Tax Return 2.0: How Blockchain Can Bring America's Budget Into The Future

As the holidays wind down, many Americans start anticipating what can be a dreaded time of year for individuals and business alike: tax season. 2018 brings a fresh wave of worry and hope with the latest changes to the tax code, but one key issue stays the same — citizens have very little input into how their taxes are used by the federal government. For those unwilling to go full Thoreau on the problem (i.e., refuse to pay taxes and risk jail time), we typically just grumble about the injustice and submit our forms by April 15 anyway. But what if there was another way? To consider a unique solution, we must first understand the revolutionary technology that can get us there — blockchain.

Blockchain Basics

The most well-known use of blockchain technology right now is likely Bitcoin, the cryptocurrency established in 2008. But what is blockchain technology, and how does it allow our digital transactions to be more secure than ever before?

Put simply, blockchain technology eliminates the current system of transactions in which every party involved has their own record of what happened during the transaction. Instead, blockchain creates a single, unalterable record of transactions that make up “blocks.” This is a permanent, indisputable record of authenticity and authorization that allows transactions to be secure and trusted over a digital network.

As BlockGeeks puts it, “Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.”

The key idea here is that everyone involved is engaging with the same record. A single record of the transaction means less wiggle room for altering the information that occurs when we rely on multiple copies of redundant records.

The record of transactions itself becomes the form of trust. Not even a system administrator can delete a digital sequence in the chain, so users have full transparency around the transactions that are occurring. And what, exactly, are these data “sequences”? They are defined as: “a kind of self-auditing ecosystem of digital value, the network reconciles every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a ‘block.'”

Federal Tax Spending: Where We Are (and How Blockchain Can Help)

So, what does blockchain technology have to do with taxes? Since this technology is both secure and robust enough to deal with a range of transaction types, it could actually be used to allow each taxpayer to set their own preference ratios of our national budget when filing. The result is that people would feel much more engaged when paying their taxes, and we’d have a stronger democratic society overall.

Before we get into an example of how this works, let’s take a quick review of how our current federal budget is allocated, courtesy of the Center on Budget and Policy Priorities. Our budget is divided into mandatory spending programs and discretionary spending programs, but the total breakdown is as follows:

• Social Security: In 2016, 24% of the federal budget, or $916 billion, paid for Social Security, a program which provides for retirement income, as well as income for disabled workers and the families of deceased and disabled workers.

• Healthcare Subsidies: The combined total of Medicaid, Medicare, CHIP and healthcare marketplace subsidies amounted to 26 percent of the budget in 2016, or $1 trillion.

• Defense and International Security: In 2016, 16% of the budget, or $605 billion, was used for defense and international security.

• Safety Net programs: 9% of the federal budget, or $366 billion, supports programs for families facing hardship, including SNAP food assistance and the Earned Income Tax Credit program (EITC).

• Interest on Debt: In 2016, interest payments on debt owed took up $240 billion, or about 6% of the budget.

• Everything Else: The remaining 19% of our federal budget is tasked with covering all other needs, including benefits for federal retirees and veterans (8%), infrastructure (2%), education (2%), science and medical research (2%), non-security related international programs (1%) and the remaining 3% is for all other federal spending.

If blockchain technology was used for tax returns, a dedicated portion of each tax return would go to the mandatory spending, which includes social security, healthcare, veteran’s benefits, transportation and food and agriculture. The remaining amount (discretionary spending, of which over 50% is devoted to military and defense) could be categorized and the filer will be able to determine what percentage of their taxable income would go toward which area of need. As an example, an individual who really values STEM education could direct 75% of their discretionary amount towards K-12 education, which currently receives a tiny sliver of the overall federal budget.

With blockchain as a way to authenticate and authorize these allocations, we can look at a family who owes $10,000 in federal taxes. 60% would go toward mandatory spending, or approximately $6,000 of their annual taxes, which is allocated as needed for the programs listed above. The remaining $4,000 would be divvied up based upon the interests of the taxpayer, but no category would be left completely blank. With every taxpayer contributing at least something to every category, we could get a better sense of our shared priorities and feel that we’re contributing to the budget in a meaningful way that truly reflects our values.

Technology experts agree that blockchain will continue to serve as a powerful tool in a range of industries, so why can’t we use it to overhaul our democracy? Not only would this approach boost engagement and allow voters to have a real say in government spending, but it could create powerful shifts in how we fund the programs that matter to us most.