Wealth tax approaches

Comparing the different wealth tax approaches that a network could adopt

A wealth tax represents the most promising approach for generating long term treasury income for any Web3 smart contract platform. There are a few approaches to consider when implementing a wealth tax.

Taxation coverage

The first decision to make about how a wealth tax could be implemented is what accounts and contracts will be included in the taxation.

If there was any way for people to avoid the wealth tax by moving their coins to a certain location there would be a large incentive for people to do this. It would also create a market for developing solutions that make it easier for people to exploit this ability to avoid the wealth tax.

Due to this incentive it will be important that a wealth tax is applied to every account and contract across the entire network so that the tax is unavoidable. This means everyone would be treated equally. The wealth tax will need to be considered by anyone that decides to hold the network's coin and use the network.

People would still be able to make contracts that guarantee a certain amount of coins will be available for someone at a specific date in the future. Contracts would simply need to take into account the future wealth tax that will be charged when making the contract and then add these additional funds to the contract ahead of time. Alternatively, contracts could also let people top up their existing contract at any point in the future. This might be necessary for situations where there has been a change with the wealth tax amount being charged and the contract has already been created.

Taxation regularity

The regularity of a wealth tax would have an influence on user behaviour. Let’s compare a once daily taxation approach with a once yearly approach.

Being taxed once yearly would mean that people could forget about the tax until it approaches each year. The closer it gets towards the taxation date the more incentive there is for people to start spending their money before the tax happens. This would mean that the buyers could try to avoid the tax by completing all their desired exchanges just before the taxation date. This is assuming the seller isn’t able to quickly exchange or invest the money prior to the taxation date. The less regular and larger the taxation amount the larger the spike you could expect to see in user behaviour. People would have a larger incentive to try and avoid the tax by offloading as much of their coins as possible.

Once daily would make it much less important for people to try and spend their money before the taxation date due to how small the tax would be on each day. The smaller and more regular the taxation amount the less impact you could expect to see on user behaviour. A smaller tax with higher regularity would mean a very gradual taxation approach with a more consistent impact on user behaviour.

Frequent and small wealth taxes would be the most beneficial approach for minimising the influence of the tax on suddenly changing user behaviour. This will also help to reduce sudden spikes in transaction volume that could temporarily reduce network stability.

Some example taxation frequencies that could be effective include every 1 hour, 2 hours, 4 hours, 6 hours, 8 hours, 12 hours or 24 hours.

The decision on which taxation frequency to use would partly depend on the operational cost of executing the tax across the network. There would be a cost involved to execute and collect the wealth tax. A balance needs to be struck between increasing the regularity to minimise the impact of creating transaction volume spikes whilst also trying to decrease the regularity to minimise the operational cost of executing the tax on the network.

Running some experiments to monitor the operational costs to execute the wealth tax and the implications on user behaviour and transaction volumes would be highly insightful. These observations and data points would help with identifying the optimum taxation regularity for the network.

Taxation amount

A wealth tax could be a fixed fee or a percentage fee. Fixed fees would be problematic as it would mean the wealthiest individuals would proportionally pay the least in tax if the taxation amount was the same for all accounts and contracts. Percentage fees would treat everyone equally. The wealthier the individual is the more tax they would pay, the taxation would be proportional to the wealth someone has.

A wealth tax that is too small could struggle to have much impact on generating enough income for the treasury. A wealth tax that is too large could incentivise people to migrate to other ecosystems due to the ongoing cost burden.

One factor that will influence how high the wealth tax should be would be based on how effectively the income can be used by the treasury. Any increase in the wealth tax would need a funding process that is able to use that increase in funding to effectively generate a reasonable return on investment for the ecosystem. If a treasuries funding process is inefficient at allocating capital towards impactful initiatives there could be an increased opportunity for other networks to outcompete them by creating a more effective funding process. The funding process will play an important role in determining how fast an ecosystem improves over time.

Web3 ecosystems could benefit from starting with a small wealth tax so that they can first provide sufficient evidence that the treasuries funding process is working effectively before considering any increases in the wealth tax percentage.

If a treasury's funding process is able to consistently generate a large amount of impact there could be a large amount of merit in increasing the wealth tax. Community members that hold the network's coin could financially benefit from the price appreciation that is achieved due to the initiatives that were funded by the tax. The price appreciation could outweigh the cost of the taxation.

A wealth tax should be highly effective for funding initiatives that will develop new use cases and functionality. Existing users could benefit from these initiatives. Even if the price appreciation didn’t exceed the cost of the wealth tax, an outcome of there being more features and use cases could be enough to justify an increase in the wealth tax.