The most intuitive reason for taxes to exist is to help pay for common services and public goods that everyone uses. This is why many people love to tax the rich: it seems fair to ask the people who can afford it to pay more for the things that everyone uses.
However, not all taxes are created equal. A tax that is only designed to maximize revenue can have detrimental effects on the economy. For example: let's say that sales tax was increased to 50%. While on paper it may seem that revenue may increase by X%, in reality the amount of sales in the economy may decrease making the total amount of revenue lower after the tax is instated.
Now, let's say that our goal as a government is to reduce the amount of carbon emissions from cars on the road. We could apply a selective sales tax to gas, which would increase the price of gas and reduce the amount of gas that people buy. The direct effect of this would be that people would use less gas.
The point is that taxes can be used to influence behavior in addition to raising revenue. This is why it's important to understand the effects of a tax before implementing and/or voting for it.
Protocols are a form of governance, and as such they can use taxes to influence user behavior. This is already implemented in many layer one blockchains:
These also exist in the DeFi space:
Understanding the effects of taxes is important for protocol designers, since they can be used to influence user behavior. For example, if a protocol wants to encourage users to use a specific token, it can give a tax rebate to users who use that token-- e.g., a stablecoin might buy a lot of governance power to make it cheaper to use their stablecoin.
I was inspired to write this post by a short YouTube video about Singapore's public transit system. They impose a very high tax on cars: a Honda Civic costs over $100k USD equivalent. This has resulted in a lot of people using public transit, which has reduced traffic and pollution and has increased the utilization/ROI of investing in the public transportation system.
Taxes are an age-old tool for governments to influence behavior. We may be able to rely on tested economics to help us design better systems for capturing value.
Thanks for reading! Have any questions, comments, or suggestions? Feel free to use the comment section below or email me at [email protected] and I'll do my best to respond.
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