Tax Policy and Digital Money: An Overview

• In Event: Crypto, Credits, and Consumption: Tax Policy in a Changing Economy

Abstract

We discuss the taxation of a wide variety of types of digital money ranging from CBDCs, cryptocurrencies, digital payment methods, and metaverse coins. We revisit the income versus consumption tax paradigm in a world with digital money, discussing how it aligns with the principles of efficiency, equity, and ease of administration.

Digital money presents both challenges and opportunities for tax policy and administration. Crypto undermines traditional tools like withholding and third-party information reporting, potentially leading to new avoidance and evasion strategies. Increased observability of transactions through digital payments, for example, could invite flawed policies such as financial transaction taxes. On the other hand, CBDCs provide more detailed information, opening the door to new—and possibly improved—tax policy designs. The coexistence of CBDCs and decentralized crypto brings its own challenges. The effectiveness of CBDC-enabled tax design will be weakened if people predominantly use other fungible tokens instead of the official CBDC.

The current-day preference for taxing income over consumption originates from economic discussions in the early 1900s, when measuring income was arguably easier than measuring the value of consumption. Digital money challenges this paradigm by making consumption easier to observe. Moreover, because digital money can improve the efficiency of progressive transfers to the poor, governments will have easier access to progressive non-tax instruments, specifically targeted better transfers. All of this strengthens the case for consumption taxation. Could digital money lead to personalized consumption taxation and a shift from income to consumption taxes?

Authors

• David Agrawal, University of California, Irvine

• Shafik Hebous, IMF