Forms of Democracy and Bitcoin

Bitcoin has now been around for more than a decade and yet policy lags far behind. At first it was a gimmick. Even when it was worth a couple of thousand, the scoffs from the financial world were palpable. Regardless the social/economic experiment which is bitcoin has recently gained unprecedented ground. The point of mass adoption has been passed. Virtually every country on earth has the presence and is influenced by the Bitcoin market. By its very nature Bitcoin is a decentralized asset which lends to a global market. Anyone can get a Bitcoin wallet, which comes with a wallet address allowing one to, so to speak be off to the races. Anyone anywhere can send Bitcoins to a Bitcoin wallet address and on the flip side anyone can send from their wallet to another without any third party/ bank or financial institution. So far policy around digital assets like Bitcoin have been non-existent but, the more the value and use of Bitcoin expands the louder the grumbles from government institutions become. As always Uncle Sam wants a piece of the pie. The question is how big of a piece and how is it going to be cut? Does the type of democracy motivate different policy stances toward Bitcoin? More specifically will a majoritarian democracy seek to tax Bitcoin gains at a lower rate than a Proportional Representative democracy?

Theory

In majoritarian democracies we will see a lower rate of taxation for Bitcoin as a result of the system skewing to the right and being less distributive. The logic here is based on now standard arguments which pertain to the distributive degree and size of government in regards to it being majoritarian or proportionally representative. In general a majoritarian democracy has been shown to lead to lower voter turn out. With better off and more highly educated populations voting at much higher levels than their poorer and less educated counter parts. Inversely PR democracies are able to motivate more voters to turn out due to greater competition and variety in parties. As a result PR democracies tend to be more responsive to the working class because the system is not a winner take all where the people is defined by the majority (Tavits 343). Part of being more responsive is providing for greater redistribution to those at the bottom because they are politically represented through the PR system. This redistribution is usually heavily levied with the help of taxation.

Now turning to bitcoin we have a situation where the educated and rich have the best positioning for acquiring and thus being interested in Bitcoin. They have an incentive to keep taxation of the new asset low (seeing as it is currently virtually zero or easily avoidable). In places like the US, Canada, and the UK we expect to see a smaller amount proposed taxation as-well as less extreme degrees of it as-well, as a result of elites owning the majority of the bitcoin in the country and also being the strongest voting demographic which allows them to defend their position.

Where we have PR we expect a different interaction since the government has to be more responsive and re-distributive to those that may not own or even understand Bitcoin. What they do know though is that bitcoin is worth money, they see that all of the world’s millionaires and industries are heavily involved and profiting from the asset. Logically, they will want that generated wealth to be redistributed to them (just like everything else that makes money for the country). In a PR system they have the avenues and power to really get a piece of the pie. Voters have multiple parties to pivot to and fro depending on how responsive they are to meeting the demands of their constituents. Leading to an almost equal participation between the well off educated folk and the working force with minimal formal education. This participation in turn degrades the elites ability in PR democracy to defend against the redistribution of their Bitcoin gains.

Hypothesis

The expectation is that Majoritarian Democracies will postpone for longer and have less intense tax policies in regard to Bitcoin as opposed to PR democracies.

Methodology

To test my theory I would select historically well defined majoritarian democracies and PR democracies to investigate the relationship between the democracy type and the current state of bitcoin taxation policy/conversation. Sweden, the Netherlands, Finland, and Denmark come closest the PR ideal type while Canada, the USA, and the UK represent majoritarian democracies (Travits 343).

With our countries of interest defined we move on to measuring the degree to which Bitcoin is being taxed or being talked about being taxed in said countries. This is a point of difficulty in the research because policy that is currently in place to regulate bitcoin is almost non-existent (our N would be too small to infer anything) so we must search for places where we have confidence that the conversation is leaning toward one side or the other (less or more taxation of Bitcoin). We must measure not only the real and implemented tax policies but the potential and likely ones. It is too early in Bitcoin to have data that can be supported by policy that is currently in place. We must look for voter and government attitudes that would sway future policy making decisions. To this end we propose combining archival data of the number congressional sessions dedicated to discussing Bitcoin with interviews of congressmen and voters in order to determine an overall tone/attitude. We hope to compare the two sets of countries through these measures of to see if our theory has any validity in the current world. At the end we want to test to see if PR democracies are leaning toward a higher tax rate of bitcoin while majoritarian democracies are more concerned with keeping the market liberalized as long as it doesn't interfere with the greater economy.

Readings/ Literature

The literature on the attributes of PR and Majoritarian democracies comes from a range of authors which we were exposed through the article from which is the greatest inspiration for the theory developed in the paper. It falls inside the study of voter turnout in relation to institutional organization and redistribution. The article by Tavits: The Size of Government in Majoritarian and Consensus Democracies being the main literature where this research is drawing from. In it we draw support from: Lijphart (1984, 1994, 1999) when defining Majoritarian vs PR democracies and Blais & Carty,1990; Jackman & Miller, (1995) to advance the “standard argument that under proportional representation (PR), electoral-rules voter turnout tends to be higher for any (combination) of the following reasons.” (343).

These are but two of the many authors in the literature that progress the logic of the above arguments.

Implications and contributions

For the first time we are applying known patterns of voter turnout, redistribution, and taxation in PR and majoritarian democracies to the novel asset/currency which is bitcoin. Traditional logic lends to the idea that a PR system will seek to use bitcoin as an issue to mobilize voters. Bitcoin provides for another way to redistribute to the lower classes, another asset, another industry. By that logic parties will be forced to support the higher taxation of bitcoin in order to extract value to reward their voters. The research could co-oberate what is already know about the general tendencies of the two democratic institutional organizations. Or show that Bitcoin does not cause the same reaction as a taxable assets in the same ways that other industries/assets do. If not why? Why would it not be redistributed or hoarded in the same manner as we expect given the two types of democracy? Do the elites/ bitcoin holders have incentives to creating special bitcoin taxes? If so why? Though we may see predictable results it is important to extend expected old trends to new phenomenon. Exploring the link between the types of democracy and their response to Bitcoin in terms of taxation/redistribution is new research that has not been explored as of yet. The novel nature of the research allows for new and old ideas to come together to explain the ever expanding world of bitcoin and digital currencies in general. Further, the findings could potentially extend beyond Bitcoin to all coins on the block chain (even NFTs) seeing as they are significantly similar. The research is further generalizable because it explores majoritarian vs PR democracies which we can observe all over the world and so the theory could travel through this unifying factor.

Conclusion

Though it is still early in to draw extremely concrete conclusions, Bitcoin has been around long enough and has become enough of a financial phenomenon that it begs to be researched and have applied to it current assumptions of how democratic institutions interact with assets. We expect that majoritarian democracies will resist the taxation and formalization of the Bitcoin market as the majority of voters are well off and have a higher level of education allowing them to buy and hold bitcoin. Those which are profiting from the assets would resist taxation and have the ability to do so through the vote in a majoritarian democracy. On the other hand PR systems should allow for a greater degree of taxation and formalization of Bitcoin markets due to the influence that the working class has through a PR democracy. By testing these simple mechanisms/assumptions we hope to explain/predict the current and future policy decisions made in democratic nations in regards to Bitcoin legislation. At the very least we can start to apply what we already know in order better regulate/organize the ever-growing asset… Bitcoin.

Bibliography

Tavits, Margit. “The Size of Government in Majoritarian and Consensus Democracies.” Comparative Political Studies 37, no. 3 (April 2004): 340–59. https://doi.org/10.1177/0010414003262068.