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How Bitcoin would make a joke of Piketty's inequality fix
High tax rates have always encouraged clever workarounds by rich people with smart tax attorneys
 
If the wealthy put their money in Bitcoin, then what?
If the wealthy put their money in Bitcoin, then what? (Justin Sullivan/Getty Images)

"The enemy has a vote." It's a military axiom about which Thomas Piketty, the French economist who wishes to wage preemptive war on wealth inequality, seems ignorant.

In his best-selling book, Capital in the Twenty-First Century, Piketty suggests two inequality-leveling levies: a top income tax rate of at least 80 percent and a global wealth tax on the planet's billionaires of as much as five to 10 percent annually. Now, he realizes this egalitarian plan isn't a tomorrow thing. A return to super-high tax rates would defy a decades-long decline among advanced economies. And a global wealth tax — which Piketty describes as "utopian" — would require an almost unimaginable degree of international cooperation to track the 0.01 percent's assets and penalize tax haven countries such as Switzerland.

But for the sake of argument, let's assume that governments will one day summon the will to institute the Piketty Plan. Even if they find the will, they may no longer have the means.

The wealthy will have recourse. They are the enemy the Piketty Plan seeks to dethrone. And they will surely "vote," probably by deciding against holding their wealth in dollars or euros or renminbi or any other currency regulated by a nation-state. Instead, the wealthy may well sink their assets into virtual money, be it Bitcoin or some successor digital currency.

Just such a scenario is explored in "Are Cryptocurrencies Super Tax Havens?," a Michigan Law Review article from late last year. Internet-based, peer-to-peer payment systems "offer, at least theoretically, a near-perfect alternative to tax-evaders who can no longer find a safe haven in tax-haven jurisdictions," Omri Marian writes

Bitcoins, after all, are not issued by any government. They exist in cyberspace and are stored in online wallets. And anonymous users can start as many online wallets as they wish without providing any identifying information, Marian notes.

But Bitcoin's biggest advantage over state-based tax havens is that no financial middlemen are required. In the offline world, governments have begun cooperating to pressure banks to fork over information about wealthy account holders. But that's not possible with a peer-to-peer currency like Bitcoin. "Financial institutions — the emerging agents of tax collection — are taken out of the picture," Marian explains.

Washington or Brussels or Beijing would naturally try to counter. Marian outlines a number of possible responses, including governments trying to take Bitcoins out of circulation by using their vast computing power to mine all of them, or ordering their central banks to buy them all up. But such moves would just launch a never-ending game of "whack a mole." Other virtual currencies would rise as replacement, driven by the extreme incentive to shield wealth in this new world of mega-taxation. No wonder New York Times columnist and Piketty fan Paul Krugman has called Bitcoin "evil."

But Bitcoin isn't evil. It's an important innovation that will make e-commerce and all manner of financial transactions easier and less costly.

More practical and less economically risky ideas for dealing with wealth inequality including establishing a U.S. sovereign wealth fund, government-seeded universal savings accounts, making it easier for individuals to start their own businessess — which Bitcoin helps — and loosening zoning laws to make it cheaper to live in high-income, high-innovation cities such as San Francisco and New York.

If Piketty really wishes to win his war, he'll need to rethink his battle plan.

 
James Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute where he runs the AEIdeas blog. He has also written for The New York Times, National Review, Commentary, The Weekly Standard, and other places.

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