I will start by saying that I am not advocating a government crypto-currency. I also do not believe one would happen in the US because our money is privatized and implementing a crypto-currency of the land would greatly increase transparency and reduce corruption. Enough politicians are plenty happy with the way things are because they get a cut of the pie. But, for the sake of critical thinking, lets say that USGovCoin did exist. What are some benefits we could get from this and what would it look like?
This coin would be minted in a proprietary process by the federal government. A blockchain technology would be preferable to something like Open Transactions because we would then have an auditable public ledger. The currency would be forever inflationary. Currency minting of USGovCoin would go to a master account and every item in the budget would be designated with their own master account which would be paid out by the minting master account for the appropriate amount. The government would never again collect taxes (but may charge transaction fees as a method of state and municipal income). They would merely alter the mining algorithm to "print" what they needed. Everyone would pay taxes in the form of inflation.
Here are some benefits I see to this system:
1. Government spending becomes transparent. The public ledger allows anyone to track where the money is going and how it is being spent. No more trillion dollars lost by the Pentagon that no one can account for coming up in the news.
2. Get rid of the IRS. No one pays taxes so no one avoids taxes, you just lose value based on measured inflation. Hey, that happens anyway and inflation is harder to track in this current complex system.
3. Inflation tax is tempered by the fact that foreign holders are getting "taxed" the same. No more offshore tax havens and inflation tax is spread over a larger base than regular tax so the effects are not as heavy on any one group.
4. With an inflationary currency people will still be encouraged to invest in businesses to stop the bleeding. You don't want your money sitting, you want it doing things for you. I realize that people tend to invest what they have saved and inflation fights that, so this argument is mainly aimed at the "inflation is necessary" camp.
Here are some issues I see with this system:
1. Why would foreign entities treat USGovCoin as a reserve currency if they are getting taxed like US citizens?
2. Like it or not, having to pay taxes stabilizes the currency. Businesses accept USD in part because when they pay taxes it has to be in USD. If there was no tax then leaving USGovCoin for a crypto-currency with lower inflation and risk would seem very attractive. If the government tries to play this game they will find themselves losing to the competition.
3. If it is a true crypto-currency, then the government would have a difficult time regulating fraud and confiscating currency after prosecuting theft. The penal system would have to change because all thefts would become final. You will send the rich to prison and they will leave just as rich.
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