Filling the Tax Gap via Programmable Money

TL;DR

This paper proposes methods for tax authorities to verify citizen declarations using programmable digital money on distributed ledgers, aiming to reduce tax evasion while preserving privacy.

Contribution

It introduces two novel mechanisms—one integrated into the ledger protocol and one as an application-layer extension—for enabling privacy-preserving tax auditing on programmable money systems.

Findings

Design enables built-in auditing with minimal ledger changes

Application-layer extension requires no modifications to the ledger

Both methods ensure high privacy for users

Abstract

We discuss the problem of facilitating tax auditing assuming "programmable money", i.e., digital monetary instruments that are managed by an underlying distributed ledger. We explore how a taxation authority can verify the declared returns of its citizens and create a counter-incentive to tax evasion by two distinct mechanisms. First, we describe a design which enables auditing it as a built-in feature with minimal changes on the underlying ledger's consensus protocol. Second, we offer an application-layer extension, which requires no modification in the underlying ledger's design. Both solutions provide a high level of privacy, ensuring that, apart from specific limited data given to the taxation authority, no additional information - beyond the information already published on the underlying ledger - is leaked.