s largesse. Imagine if we actually had a flatter, simpler tax system like the one outlined earlier and this meant all income over 20k was taxed at 50% and over 40k at 70%. People would be furious, the next elected government would deliver austerity on speed. Both the government and the electorate prefer to rob and be robbed quietly over an extended period of time, not upfront and in your face like some sort of Mafia gangster…

If we actually want to reduce tax evasion and avoidance we need to move to a simpler more competitive system. Continuing to complicate our current system with more rules and regulations simply won’t work and we will see more and more Panama Papers.

Beware Outlawing the IT Contractor Mr Osborne

It seems Mr Osborne’s attack on contractors continues apace… In the last 12 months or so we’ve had VAT Moss, the Dividend Tax and the proposed but defeated 1 month IR35 rule.

One suspects Mr Osborne really doesn’t like contractors and now we’re going to have to watch the budget, once again, very closely

George Osborne is planning a clampdown on a tax dodge used by media stars and mandarins who have their salaries paid through special companies to save thousands of pounds a year.

The Chancellor is expected to use Wednesday’s Budget to tackle the practice of paying staff ‘off the books’, which costs the Treasury more than £400 million a year.

As many as 100,000 people – including senior civil servants and NHS staff – receive their income through personal-service companies: it is intended to benefit temporary workers, but is widely used as a perk by long-term employees.

A couple of points to make here… First you shouldn’t base legislation around a minority of celebrities and useless, overpaid bureaucrats. It won’t end well…

Second the £400m figure lost to the treasury has clearly been plucked out of thin air. It is based on what contractors are paid today. If contracting were outlawed wages would drop dramatically so there would be far less to tax — also no VAT to collect. My prediction, an even bigger black hole in tax receipts…

But my main point here is that huge swathes of Government IT infrastructure is supported by contractors. The very people George wants rid of. The reason is simple to understand, contractors are far more flexible and they don’t add to the employee head count. If George continues with his war he will shoot himself in the foot eventually and I can imagine a little conversation in a few years time between him and one of his SPADs…

SPAD: Wake up George, wake up!!

Gideon: What… What is it..?

SPAD: Nothing’s working George! None of it’s working!!

Gideon: What do you mean, ‘none of it’s working’?

SPAD: The servers, the applications, the IT infrastructure… It’s all offline, it’s all down!!

Gideon: What!! How?!? Is it the Chinese?!?

SPAD: No, no, not the Chinese… There’s no one left to maintain it… I mean there’s that guy Steve who we promoted from admin to Head of IT, but no one else.

Gideon: How?!? How is there only one man maintaining our whole IT infrastructure?

SPAD: Well sir, and you’re not going to like this, you outlawed contractors.

Gideon: Didn’t you offer them permanent positions?

SPAD: Yes, but as one developer put it, “I’m not working on a Government IT mind fuck for £35k a year!”

Gideon: But that’s a good wage, you said they could earn 50 if they worked hard for 10 years? I mean where have they all gone..?

SPAD: Yes, yes we told them all that, but they just laughed and said they were going to work in Advertising…

Gideon: Advertising?!? Why?

SPAD: Well it turns out you get free coffee, a beer trolley on Fridays and there are floors and floors of young, normal, attractive people who might talk to you…

Gideon: Shit!!

Bitcoin: a protocol for the distributed maintenance of a ledger?

When I finally found my way to Brian Micklethwait’s Pimlico pad on Friday evening I was in for a few surprises. The biggest visual surprise was Brian’s amazing collection of books and CD’s. The amount knowledge there, in one home, is staggering. I enjoyed running my eyes over the titles and trying to notice whole areas of expertise I might have missed out on. The real surprise was that I had arrived thinking I was to hear about a revolutionary communications protocol for the distribution of digital money. I was going to get a talk about the minutiae of digital accounting.

I was also pleasantly surprised to be joined by several of Brian’s Samizdata colleagues, who’s excellent work over many years got me, and no doubt countless others, into libertarianism and so it was an honour to meet them. Brian’s chief guest, Frank Braun was an IT security professional with an interest, and a small income stream, in Bitcoin and was there to explain how it worked and what the advantages were for freedom loving libertarians. Frank explained that he is a fan of “freedom technology” because rather than changing a culture to value and understand freedom, a difficult and uncertain process, building a new peice of technology is a smaller problem with a faster and more certain pay off. If you are reading this thinking you have found the software hacker you are looking for, move along, but Frank was merely an admirer of the work of pseodonymous Satoshi Nakamoto, the inventor of Bitcoin.

The following explaination is based on my notes and is therefore mostly pointless, I’m sure better explanations exist, but I am interested in sharing it as a snapshot of my understanding. If I’m seriously wrong, it would help if you left a comment. If I’m right then hopefully there is some value in the way I explain it.

The major feature of the Bitcoin protocol is to effect transfers of wealth, but it’s primary domain object – the primary noun of importance in the system – is not coins or vouchers but an accounting ledger. The maintenance of that shared public record is the primary task and the competitive challenge addressed by the participating nodes, the computer systems owned by users and service providers who take part. It’s like one big trackerless BitTorrent, a network with no centre and no boundaries, co-operating to store copies of some data to which new blocks are conststantly added. The content of these blocks, the ledger, is not something you would be familiar with. I understood it by analogy: if the Dollar were only handled by a single Federal bank, and there was no cash, then the Fed would need to record the transactions of every US citizen and every other user of the currency in perfect detail. As Frank put it, trying to do something illicit in such as system would be “dumb”. This perfect transparency was the opposite of what I had understood to be the point of digital money and of Bitcoin.

Of course, a degree of privacy is acheived by the use of pseudonymous cryptographic identities, and your privacy is dependant on how much personal data gets linked your digital fingerprint. Your public key is your bank account and your bank balance is merely the sum of the values of every transaction involving that public key. As you might have computed, your private key is your means of accessing your money.

In economic terms Bitcoin is non-State fiat money, and the unit for numeric values in the ledger. From the users perspective, the advantages were given as:

  • The system is able to clear transactions (store them in a ledger-block) within 20 to 30 minutes
  • Transactions are reliable, businesses do not suffer the expense or risk of payments being charged back by the credit card company.
  • It is not possible to have your account frozen.
  • Possible to work under a pseudonym.

The disadvantages, as I touched on above are:

  • No anonymity, flows of money can be traced and tracked.
  • (I got the impression later that in order to take part, you are forced to download enough data to calculate every participants bank balance, illustrating how little privacy there is)
  • Very few tax implications, that is, you should expect to be taxed.
  • Somewhat smaller risks for people who want to protect their earnings from tax enforcement, since there is no current enforcement.
  • Needing to hold state fiat money to pay state taxes mean you cannot trade soley in Bitcoin.

Despite the high degree of transparency the “eBay for drugs” known as Silk Road appears to be the killer app. Bitcoin reached notoriety when a US senator triggered the Streisland effect for Slik Road by talking to the media about shutting Silk Road down. Silk Road was an existing site for traders that lacked a payment system, and whcih adopted Bitcoin.

The combination of Silk Road and Bitcoin has already made drug users safer and more free. Allowing them to easily purchase drugs and have them shipped in the mail rather than visiting dark urban corners.

Braun spoke about how the Governemnt might choose to attack Bitcoin:

  • Attacking the exchanges affecting people’s ability to buy into and out of Bitcoin. This is important as the price of Bitcoins is very unstable and holding Bitcoins long term amounts to currency speculation.
  • Attacking the pricing, so that people loose faith in the currency, e.g. by conducting a pump and dump in which large volumes are bought until the exchange rates rise then are sold again forcing a sudden price drop.
  • Braun provided an anecdote regarding the analogous EGold system which had a central technical and legal point of failure. The EGold system was prosecuted and shut down.
  • Similarly, IceGold the eGold broker shut down when threats of prosecution were made against the founder, essentially extending “Process as punishment” to “Process as threat”.
  • Technical attacks could be addressed at the “Bootstrapping” phase or via deep packet inspection, though these were not covered in depth as the main threat is clearly to exchanges.

Frank identified some important lessons for the development of future freedom technologies:

  • People will be less obedient of Government when they have practical options available that flout authority.
  • The technology’s originator stayed anonymous which was a smart move for him and for the network. Counter example: Julian Assange.
  • Very few people were needed to affect change, in this case they created a $60m economy.

© IK

We went on to discuss market opportunities for Bitcoin in replacing Hawala and Western Union money transfer systems and whether Bitcoin might remain a “wholesale” form of money with retail users accessing it via human contact points. We also identified potential business opportunities for individuals setting themselves up as Bureau de Change in retail settings e.g. at the shop where you get phones unlocked.

I want to end with Bitcoin’s monetary policy. Large chunks of the libertarian community are motivated by one primary economic problem caused by the states domination of currency: inflation. Currently hovering around 5%, depending on your definition, inflation is the process of granting invented “fiat” money to banks and other major instutions and deliberately increasing the number of units in circulation and devaluing the currency. The effect on savers, which I don’t need to explain here, is that they are ripped off at a rate of 5% per year, and the effect over time is compounded year on year in a sick mockery of compound interest. That this deliberate policy is morally repugnant is an excercise in subtle understatement.

Bitcoin is a new system, and it is a type of fiat money whose value, like state fiat money, does not relate to anything real. It could collapse tomorrow. But it is a currency that directly protects people from inflation – in fact Bitcoin is limited by a resilient technical and democratic cap of just 21 million units – ever.