Filling the Tax Gap via Programmable Money

Abstract: We discuss the problem of facilitating tax auditing assuming "programmable money", i.e., digital monetary instruments that are managed by an underlying distributed ledger. We explore how a taxation authority can verify the declared returns of its citizens and create a counter-incentive to tax evasion by two distinct mechanisms. First, we describe a design which enables auditing it as a built-in feature with minimal changes on the underlying ledger's consensus protocol. Second, we offer an application-layer extension, which requires no modification in the underlying ledger's design. Both solutions provide a high level of privacy, ensuring that, apart from specific limited data given to the taxation authority, no additional information - beyond the information already published on the underlying ledger - is leaked.