Abstract
A game between a representative household and a government was analyzed. The household chose which fractions of two currencies to hold, e.g., a national currency such as a Central Bank Digital Currency (CBDC) and a global currency such as Bitcoin or Facebook’s Diem, and chose the tax evasion probability for each currency. The government chose, for each currency, the probability of detecting and prosecuting tax evasion, the tax rate, and the penalty factor imposed on the household when tax evasion was successfully detected and prosecuted. The household′s fraction of the national currency, the government’s monitoring probability of the national currency, and the penalty factor imposed on the global currency, increased in the household′s Cobb Douglas output elasticity for the national currency. The household′s probabilities of tax evasion on both currencies increased in the government’s Cobb Douglas output elasticity for the national currency. The government’s taxation on both currencies decreased in the output elasticity for the national currency. High output elasticity for the national currency eventually induced the government to tax that currency more than the global currency. The household′s probability of tax evasion on the global currency increased in the government’s output elasticity for that currency. The household was less (more) likely to tax evade on the national (global) currency if the government valued taxation and penalty on the national (global) currency. The results are illustrated numerically where each of the eight parameter values was varied relative to a benchmark.
Highlights
The government has a Cobb Douglas expected utility with four output elasticities, i.e., one output elasticity for each currency reflecting its identification with the household, and one output elasticity for each currency reflecting its preference for taxation and penalties on unsuccessful tax evasion
This article relates to this literature by considering one national currency that can be interpreted to be a Central Bank Digital Currency (CBDC) and one global currency that can be interpreted to be a cryptocurrency
The results showed that progressive taxation operated like an automatic destabilizer that generated equilibrium indeterminacy and belief-driven fluctuations in the economy, which differed from traditional Keynesian-type stabilization policies
Summary
Digital currencies are receiving increasing attention as central banks launch Central Bank Digital Currencies (CBDCs) (https://cbdctracker.org/, retrieved 7 April 2021), companies develop currencies (e.g., Facebook’s Diem), and individuals, institutions, and others (e.g., Tesla, Grayscale, MicroStrategy, Square) buy Bitcoin and other cryptocurrencies. Advantages of cryptocurrency included typical avoidance of inflation (e.g., through a fixed limited supply for Bitcoin or burning coins for the Binance coin), self-governance, disintermediation (no central party), security, privacy, cost-effective transaction modes (especially for cross borders payments), instant or quick, and 24/7/365 accessibility, etc. Households might correctly or incorrectly assess and compare governments’ abilities to monitor storage and transactions and enforce regulations for cryptocurrencies and government-issued currencies. Marian [1] suggests that cryptocurrencies could replace tax havens as the weapon-of-choice for tax-evaders. These developments induce households to determine what fractions of each currency to hold, how to evade tax on each currency, and induce governments to determine how to tax, monitor tax evasion, and punish tax evasion, on each currency
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