The future of public finances
Historically, power shifts from governments to the people. Democracy is the product of revolution and the disruptive innovation of those who abhor the elitism of aristocracy and monarchy, who fear the stubbornness of theocracy, and who see the impracticality of communism. More than ever, governments represent fairer and more reliable social contracts. How do we merge the rule of law with “the code is the law” and can we have both?
As we see the irresistible force of decentralization, we must recognize the following: mass communication, intercontinental travel, widespread literacy, the proliferation of the Internet, the pro-democracy movement, and the emergence of on-demand economies.
Liquid taxation: individual control, instant gratification, real-time impact
The problem with taxation is the adversarial tension that arises between governments and voters once a year. We end up funding high-level officials whose judgment we trust less than our own. The solution is for us to control our societal contributions in real time, on the very streets where we walk, with other members of the community as co-creators at the local level. Web3 is a chance to make sense of taxes, create a sense of community through economic power, and enjoy paying our taxes instead of dreading the act. Liquid taxation works as follows.
Imagine receiving an estimated tax assessment at the beginning of the year based on your income and net worth. This assessment is loaded into your municipal crypto wallet. Throughout the year, as you see problems to solve and causes to support, you send the amount of money that seems worthwhile to you. If you wish, you recruit friends to contribute with you from their tax pools. If you see something that deserves your attention, you create a funding pool for that problem, like a crowdfunding platform.
As people self-identify the problems and corresponding solutions of their own neighborhoods in which they raise families and work, the impact is easily measurable and immediately rewarding. It creates a sense of community when local issues are addressed with such speed and efficiency that they need not be trifled with at the national level. At the end of the year, each person receives a summary of how they have contributed to their own economy, how much of their tax assessment has been deployed, and what kinds of community benefits they deserve. Thus, taxation is done in real time as a tool of liquid democracy. Localities are insulated from time lag, human error, asymmetric information, and bureaucracy from higher-level governments.
If you don’t spend your tax contribution, the difference goes to your local government to be used at its discretion. If you spend more than you actually owe in taxes, you get a refund. If you feel like it, you can delegate your spending authority to a trusted friend or family member. If all this sounds like a decentralized autonomous organization (DAO), it is because it is a possible instantiation of liquid taxation.
Related: Decentralized Autonomous Bodies: Tax Considerations
Smart Procurement Contracts: Automation, Scale, Economic Efficiency
Public spending is inefficient due to bureaucratic silos. By automating the negotiation of supply contracts between suppliers and government organizations, we can save public finances and help large companies make more money.
It helps everyone proliferate effective products and services from city to city, state to state, and department to department. Smart contract sourcing can also automate and align termination and return terms should something go wrong. In the world of Web3, procurement will not happen through legal, political and bureaucratic teams that act both redundantly and inefficiently.
Smart contract sourcing is more meritocratic and competitive than what we have today. It is also a resilience tool for public sector workers who often receive less than they deserve from the private sector. In addition to this system, we can institute smart contract microbonds and municipal utility tokens that raise discretionary funds for local issues.
Related: What are smart contracts in the blockchain and how do they work?
Multi-currency monetary system: from physical to digital, from national to local
The problems with physical currency are well known. Digital currencies offer superior traceability, security, privacy and administrative ease. The problem is that central banks issue a single currency for a diverse set of jurisdictions. Just as it makes sense for the world not to have a single planetary currency, it makes sense for a nation to have a diverse set of currencies that interact across federal, state, and municipal levels.
Related: From cash to crypto: The Cantillon effect vs the Nakamoto effect
Decentralization does not mean crypto-anarchy. It means shifting power and responsibility to localities, from abstractions like federal governments to front-line agents like municipal governments. “The power of the people” means the power of the cities. Local authorities and neighborhood communities should solve their own problems rather than having to negotiate with higher levels of government and have their hands tied.
Multi-currency monetary systems have the following advantages: 1) retain value created and shared within local communities; 2) reduce administrative burdens on higher level governments; 3) empower microcosms of a nation to deal with each other autonomously through real-time “North Star” metric problem solving; 4) protect the economies of cities and states from the adverse effects that befall national and international economies. With a physical mint, this model would be a complete mess. With a digital currency and smart contracts, however, this model is possible for the first time in history.
Civic engagement, social resilience and economic efficiency are the foundation of the social contract in liberal democracies around the world. With the unstoppable force of Web3, we have the opportunity to make public governance and funding fair and fun for the first time in history through liquid taxing, smart contract sourcing, and multi-currency monetary systems.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Luke Kim, originally from Tokyo and Seoul, is co-founder of Berkeley Blockchain Xcelerator, co-inventor of two blockchain-based public finance models in partnership with a US mayor’s office, Partner at Truth Cartel, and co-founder by Startup Grind Berkeley. He is an investor and advisor to actors of change in the world of Web3.