QIP: 29
Title: Taxing Design
Author: xiaobai99([email protected])
Category: Core
Status: Draft
Created: 2019-05-20
Taxation is the main form and source of revenue of the state (government) public finance. Marx pointed out, "The existence of the country embodied in economy is taxation". American Justice Holmes said, "Taxation is the cost we pay for a civilized society." The role of taxation is mainly embodied in three aspects:
- Raising financial funds,
- Adjusting social economic activities,
- Reflecting and supervising economic activities.
In the original blockchain network design (e.g. Bitcoin), there was no tax consideration. Later, some cryptocurrencies extract a certain proportion of block rewrds as tax revenue for specific needs and development, such as Zcash, Dash, Decred.
In the initial stage of a blockchain network, due to the weakness of the ecological structure and the contribution incentives of the development team, it is acceptable to consider setting an appropriate proportion of tax revenue as a development subsidy. Drawing lessons from the current tax system，It is a valuable consideration to build a development and subsidy fund to adjust the long-term development of blockchain network.
Here are a few representative tax systems.
The current US tax law is one of the most complicated tax law systems in the world, and it implements a tax-sharing system.
Taxes are collected by the federal government, state government and local government. Federal tax accounts for about 70% of the total national tax revenue, state and local government tax accounts for 30%, and state and local tax accounts for 6:4. In federal taxes, personal income tax accounts for 50%, followed by social insurance tax, accounting for about 30%. Tariffs are imposed only by the federal government.
State government tax sales and income tax account for about 50%, personal income tax accounts for 25%-30%. Local governments levy income tax, property tax, license tax, food tax, etc., and property tax accounts for up to 75%.
In December 2017, after the United States passed the latest tax reform, the individual tax and corporate tax were all lowered. Overall, the proportion of ordinary Americans paying taxes is about 41%.
British taxation consists of direct taxes and indirect taxes. The income tax in direct tax is the main body of British tax, accounting for more than 60% of the total tax revenue. Indirect taxes are in a secondary position in the UK tax system, accounting for a little more than 30% of all tax revenue.
British taxation is highly concentrated in the central government. The national tax accounts for about 90% of the national tax revenue. Local taxes account for about 10% of the national tax revenue. The main financial source of local finance is the subsidies provided by the central government to local governments. At present, the main economic source of the central government is income tax, followed by social security tax, then VAT, and finally enterprise tax.
The UK has now joined the global tax cuts. Corporate income tax has been reduced from 20% to 19% and promised to fall to 17% by 2020. The starting point for the collection of personal income tax is raised to an annual salary of 11,850 pounds, or 106,000 yuan.
The British taxation is very "robbing the rich and helping the poor." 0.4% of the UK population, about 300,000 people, bears a quarter of the income tax of the entire country.
Canada is a country with direct taxation and implements a federal, provincial (or territorial) and local level three taxation system, similar to the United States. The main taxes include: corporate income tax and surtax, personal income tax and surcharge, goods and services tax (VAT), social insurance tax, capital tax, sales tax, customs duty, special dumping tax, mineral tax, land and property tax.
Canada is known as the “country of taxation”. In 2017, its total tax rate is equivalent to 42.5% of annual income. This may seem surprising, but high taxes can lead to high benefits. Canada is also a high welfare state. Canadian citizens enjoy a wide range of benefits and coverage:
- Social welfare. Generally for refugees, single mothers and other vulnerable groups.
- The old age pension system is the largest pension program in Canada, and the funds are fully borne by the federal government.
- Unemployment insurance can be collected for up to 10 months in a row, and the amount is 55% of the original salary.
- Medical insurance can receive free medical services after registration, and meals and medicines are free during hospitalization.
- Child tax benefits, also known as milk gold, are issued monthly to eligible mothers.
- The government housing program provides public rental housing, and the rent is charged at 25%-30% of the applicant's monthly income.
- Low-income people receiving old-age security benefits can also receive income security benefits (GIS) and spouse allowances (SPA).
- Child Care Subsidy, which subsidizes preschool children.
Sweden has a complete tax management system and tax enforcement is relatively independent. Sweden implements a taxation system at the central and local levels. The main current taxes are: corporate income tax, personal income tax, value-added tax, inheritance and gift tax, social security tax, land and property tax, net wealth tax and other indirect taxes. Income tax is the main tax type of Swedish local tax.
Sweden provides nationals with a “cradle to grave” welfare guarantee, but its high welfare is closely related to high taxes. Swedish tax revenues accounted for 40% of GDP in 1970 and rose to 51.3% in 2005. Today, Sweden is the only country in the Organization for Economic Cooperation and Development with tax revenues of more than 50% of GDP.
Sweden, Denmark, Finland and Norway in Northern Europe are the countries with the highest “happiness” in the world, largely due to the unique socio-economic development model of Northern Europe. The Nordic model is known for its “high taxes”, “high welfare”, “high income”, “high consumption” and “low unemployment rate”.
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Digital Cash (Dash)
Dash is described by some as a two-tier network that relies on miners and master nodes. The master node is a proof-of-service layer. These nodes act as both a transaction mixer and a booster, and in addition, they serve as a voting mechanism for the Dash Management System.
45% of Dash's block rewards are allocated to miners, with 45% of the main nodes, and the remaining 10% allocated to the Dash budget system. The system allows users to vote for resources, such as for development, marketing or other purposes.
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Zcash (ZEC)
When building Zcash, the project team designed a more special reward distribution mechanism. In the first four years of the project, 20% of miners' mining will be deducted and transferred to the founder's address as a founder's reward. In the first 4 years, 20% of the token rewards were about 2.1 million, accounting for 10% of the total tokens. The table below reflects the distribution rules of Zcash:
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80% Zcash rewards miners (175,000 ZEC per month)
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3% for the Zcash Foundation (6563 ZEC per month)
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2.8% to Zcash's company (6125 ZEC per month)
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miners | Zcash Foundation | Zcash's company | 44 employees,consultants and founders
-- | -- | -- | --
80% | 3% | 2.8% | 14.2%
The remaining 14.2% is allocated to 44 employees, consultants and founders.
Controversial issues:
The founder of Zcash was assigned 0.9% of the mining revenue in the first four years, about $4.27 million per year. Someone in the community was dissatisfied with the founder reward mechanism to modify the Zcash code and forked the new currency ZClassic (ZCL), but not long after the project was basically stagnant.
Compared with the initial allocation of 20%~30% of other projects, Zcash's 10% founder reward is more reasonable, and the part of the reward is slow release, which has less impact on the market value of the project. At the same time, the Zcash Foundation has taken part of the incentive funds for community feedback, encouraging developers who contribute to the community, and promoting the progress of some projects is a virtuous circle. The next version of the upgrade announced by the project side also includes improvements to the transparency of the founder’s rewards so that the community can better track and monitor the use of funds.
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Decred (DCR)
Like Bitcoin, DCR has a total supply of 21 million units, and 8% of DCRs are pre-excavated, 4% of which are used for airdrops to select individuals selected for pre-registered airdrop activities at a cost of approximately $0.75. The remaining 4% is used to pay for the development costs of the DCR team and the initial funding for individual development projects. The purpose of this is to promote the use of tokens and encourage better community participation.
In DCR, 60% of newly dug tokens belong to PoW miners and 30% belong to PoS voters. The remaining 10% are project development subsidies, while Bitcoin is 100% rewards for PoW miners. By investing funds in different settings for development subsidies, DCR allows developers to obtain proposals based on proposals in the case of community-approved payments.
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BEAM
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BEAM uses the POW consensus, Equihash algorithm, no pre-excavation, no ICO. A new block is generated in about 60 seconds, each block contains about 1000 transactions, and the block size is about 1M. The total amount is 262,800,000 BEAM, the first year block reward is 80 BEAM, the 2-5 year block reward is 40 coins, the 6-9 year block reward is 25 coins, then halved every 4 years Until the 133rd year, the BEAM was dug.
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Beam plans to resist ASICs 12-18 months after going live to ensure Decentralized. Each time the hard fork will change the algorithm, the specific modification will be announced a few weeks before the hard fork.
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Beam is an open source blockchain project built from scratch, managed by the community and funded by the Beam Growth Pool: 20% of the mining rewards enter the development pool to motivate Beam's development and Promotion.
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Through the analysis of the taxation mechanism in the national and blockchain projects, we can see that the state's taxation mainly affects the national economic life and social civilization construction. High taxes have brought a high degree of social welfare protection to the public to a certain extent, mainly reflected in: social welfare payments, old age pension system, unemployment insurance, medical insurance, children's milk, government housing plans and some other benefits. The main functions of taxation in the blockchain are: project development, maintenance, promotion, and founding team rewards.
To consider at a deeper level, can the tax in the blockchain have other uses?We found that some of the tax revenues from blockchain projects are used for project operations, promotion, governance, and incentives for founding teams. Even some of the project's tax ratios were designed without careful thinking, and a long-term and high percentage tax system was designed to meet the founding team's own interests. This is actually not true.
So, is it the main purpose of taxation to reward the founding team and maintain project development? I don't think it is, or is not the main purpose I want to consider. Then back to thinking, what is the purpose of the taxation mechanism design in the blockchain? I think we should split this issue into several aspects:
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Range of taxes
Taxation mainly refers to the profits from miners mining. Is there a broader tax range?
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Basic problem that can be solved
The use of taxation can guarantee the operation and development funds of the initial team of the project and the development reward of the founding team.
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What problems can be balanced?
Taxes can be used to balance the contradictions of various stakeholders in the network, or the contradiction between the network and stakeholders in order to achieve long-term maintenance of network security.
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Reward
In addition to the founding team, incentives should be given to others who contribute to the project.
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Welfare
Whether in real life or in the Internet, taxes and benefits are inseparable, and it is also important to use a portion of the tax incentives for project supporters.
From the above points, we can see that stimulating and balancing the interests of all parties is the most important purpose of designing the taxation mechanism in the blockchain network. For example, if the miners have finished digging the coins in the future, Imagine if the miners are willing to continue to serve this chain only by collecting the handling fee. Will it contribute to the security of the network? Should we use the tax-subsidized miners to balance this problem? Should we design a “pension” plan to protect people who contributed to the network early? Or how to use tax adjustment when the network is congested and the transaction fee is high. When the network is idle and the transaction fee is low, how do we use tax subsidies to miners? In short, the main purpose of the tax reserve is to maintain the security and long-term operation of the network by stimulating and balancing the relationship.
Through the analysis and reference of some project taxation mechanisms, we can divide the tax into the following three situations:
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From less taxes to more taxes
That is, when the first block starts to dig, it will charge a small percentage of the tax. After a number of cycles or a few block chronology, the tax rate will gradually increase, and finally fixed at a certain ratio. The advantage of this mechanism is that the number of people involved in mining in the early stage is small, and enough benefits for the miners can attract more people to participate in the project. The disadvantage is that low taxation is not enough to support the development funds of the project in the early stage, and the difficulty of mining in the later stage is gradually increasing. When the block reward is reduced, the high tax ratio will have a direct impact on the miners' income.
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From more taxes to less taxes
When the first block starts digging, it receives a relatively high proportion of tax, and then as the difficulty increases, the block reward decreases, and the tax ratio is gradually reduced. The advantage is that the initial mining is difficult, the block reward is high, the higher taxation does not have a great impact on the interests of the miners, and there can be sufficient tax funds to support the project development, the team can put all the energy into development and operation. You can quickly reserve a certain amount of tax funds in the short to medium term to adjust for sudden problems in the network.
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Fixed tax
The fixed tax is from the beginning of mining to the excavation of all blocks, using a fixed proportion of taxes. The advantage of this design is that it can be distributed through tax accumulation funds in a long-term and stable manner. In the early stage, there is no need to worry about the funds needed for project development, and there is no need to worry about the shortage of funds caused by market fluctuations in the later stage. However, its shortcomings are also obvious. It is impossible to adjust the tax ratio to deal with the impact of changes in mining difficulty and block reward reduction on miners.
According to the comparison of the above three taxation methods, combined with the actual situation of the project, we can analyze which taxation method is more suitable to be more conducive to the long-term development of the project.
Through the comparison of the above three tax forms and the historical reasons and current situation of the QIT, I think it is more reasonable to adopt the second taxation method (similar to Zcoin).
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Solve the problems left over from history.
In the case where the Foundation does not participate in mining, it is also possible to meet the Token exchange of previous QIT investors through an initial high percentage tax.
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Founding team rewards.
A portion of the early higher percentage tax is a token reward for the founding team or contributor, which is gradually eliminated through periodic changes and is not permanently sustainable.
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Public chain development funds.
These include foundations, commercial company promotion, and operations. This part can be allocated all the time
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Welfare system.
Supporters who hold tokens for a long time are rewarded according to certain rules
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Reserve a pool of funds.
This part of the tax is mainly used to balance the subsidies to miners in the future, as well as to deal with some other problems.
In view of the above points, it is necessary to consider the interests of early QIT investors, the interests of early development teams, and the funding needs of ecological construction. In a relatively short period of the early period, the tax ratio can be increased and the tax distribution is clearly defined. For example 20%, then:
- QIT Investor: 8%
- Founding team: 4%
- Development Fund: 4%
- Welfare system: 2%
- Reserved funds: 2%
After cycle T1 (to focus on solving QIT history issues, this T1 is somewhat equivalent to the pre-digout cycle), consider reducing 8% first (ie minus 8% allocated to QIT investors), ie the total tax reduction is 8%. Then after a period of T2, the tax began to gradually fade. In the T2 cycle, 4% of the founding team gradually decayed to 0, and the attenuation part was added to the development fund, welfare system and reserve fund pool, that is, the development fund gradually increased from 4% to 6%, and the welfare system increased from 2% to 3%, the reserved funds pool is increased to 3%, and then gradually decay or remain unchanged.