Bitcoin City in El Salvador
How does a bitcoin based, 0 taxes city work?
President Bukele is not finished with his plans to make El Salvador a bitcoin mecca. The most recent news to come out of the Latin American country, is plans to build a “Bitcoin City”. Part of the plan, is to make it extremely appealing for people to come live, and build within the city. The focal point of this plan is zero taxes.
How does a city function on 0 taxes?
Shortly after this announcement, Mrugakshee and I started getting a few messages wondering exactly how this whole zero tax situation would work. Taxes are supposed to be for providing social services, infrastructure, and funding for non-profits. How then does this “Bitcoin City” hope to provide a functional society for all classes and tiers of citizens?
While I don’t have the answers, I can speculate on what may happen. Ultimately, only time will reveal whether or not such a city with 0 taxes would actually work.
Bukele did mention that there will be a 10% value added tax in order to fund infrastructure and services — Fortune Magazine
People keep more of their money
The implication of people not paying taxes is that people get to keep more of their money. In a perfect world, this means they have more to give away to causes that they believe in. In theory this makes sense; instead of relying on a government to organize and provide social services, people can take it upon themselves to raise funding, and manage the operations of social causes.
Less taxes means people have to work less to make the same amount of money. Less work means people have more time. More time means people can spend more on themselves and allocate resources to altruistic endeavours.
But is there any evidence that people are more charitable with their time and money within a society with less taxes?
Reduced Taxation in History
We actually have a fair bit of historical evidence to answer this question with confidence. What actually happens when there are high taxes in a society, is that people are incentivized to discover, or invent tax avoidance schemes.
That might be strategically never selling assets in order to borrow against them, avoiding capital gains. Or it might be creating a non-profit organization (Gates Foundation, Clinton Foundation) in order to reduce your taxable income.
It could also mean that people move their funds offshore, something that many wealthy people were exposed doing in the Panama papers.
Paradoxically, tax cuts in the past have lead to increased tax revenue1. How is that possible? Reducing taxes to something resembling a simple and reasonable figure (10% - 25%) has lead to more people actually paying their taxes. So even though the overall marginal tax rate is reduced, the government ends up with more tax revenue.
People no longer have as much incentive to hide from taxes because the tax code is simple, and reasonable. The higher the tax, and the more convoluted the tax code, the more incentive the wealthy have to find ways to manipulate the system and pay less tax.
This ultimately leads to the rich paying less tax, as they’re the ones who have the funds and ability to pay accountants to optimize their tax bill. No one likes paying tax, but if the government makes the tax simple to understand, then the result is actually positive for both the people, and the government. The government gets more money, and the populous keeps more of their money.2
An Experiment in Privatization
It is unknown whether or not the government will be providing the full scope of social services to the public. Such details have yet to be released by the El Salvadoran administration. In the event that the government doesn’t provide things such as schooling, or healthcare, it makes sense that these services would be picked up by entrepreneurs and businesses.
The typical libertarian would tell you that this will lead to the optimal set of services. Businesses will compete with each other by lowering prices and providing the best service. The socialist might say that people will end up getting a different tier of service depending on which rung of society they were born into. I think both are true.
There will be businesses providing high quality, highly priced services. There will also be businesses providing affordable, lower quality but hopefully sufficient services.
To be honest, I think this sort of hierarchy of services is the natural order of things. Hierarchies always exist, I just wonder whether or not this model for society would result in too large of a social disparity.
My gut feeling is that the disparity would be less with less government intervention. Let the free market figure out how to care and provide services for people, regardless of their social standing.
In a society with less taxes, the theory is that more people have more time and money to take on more risky entrepreneurial or purely altruistic endeavours. Endeavours such as providing high quality, affordable health care for anyone from any background. We will see.
El Salvador’s Strategy for Bitcoin City
The details of Bitcoin City are as follows. El Salvador is going to issue $1 Billion worth of bonds through prominent bitcoin company Blockstream.3 They will immediately use $500 million to buy bitcoin, and the other $500 million to build the city.
The 10% value added tax (VAT) is in place to fund further infrastructure developments, and government services. El Salvador has already become a hub for bitcoiners all over the world. The idea of building a bitcoin city is to further entice bitcoiners to make a pilgrimage to El Salvador to spend their bitcoin and boost the economy.
Regardless of whether or not all of this will play out as they expect, one thing is for certain; all eyes are on El Salvador.
What do the locals think of Bitcoin City?
Mrugakshee and I spoke to one local that shared an interesting perspective. There is still an anti-governmental, anti-authority vibe amongst a cohort of the people here. One local said that he thinks the Bitcoin City is bullshit. It’s a big promise that the government is unlikely to follow through on. Much like the border wall promised by President Trump.
Another local told us that regardless of whether or not the city actually comes to fruition, other countries are looking at El Salvador, wondering how this bitcoin experiment is going to play out. In short, bitcoin city is a mixed bag for El Salvadorans. Only time will tell how it actually plays out.
A Grand Experiment
The thing I like most of what is taking place in El Salvador is that this entire thing is a grand experiment. Never before has a nation removed itself from the administration of the national money, then subsequently pledged to build a 0 tax city. The dichotomy is strange.
On the one hand Bukele has described himself as a dictator on Twitter (apparently a joke). On the other hand, he has lead the El Salvadoran government to relinquish control over one of the core tools of power that each government has; the ability to control their money. Furthermore, his administration is not seeming to increase taxes, and increase their grasp on society, but instead reduce taxes.
If Bukele is truly a dictator, he is the first of his kind.
I am sincerely looking forward to how this whole thing plays out. Mrugakshee and I will no doubt be coming back to El Salvador to witness with our own eyes how this pans out in a year. Thanks for reading.
Regards,
Keegan