An Investigation into the impacts of blockchain applications

on income inequality, mediated through financial inclusivity

and taxing efficiency.

Word Count: 9710

SN:19009726
Candidate number: KVNV4

SESS0053: Free standing dissertation

UCL School of Slavonic and Eastern European Studies

Supervisor: Marco Ranaldi

Abstract
This paper analyses the implications of blockchain applications on the level of income

inequality. Two separate econometric models are used to mediate the effects of blockchain on

income inequality, through estimating the capability of blockchain to ameliorate financial

inclusivity and tax evasion; which are both significant determinants of income inequality.

This paper first explores the theoretical conceptions of blockchain, describing how its new

mode of decentralised trust revolutionises the capabilities in resource accessibility and

reallocation. The empirical portion of the study is then conducted using the changing

remittance transaction costs for 217 of the available world bank countries, and the offshore

wealth of 37 developed countries indicative of nation-wide tax evasion levels. The empirical

exploration finds that the overall implementation of blockchain, is conducive to the

improvement in income inequality for both models. The cross-comparative assessment of the

two econometric model, also illustrates different implementation rigidities for blockchain

exercised in private and public spaces. Nevertheless, since this paper is approximating the

nascent blockchain industry with current data, it aims to demonstrate the validity of the

drawn relationships as opposed to assessing the varying degrees of impact.

Table of Contents

1. Introduction...............................................................................................................4

2. Theoretical background of blockchain...........................................................................6

2.1 Understanding the mechanism of blockchain operations.....................................................6
2.2 How does blockchain create a new framework for ‘trustless trust’.....................................8
2.3 Improving the current fiat monetary system with blockchain.............................................9
2.4 Inherent Weakenesses of Blockchain..................................................................................11

3 Literature review......................................................................................................13
3.1Blockchain empowered remittances.............................................................................13
3.1.2. Contemporary case studies on blockchain-remittance firms.......................................................16
3.2 Blockchain on credit accessibility.................................................................................17
3.2.1 Background on credit accessibility on income inequality........................................................17
3.2.2 Resolving obstacles in the lending industry....................................................................................19
3.3Revitalizing tax systems with blockchain.............................................................................21
3.3.1The issue of tax evasion with income inequality..............................................................................21
3.3.2 How does blockchain rectify undesired tax leakages.....................................................................23

4. Methodology and data interpretation............................................................................24

4.1 Impact of blockchain empowered remittances on income inequality.................................25
4.1.1. Model specification...........................................................................................................................25
4.1.2 Hypothesis of econometric relationship...........................................................................................27
4.1.3 Data interpretations and results for blockchain-remittances........................................................30
4.2 Controlling for tax evasion with Blockchain.......................................................................32
4.2.1 Model Specification...........................................................................................................................32
4.2.3 Hypothesised relationship of predictors..........................................................................................34
4.2.4 Data interpretation and results on tax-induced income inequality..............................................36

5. Conclusion...................................................................................................................38

Bibliography....................................................................................................................40

Appendix.........................................................................................................................46
 1. Introduction

The advent of blockchain is seen as the next interaction of information and communication

technologies (ICT), but instead of an integrated network for transfer of information,

blockchain enables a global collaboration and exchange of value (Tapscott and Tapscott,

2019). This differs from the conventional system of payments through financial

intermediaries, where transactions are instead made peer-to-peer through the help of a

distributed ledger. Trust is essentially hardcoded into the framework, mitigating the

downsides of intermediary intervention. Since blockchain facilitates decentralised channels of

transactions, it is expected to not only reduce cost of doing business, but solicit more

effective coordination and reshaping institutional structures (Davidson et al., 2018). All three

of the aforementioned perks are, heavily relevant in the discourse of income inequality. As an

infrastructural novelty, the effects of blockchain on income inequality are only realisable

through mediating relationships. The paper thus looks towards financial inclusion and tax

systems, to mediate the implications of blockchain on income inequality. Financial inclusion

is described as a process which eases the access, availability and usage of formal financial

system (Sarma, 2008). The decision to assess financial inclusion as opposed to more common

determinants of inequality, comes down to the an abundance of blockchain applications

within the financial industry. Therefore, alluding to existing applications of blockchain,

could better consolidate the theoretical construct of this paper. Hitherto, progressive tax

systems has been the main mechanism in resolving income inequality, but their impact on the

issue remains ambiguous (Duncan and Peter, 2016). A new study from PWC (2016) has

indicated the potentiality of blockchain in rectifying VAT fraud, which marks an important

transition for the relatively stagnant sector. Hence, before blockchain technology could foster

and ameliorate income skewness, this paper establishes the promising relationships and

opportunities it could nurture through financial inclusion and increased tax efficiencies.
Income inequality is defined as the extent to which income is unevenly distributed across a

population. The role of blockchain on income inequality simulates closely to that of the

internet, providing greater opportunities for personal advancement in economic positions.

However, it also carries similar drawbacks, including the substantial increase in income for

those working in the field. Income inequality as an integral topic in macroeconomic policy-

making, intensified by the plethora of scholarships it attracts. Predictors like GDP,

unemployment an social transfers are frequent predictors traditional predictors of income

inequality (Awe and Rufus, 2012; Tsaurai, 2020; Dervis and Qureshi, 2016), whilst recent

literature has increasingly emphasised the importance of financial inclusion (Kling et al.,

2020; Omar and Inaba, 2020; Sawadogo ad Semedo, 2021). Financial inclusion was also

found to be more significant than factors such as financial sector size and fiscal policy, when

estimated against income inequality for over 150 countries (Garcia-Herrero and Turegano,

2015). Tax evasions were also seen as a major threat to income inequalities, regardless of the

type of tax systems practiced (Argentiero et al., 2021). The system is far from perfect with

scandals such as the Panama and Paradise papers, the deterioration of the tax system would

lead to issues on both income distribution and social cohesion. The need to move beyond the

tax data has also been envisaged by relevant scholars, which blockchain could readily be of

use (Alstadsæter et al., 2017). They argue that random audits could hardly uncover

sophisticated forms of tax evasion available to the rich, particularly when information from

tax havens are severely truncate. Hence, this nicely setup for blockchains’ capability in

smoothening information, data and value flows.

Hence, this is how the rest of the paper is structured. Section 2 provides the theoretical

background of blockchain applications. Section 3 provides a literature review of blockchain

implementation in remittances, credit accessibility and tax systems. Section 4 presents the

methodology used and interpretation of data. Section 5 then concludes the paper.

2. Theoretical background of blockchain

2.1 Understanding the mechanism of blockchain operations

The prominence of blockchain technology was first popularised by the cryptocurrency

Bitcoin, a technology manifested after the financial crisis of 2008. A pseudonymous

individual named Satoshi Nakamoto proposed Bitcoin as a remedy for the financial system,

hardcoding trust onto its associated blockchain. The topic of trust interweaves across the

finance industry, as it governs how banks extend credit and offer liquidity (Basaran, 2020).

The proposal introduces the concept of decentralised transaction, which disregards the need

for intermediaries to facilitate trust. Instead, promotes true peer-to-peer transactions

harnessed on a virtual platform, where trust is based on embodied cryptographic constraints

and mathematical guarantees instead (Werbach, 2018). The typical central ledger held by

intermediaries, are now mutually held through participants of the blockchain network. This is

effectively known as distributed ledger technology (DLT), where each ledger has to be in

agreement for a transaction to be validated (Memon et al., 2018). DLT works in conjunction

to the blockchain, where each block represents a verified transaction data. The verification is

a two-step process, first the transaction has to be documented onto a block, which is known

as the process of ‘hashing’ supported through the computational power of ‘miners’. ‘Miners’

are then tasked to hash a block according to the algorithm’s requirement (suppressing block

size to zero bits for Bitcoin), in return for a token of value sometimes in the form of a

cryptocurrency (Monrat et al., 2019). The addition of the ‘block’ to the ‘chain’ of past
transactions, is then approved through the consensus mechanism of the blockchain network.

Such that network participants known as nodes, would verify the transaction with their own

ledger to see if it existed previously. Once rectified, the addition of the new block is updated

for all nodes, ensuring that all ledgers are identical. This particular sequence of verification,

is subsequently known as the Proof-of-Work (PoW) algorithm (Nakamoto, 2008).

The algorithm provides an immutable distributed ledger, as the blockchain is secured through

an unalterable cryptography. The DLT ensures modification of past blocks would be virtually

“impossible”, whilst PoW ensures the simultaneity of coordinating ledgers and reached

consensus (Zhang et al., 2019). The combination of the PoW algorithm and DLT technology

consolidates the ‘trust protocol’ between two parties in dealing, where the authentication of

transactions are in the autonomy of participating nodes. These nodes collectively form the

infrastructure of the blockchain network, where nodes are simply any hardware with the

memory and process power to store a distributed ledger (Newman, 2021). Blockchain also

has the flexibility to modify its consensus mechanism, depending on the purpose of its

network. Examples such as public blockchain, private blockchain and consortium

blockchains (hybrid of public and private blockchain) curates accordingly to implementation

incentive (Memon et al., 2018). Thus, blockchain supervises accountability and transparency

of transacted contracts, where records are protected from any form of tampering.

Additionally, data on blockchains are timestamped accordingly, enabling users to recall

historical transactions if uncertainty does arise. Figure 1 summarizes a typical blockchain

transaction, through a logic diagram of the entire described process.

Figure 1. General Blockchain logistic diagram

Source: A survey of Blockchain from perspectives of Applications, Challenges, and Opportunities. (Monrat, et al, 2019)

2.2 How does blockchain create a new framework for ‘trustless trust’

After an overview of blockchain technicalities, its influence on improving income inequality

is examined. As previously mentioned, increased access to basic financial services

enormously benefits the underprivileged, as it promotes productive-enhancing activities

which generates income in the long-run (Eliis et al., 2010). Lower-income individuals often

suffer from higher interest rates, as existing information asymmetries forces financial

intermediaries to compensate for higher risk through charging high interests. Especially after

the financial crisis of 2008, Guiso (2009) argues that the loss of trust in the financial system

was fuelled by unregulated opportunistic behaviour. Nonetheless, blockchain technology

introduces a new framework of ‘trustless’ trust, which enables cryptographic-trust to provide

validity instead (Swan et al., 2019). On this occasion, blockchain could either be integrated

into existing interactions or facilitate a completely different medium of exchange. When

integrated, the blockchain significantly diminishes existing information asymmetry, reducing

the implicit cost of information procurement. As such, the provision of a true peer-to-peer

channel of transaction, reduces related administrative cost severely. Moreover, decentralising

from conventional payment companies elevates the economic position of vulnerable groups,
as methods of value transfer has been diversified. In a different lens, financial intermediaries

have traditionally monopolised their role as a guarantor of trust, but with the complication of

blockchain, this competitiveness could potentially lead to a cheaper market equilibrium. The

practicality of blockchain could be further attested through its security, speed, transparency

and lower costs.

2.3 Improving the current fiat monetary system with blockchain

The implementation of blockchain could rectify our current fiat monetary system, which was

claimed to perpetuate income inequality through tax channels, earnings heterogeneity and

dissimilar income compositions (Feldkircher and Kakamu, 2021). Progressive taxes although

improves the inequality in observed income, it actually causes greater inequality for wage-

dependent workers (Duncan and Peter, 2016; Jackson et al., 2019). This justification is

coherent with Piketty’s (2010) argument during economic booms, as individuals at the high

end of the income distribution could offset their taxes with capital gains. Whilst lower-

income individuals during economic downturns, are most vulnerable to the impact of

unemployment as their income streams are characterised by labour work (Amaral, 2017). The

net effect opposes conventional wisdom on progressive tax, spurring income inequality

instead. Nonetheless, hesitations regarding cryptocurrency as a device of tax evasion, could

devastate the income inequality gap. However, with heightened financial inclusivity,

individuals now have access to resources and opportunities which were formerly

unattainable. In same vein as microfinance introduced by Muhammad Yunus’, blockchain

levels the playing field for lower-income skewing individuals, driving entrepreneurial

incentives to advance their relative position on the income distribution.

Blockchain networks also significantly improves settlement speed, which is exemplified by

cryptocurrencies transfers. The speed of transaction is fundamentally determined by the time

it takes for a block to be hashed onto the blockchain. The Bitcoin blockchain takes

approximately 10 minutes to add another block, whilst the Ethereum blockchain would only

take roughly 12-15 seconds to validate a block (Zhang et al., 2019, p.51:10). Nevertheless,

both validation time outmatches international transactions, which normally takes 1-5 days or

even weeks depending on currency (Wise, 2021). Subsequently, blockchain substantially

shortens the timeframe in money transfer, which allows liquidity to be more flexible in times

of emergency. Blockchain has also lowered costs of lending, through microcredits which

supervise smaller sums with lower interests. In the United states, average credit card loans

were approximately 16.5 percent, and payday loans ranging from US$50 and US$1000 are

affiliated with steep fees of US$15 per US$100 with interest rates exceeding 100%

(Hoffmann, 2021). A blockchain-based micro-lending platform would be projected to charge

only 5-10 percent interest, for small and short-term loans of around US$50-US$2000 (ibid,

2021). The implementation of blockchain in this occasion lowers the barriers-to-entry, which

would make financial instruments more affordable in general. The ability to bypass

commission-incentivised intermediaries, enables blockchain to make peer-to-peer

transactions more frictionless yet cheap.

Furthermore, usage of cryptocurrency as a storage of wealth, emancipates individuals from

country-specific macroeconomic conditions. The Venezuelan state-backed cryptocurrency

Petro is an infamous example, where it was introduced to circumvent the hyper-inflation of

6500% (Martin, 2021). Although the cryptocurrency itself is not entirely decentralised, it

captures the essence of detachment from macroeconomic influence. Subsequently, lower-

income households were hampered by inflation tax channels, as the value of their fixed-
income assets like savings are utterly diminished (Cornia and Kiiski, 2001). Wealthy

households are also more likely to have diversified their portfolio abroad, in contrast,

inflation depletes the purchasing power of wage-dependent households- a characteristic

common across the lower income distribution (Erosa and Ventura, 2002). Blockchain also

grants greater wealth autonomy, where individuals could reallocate their assets when

macroeconomic conditions are unfavourable. Incidentally, the action of blockchain

technology imitates the nature of a for-ex market here, which is traditionally a luxury for low-

income households. Additionally, cryptocurrencies with limited supply like Bitcoin, are

equivalent to a deflationary monetary system. Therefore, the purchasing power of such

cryptocurrencies, would only temporarily increase due to its scarcity (Hays and Coronado,

2018). Hence, through bridging the theoretical mechanisms with realistic applications of

blockchain, the basis to explore blockchains’ impact on economic inequality is sufficiently

established.

2.4 Inherent Weaknesses of Blockchain

Although blockchain’s heightened security does not violate Brewer’s (1998) CAP theorem

entirely, it facilitates partition tolerance and availability through maintaining utmost

consistency (Chalaemwongwan, 2018). The CAP theorem states that distributed systems cant

at most hone two characteristics, from Consistency, Availability, and Partition (Bashir, 2018).

Firstly, partition tolerance means to ensure reliability, which is guaranteed through the

immutable DLT and consensus algorithm (Kernfeld, 2016). Secondly, its availability remains

consistent and operational, even if a node in the network becomes inactive. In terms of

consistency, a method of ultimate consistency is applied, which indicates that the blockchain

could still be validated as long as its texture remains consistent (Chalaemwongwan, 2018).

An incident occurred in 2013 when two separate Bitcoin blockchain pathways were

established, as the newer 0.8 Bitcoin nodes had contrasting BDB lock configuration to pre 0.8
Bitcoin nodes (Andresen, 2013). Thus, a significant double spend was recorded as a result,

with a temporary suspension to cryptocurrency exchanges like Bitpay (Andresen, 2013). This

suggests that users have the potential to lose their cryptocurrencies, if the network does

malfunction with new bugs. This could be a lot harsher on low-income individual, if they

have less insurance-savings to fall back on. Thus as low-income individuals are relatively risk

averse with their economic positions, malfunctions in blockchain networks might sway them

from participating. Despite the responsiveness of Internet Relay Chat (IRC) when the failure

occurred, this still shows the unreliableness of blockchain compared to law-abiding

intermediaries. Consequently, this might further exacerbate income inequality, as individual

willingness to partake is limited by their risk-tolerance.

The phenomena known as 51% attacks, occurs when an individual amasses 51 percent of the

cryptocurrency’s computational power. An empirical study finds that major cryptocurrencies

(Bitcoin, Ethereum, etc.) are already in-line with wealth distributions, with some alternate

coins like Dogecoin having less than 100 participants controlling more than 51% of its

wealth in the ecosystem (Buckley, 2021). Alternative-cryptocurrencies like Dogecoin violates

the honest majority assumption of consensus mechanism, as the individual with 51%

ownership no longer has to follow network protocol. Individuals with majority ownership

could rehash blockchains at their own discretion, which includes rewriting past transactions

and preventing new ‘blocks’ from added. Which means wealthy individuals could shift

current fiat wealth inequalities onto the cryptocurrency market, subsequently undermining the

ability of blockchain to advance economic positions of lower-income individuals.

Nevertheless the likelihood of a 51% is not likely, since miners would have to constantly

upgrade their hardware, to compete for expanding computational power (Mcshane, 2021).

Projects related to detecting 51% attacks are also gaining sophistication, providing industries
with better PoW practices (MIT media lab, 2020). The existence of multiple

cryptocurrencies, also gives individuals the autonomy to pick the preferable consensus

mechanism. Nevertheless, since only 10.2% of global population actually owns a

cryptowallet (Blockchain, 2022), the addition of new nodes accompanied with more maturity

in policy regulation; could better insulate the technology from exploitation.

3 Literature review

The understanding in the mechanisms of blockchain operations, fundamentally underlies the

successfulness of blockchains’ implications in income inequality. Werbach (2018) claims that

blockchain’s eventual impact on society, depends on its effectiveness as a new architecture of

trust. This trust is harnessed through the DLT and consensus mechanisms, where its validity

expands alongside the number of participating nodes. Additionally, blockchain poses as a

healthy candidate as a leader for the next techno-economic paradigm, since ‘smart contracts’

allows it to explore discernible spaces for innovation (Perez, 2010). ‘Smart contract’ is a

function more common with newer blockchain networks, where different consensus

functionality could be specified to cater specific objectives. Thus, the following section

investigates how malleable ‘smart contracts’, could revolutionise financial institutions and

tax systems to provide inclusivity and validity.

3.1Blockchain empowered remittances

3.1.1Remittances and the impact of blockchain integration

Remittances are transaction of monetary funds of migrated worker diaspora back to their

home country, accounting for a larger, more stable capital flow at US$702 billion at 2020.
Copious literature have mutually voiced for remittances positive impact on income

inequality, including Anyanwu (2011) who has quantitatively proven the negative correlation

between remittances and income inequality. The common variables including GDP and

inflation rates were also utilized in his econometric model, which this paper also empirically

assesses in the forthcoming sections. The disintermediating effect of blockchain allows

individuals to transact without a mediating third party. This not only purports a reduction in

transaction cost, but expected transaction speed should also exceed traditional methods. To

illustrate, current repatriated remittances takes an average of 3-5 business days to settle,

whereas blockchain could facilitate the entire transaction in approximately 10 minutes.

Despite the drop in global average transaction cost from 7.00 percent to 6.30 since Q1 of

2019, this is still far from the 3 percent target stipulated under the 10th Sustainable

Development Goals (SDG) for reducing inequality. Remittance has an imperative impact on

discretionray income for remittance-reliant families, particularly since US$540 out of

US$719 billion were sent to low and middle-income countries. United Nation further

estimates that US$20 billion could be saved, if transaction cost could drop to 3 percent. The

importance of remittance to creating income earning opportunities, is further found in

Woodruff and Zeneteno’s (2001) analysis in urban Mexican micro enterprises, discovering

that remittances account for approximately 20 percent of invested capital. The access to

remittances acts as liquidity for uncredited individuals, as Dustmann and Kirchamp (2001)

noted, 50 percent of migrant remittances in Turkey were used for start-up capital.

Nonetheless, improper use of remittances could result in adverse effects. For instance, if

households across the nation are dependent on remittances for daily consumption, this would

discourage domestic labour supply through increased leisure time (Chami et al., 2005).

Another study denotes the three possible outcomes on income inequality, specifying an
individuals’ ‘negative’ or ‘positive’ selection determine whether remittance is an effective

tool (Borjas, 1987). Such that negatively selected individuals whom funnels received

remittance payments into investments, are likely to improve income inequality. Nonetheless,

poor households who become reliant on remittance and rich households who receive

remittances, could exacerbate inequality levels across the country (Adams,1989; Barham and

Boucher,1998; Acosta et al., 2008).

With the understanding that remittances accounts for 60 percent of income for households at

the lowest income decile (Worldbank, 2006), blockchain-empowered remittances could

provide greater accountability, affordable cost and heightened access. In the context of

modern remittance companies like Western Union, tedious administrative procedures

including anti-fraud, Know-Your-Customer (KYC) and identification checks hinder the

transaction time of remittances immensely. The importance of time could be overlooked if

large sums are sent each time, but timeliness matters for lower-income individuals dependent

on remittances for basic necessities. Especially for households without any emergency

savings, unforeseen financial emergencies could have significant effects on long-term

financial stability (Collins and Gjertson, 2011). Additionally, lower-income households

traditionally having restricted access to formal credit, ands are forced to suffer higher cost

credit products. Thus, blockchain empowered remittances provides economic stability for

rural areas, since approximately 75 percent of remittances usage targets food and medical

consumption (IFAD, 2021). The supervision of blockchain-remittances not only provides

greater financial security, but reduces implicit cost including travelling costs and avoids

vulnerable groups from exploitation.

 3.1.2. Contemporary case studies on blockchain-remittance firms

Philippines as the 4th largest remittance recipient, had over US$26 billion in capital influx as

of 2020 (The World Bank, 2020). The role of remittances have become a lifeline for the

Filipino economy, accounting for 9% of its GDP. This fertile remittance market, has

subsequently led to the creation of Coins.ph, becoming the only non-bank financial app to

reach the top five list (Subido, 2016). The company having the approval of the central bank

of Philippines BSP, are able to authenticate individuals only with a phone number and a

photo of the applicant and identity card. It has been estimated that Filipinos loose on average

of 7.5 percent to remittance fees, which amounts to a month of wages if their annual wage

was remitted(Ezra,2017).Blockchain here is utilized to not disrupt existing financial systems,

but to offer an alternative route for cheaper remittance access (Aggarwal, 2017). Although

this integration of blockchain fails to harness its full decentralised qualities, the ‘consortium’

blockchain model supports programable contracts which automates administrative duties. The

commercial world will ultimately be more compatible with consortium blockchains, as the

accountability and efficiency are realised without sacrificing centralised control. Hence,

Coin.ph is able to provide lowered transfer fees at 1-3 percent, when it traditionally costs 7.5

percent (Aggarwal, 2017). Furthermore, the upsurge of competing remittance companies

within the Philippines market in 2014, coincidentally happen to coexist with a 5.2 percentage

drop in domestic inequality, which was the largest drop to date (The World Bank, 2022).

In terms of international income disparity, developing countries are one of the largest

recipients of remittance income (Tapscott and Tapscott, 2019). Remittance flow currently

constitutes 3 to 4 times of financial aid received, which helps alleviate poverty through higher

levels of disposable income (CIDP, 2012). The fact that UN is targeting lower remittance

transaction cost as an effort to reducing inequality (IFAD, 2017), accentuates the role of
financial inclusion in the context of income distributions. Last but not least, the enhance

anonymity and accountability reduces counterparty risk, as instantaneous and tracible

blockchain settlements certifies the exact amount is received. Potentially smoothening

administrative and resolution costs, mitigating any unforeseen dispute and time-costs. Lower-

income individuals are particular wearied by such obstructions, as livelihoods are dependent

on the successful transfer of remittances. To summarize, blockchain tackles the existing

weaknesses of traditional remittance channels, ameliorating transaction costs, speed and

process security, which would vastly elevate the living standards and discretionary income

made available to low-income recipients.

3.2 Blockchain on credit accessibility

3.2.1 Background on credit accessibility on income inequality

Households access to credit is seen as an essential mitigator to discretionary income

inequality. Iversen and Rehm (2022) explains that without credit, income-smoothing and

homeownership benefits are unobtainable. Without said, information asymmetries are

intrinsic between credit accessibility, as creditors are expected to pledge a collateral

equivocal to the risk of debtors. Likewise, information asymmetries leads to pronounced

frictions for lower-income individuals, as risk premiums are unfavourable to low-income

individuals without a healthy credit portfolio. Since credit portfolios could only be built

through types of credit loaning, which could range from credit card to mortgage repayment.

However, the barriers-to-entry for such instruments, aren’t always affordable by individuals

with minimal discretionary income. Leading to a paradox in liquidity attainment, as the

prerequisite to obtaining liquidity relies on past credit record, but credit records are only

obtainable is associated fixed costs are met. In an empirical analysis on acquiring loans for

business ventures, Delis et al. (2022) depicts how adverse selection and moral hazard
crucially hampers loan applications regardless of the quality in investment ideas. Which

means that if access to capital returns are limited to wealthy individuals, so does the

concentration in income growth (Demirgüç–Kunt and Levine, 2009). Consequently, as the

returns on investment correlates with employed capital, wealthier entrepreneurs could further

perpetuate income inequality through a second-order effect with economies of scale

(Greenwood and Jovanovic, 1990).

There is a growing consensus that expansion of credit market only benefits the rich, due to

the imbalanced credit constraints on individuals of different income levels (de Haan and

Sturm, 2017). The term credit here, compromises of any individual loans including but not

limited to consumer loan, mortgage loan and general loans. To illustrate, credit card

companies often indirectly stipulates income or even deposit requirements for credit card

applications, however, lower-income individuals might fail to fulfil this prerequisite (Delis et

al., 2022). Additionally, individuals without access to credit cards or similar credit

instruments, are subsequently unable to construct a credit portfolio. Individuals who fail to

meet such requirements, are essentially excluded from accessing formal credit markets. The

repercussion of credit market inaccessibility, leads to the high cost burdens of informal credit

channels (Demirgüç-Kunt et al.,2018). Moreover, even if a credit card was obtained, the

accountability of expenses are based on the rating agency’s discretion (Backman, 2022).

Notably, this implies that an individuals’ accessibility to credit, is dependent on the standards

decided by the intermediary. Thus, low-income individuals who might have made less

payments with a credit card, would suffer a higher loan interests as credibility is determined

through past credit record. This definition of credibility is inherently skewed towards higher

income individuals, who have built their credit repayment portfolio with past wealth. low-

income households were offered the same opportunities in terms of access to credit markets.
 3.2.2 Resolving obstacles in the lending industry

The incentives for adopting blockchain in the collateral business, would enhance the

monitoring capability of intermediaries significantly (IBM, 2019). Lenders could identify

borrower credibility through real-time consumptions, providing Big data for the creation of a

more sophisticated credit portfolio. Assuming intermediaries are profit-incentivised, adverse

selection of default-prone individuals could be screened, when more robust microdata are

employed. Consequently, allowing interest based on risk to be more carefully tailored

towards individual characteristics, expanding the loan market to service for individuals

traditionally hampered by unaffordable interest rates. Nevertheless, this conceptualised

scenario relies on the fact that a net benefit between expansion into lower-income markets,

and the costs of taking on their associated risks exists. Developing on this assumption, ‘smart

contracts’ could be used to streamline borrower data and documentation, underwriting

process, fraudulent checks and payment records all on the same blockchain. Due to the need

of less third-party intermediaries, administrative costs implicit in transaction costs are

significantly reduced. As a consequence, this reduction in transaction cost unlike remittances,

bolster the liquidity potential of households and individual liquidity. Underprivileged

individuals could pursue income-generating business decisions with less credit constraint,

essentially aiding their economic mobility to discover income stream opportunities. liquid

mortgage is an example of blockchain used to revamp infrastructural inefficiencies, through

their patented ‘intelligent contracts’, blockchain technology reduces the tediousness of

constantly reviewing legal contracts, due diligence, reporting and data (Cision, 2021). The

implementation of blockchain on an operational basis is able to create a transparent yet

efficient ecosystem, saving borrowers money through technology (Cision, 2021).

The second purported framework envisions a peer-to-peer (P2P) frictionless marketplace for

credit contracts, which extends the preceding concepts such as FinTech credit, marketplace

lending and crowdlending (CGFS, 2017). Nonetheless, the revitalised format of credit

loaning, does not come with heightened transparency in the determination of collateral risk.

Sceptical lenders are left virtually clueless about the borrowers credibility, creating a

problematic situation when these high-risk financial instruments are not endorsed with trust

(Serrano-Cinca et al., 2015). Consequently, leaving the issue of information asymmetries

undealt with, whilst Fintech credit intermediaries worsens it by deluding the borrowers’

trustworthiness (Klein et al., 2021). However, blockchain could fundamentally revolutionise

the peer-to-peer lending industry, with its increased transparency and accountability

safeguarded by cryptographic ‘trsutless’ trust. The clarity on borrower characteristics elicited

through blockchains, allows the lending decision to be formulated at the discretion of the

lender. Where such lenders could perform their own risk-adjusted credit offers, which was

formerly unavailable due to legal complexities (Klein et al., 2021). The ameliorated

transparency would ultimately benefit lower-income individuals with healthy consumption

habits, overcoming the prejudices associated with socio-economic status (Chetty et al., 2014

). Thus, the heightened accountability and lowered cost of the credit origination process,

benefits the surveyed 25 percent of below average income earners (Klein et al., 2021).

Moreover, borrowers would be able to request small loans for 5-10 percent, significantly

undercutting credit card and payday loans (Hoffman, 2021). An investigation conducted

Delis et al. (2022) empirically illustrates how income inequality could be remedied with

relaxed credit constraints, according to their model, marginally accepted applicants are able

to generate 11 percent increase in income five years onwards. Although the figure might lack

persuasion, these incomes returns are estimated from returns on venture.

The second framework is actually deeply complementary in the effects of lowered transaction

cost, as it disrupts the market with availability to cheaper credit. If the first framework of

cheaper blockchain-transaction costs were to solely exist, intermediaries alike previously

mentioned ventures are likely to take the hybrid route. Which takes advantage of the

distributed ledger to provide efficiency, yet internalises the benefits of cost reductions as the

blockchain network remains semi-decentralised. As profiteers, creditors would nevertheless

fine tune credit risks, to exploit available “information rents” (Pagano and Jappeli, 2005). The

implication of blockchain as a collaborative credit space, facilitates lower interest rates as

lenders are incentivised to undercut market interest. Thus, intermediaries are pressured by

market forces to match their rates with cheaper interests, in order to sustain their market share

within the credit market. Nevertheless, The verdict here remains inconclusive. Iversen and

Rehm (2022) argues that discretionary income would be made more unequal as disposable

income negatively correlates to default risk, but this claim is refuted by Pagano and Jappeli

(2005) as they propose detailed risk-assessments drives down lending interest. The

blockchain-reinvigorated credit metrics would essentially stress more on individual financial

behaviour, emancipating lower-income households from credit constraints. Consequently,

obscuring the unequal prerequisites to vulnerable groups and levelling financial accessibility

and diminishes income inequality.

3.3Revitalizing tax systems with blockchain

3.3.1The issue of tax evasion with income inequality

Progressive tax has been one of the most widespread mechanisms for amending income

inequality, buts the extensiveness of its impact is overshadowed with loopholes. Asides from

the unequal effects of progressive tax on individuals with differing income-dependencies, the
pertinent issue of tax evasion hampers its effectiveness to induce equitable redistribution.

The global tax evasion has reached a staggering feat of US$427 billion in 2020, where

US$182 billion were lost to private tax havens (Tax justice network team, 2020). The

avoidance of post-income redistribution measures, is a clear adversity to rectifying income

inequality. Some of the tax manoeuvring strategies include hiding assets offshore, which was

testified to rise with wealth ownership (Johns and Slemrod, 2010). To emphasise, households

owning US$10 to US$12 million in net wealth compared to households with US$5 to US$6

million, are twice as likely to conceal assets broad (Alstadsæter et al., 2017). This pervasive

act of tax noncompliance, would clearly offset any progress of income redistribution.

Although lower-income taxpayers are no stranger to tax evasion, a given parentage reduction

leads to a considerable decrease in tax liability. Thus, this underlines the true rationale behind

the larger ratio of tax evaders in lower-income strata, as their avoidance of tax burdens could

drastically improve available discretionary income and welfare of vulnerable groups (Johns

and Slemrod, 2010). Hitherto, the inconsistency with tax system’s ability to redistribute,

forces lower-income individuals to make the economic-efficient decision of evading tax.

In reference to past literature, papers have frequently visited the behavioural aspects of tax

noncompliance, stating that rational tax noncompliance would be exercised in the event

where tax savings is greater or equal to utility costs (Johns and Slemrod, 2010). Either how,

the relationship between tax evasion and income inequality could be bilateral, such that in an

economy with high inequality, the supply of tax evasion services to only the ultra-high net

worth individuals would suffice (Alstadsæter et al., 2017. This could capitulate into a viscous

cycle, as tax evasion services could perpetuate greater capital tax savings and consequently

exacerbate inequality. The repayment of tax delineates the social contract between

individuals and the state, where people could be frustrated if public services are
unsatisfactory (Bloomquist, 2003). Especially, if horizontal inequality exists, which is

depicted as the heterogenous treatment of individuals from the same income class

(Kaplanoglou and Newbery, 2008). On another note, the discrepancy between the

sophistication of low and high-income taxpayers, further signifies the opportunities

associated with income discrepancies. Which intertwines with the notion that tomorrow’s

inequality of opportunity, depends significantly on the inequality of outcome directly

influenced through income inequality (Atkinson, 2005).

3.3.2 How does blockchain rectify undesired tax leakages

Overlooking the repetitive attributes which make blockchain an advantageous technology, its

implication on tax evasion could potentially see the most significant repercussions among

other applications. Previous applications of blockchain all revolve around private business

and corporation, nonetheless, nothing could be more direct in solving income inequality than

state-led policies. The combination of more aggressive tax and labour market regulations,

could limit the growth of top 1% income earners to 1.6 percentage point (Hatch and Rigby,

2014). The view that the government holds the most influential position, is also portrayed

through a public survey conducted in the US, where 66% of surveyed adults agreed that the

federal government has the most influential role in amending income inequality (Horowitz et

al., 2020). Despite how income inequality is defined, policies aim to provide equitable

redistribution rather than unreasonable clampdown on top-income earners. Hence, the

rectification through blockchain powered tax systems, could foster such redistribution

without undergoing drastic infrastructural changes.

At the end of the day, the capabilities of auditor to detect sophisticated tax evasion methods

are limited. States in an investigation of evasive foreign accounts, it is reported that auditors

probably only captures 10-15 percent off all offshore evasion (Johannesen et al., 2020). The
introduction of blockchain alike previous examples heightens transparency and

accountability, which advances the ability of the blockchain network to detect fraudulent

activities (PWC, 2016). The incorporation of ‘smart contracts’ could document all transaction

activity of a user, its ‘smart’ cause it hardcodes and automates fraudulent checks onto the

blockchain network. Thereby, the anonymity of an individual is secured through public and

private keys, where the public key possessed by an auditor, could only access historical

records of an individual in conjunction with their private key (Cryptopedia, 2022).The sleek

combination between security and transparency, positions blockchain favourably in error

reduction and ensures proof of tax payments are tamper-proof. The purported use of

blockchain in detecting VAT fraud, also highlights the technology’s malleability in both a

macro and micro context. Furthermore, given the prior discussion on attitudes towards tax

noncompliance, blockchain would also make individuals reassess their risk of fraud

detection. Consequently, the exploitability of tax secrecies in the interest of the wealthiest

could be hindered, which helps prevent the social contract from further corroding (Cobham et

al., 2020). All in all, the implications of blockchain could instil trust back into tax systems,

fostering the intended outcomes of income inequality policies as a result of lessen tax evasion

from the rich.

4. Methodology and data interpretation

Due to the fact that blockchain remains a nascent industry, the use of mediating econometric

models are used to proxy the effects of blockchain on income inequality. The established

relationships between remittances, credit accessibility and tax evasion on income inequality,

could all be fundamentally revolutionised through the advantageous attributes brought about

through blockchains. To reiterate, these determinants serve the purpose of mediating the

impacts of blockchain on income inequality, as blockchain is inherently a structural

technology reflected indirectly through its applications. Its novelty, further indicates that

available data on its associated crypto tokens are limited. Whilst the use of general Bitcoin

circulation, would not be an applicable proxy for factor-based analysis. Thus, this paper

establishes two econometric models to proxy the effects of blockchain on income inequality,

which envisions the impact of remittances and tax evasion respectively. The exploration first

delineates the respective tests used to justify model specification, and moves onto the

overview of the utilised variables for each regression model. For the econometric model

involving remittances, all 217 available countriess from the World bank data set would be

used. Whereas the empirical exploration for tax evasion, merges a comprehensive dataset

between European Commission (Ecorys) and World bank data.

4.1 Impact of blockchain empowered remittances on income inequality

4.1.1. Model specification

The effects of remittances on income inequality are illustrated through a panel data, to

maximise the information captured of different cross-sections through time. There aren’t too

many past references for testing remittances on income inequality per se, but fixed effect

(FE) model is most common across literature on income inequality (ref). The FE model

control for country specific heterogeneity, since countries have domestic factors such as

socio-economic status, fiscal incentives and financial depth which could sway predictors.

However, the Hausman test suggests the use of random effect (RE) model over the

conventional fixed model, rejecting the null hypothesis at Chi-square value of 0.238. The

models robustness and issues with heteroskedasticity were further controlled, through

applying robust estimates and graphical assessment of residual plot. Nonetheless, the

unorthodox specification would arguably serve the purpose of testing better, as the time

variating effects are not really a concern for this exploration.

The random effects model analyses the dataset on the level of between heterogeneity, where

it shifts the focus towards between country effects rather than within. This general analysis

allows the paper to emphasise towards the connection between the dependent and the

independent variable, where the ability to draw further inferences from it has been recognised

as superior among practitioners (Shor et al., 2007). To further ensure RE is the correct

specification, the Breusch-Pagan Lagrange multiplier (LM) test was used. The LM test

specifies whether the random effect specification is preferred over the OLS, which on this

occasion, fails it rejects the null hypothesis at 1% significance level.

Last but not least, the variance inflation factors (VIF) test helps detect multicollinearity

between predictors, avoiding invalid coefficients with high variances. A VIF value equating

to 1 suggest independent variables are uncorrelated, this paper takes the Johnston et al. (2018)

requirement such that a VIF of 2.5 or above would indicate considerable collinearity. The

VIF value for the specified econometric model is 1.27, which safety rejects the concern for

multicollinearity.

For determining the influences of log average transaction cost of remittance on log income

inequality, the following regression is specified:

(1) ln ⁡GINI¿ =α + β 1 ln ⁡ATC¿ + β 2 REMGD P¿ + β 3 IUI ¿ + β 4 INF ¿ + β 5 ln ⁡TRD ¿ + β 6 UT ¿ +u¿

Where lnGINI = log of index for income inequality, lnATC = log of average transaction cost

for remittances, REMGDP = Remittance to GDP ratio , IUI = internet usage as a percentage

of the population, INF= inflation as measured by annual GDP growth rate, lnTRD= total
import and export as a % of GDP, UT= total unemployed as a percentage of labour force,

i=1,2,3,… n country, t = 1,2,3…9 time period, u¿ =the idiosyncratic error term for ith country

and for the nth year

To ensure that coefficients could elucidate the elasticities and linear change between

regressed and regressor, model (2) is specified below:

(2) GINI ¿ =α + β 1 ln ⁡ATC¿ + β 2 REMGD P¿ + β 3 IUI ¿ + β 4 INF ¿ + β 5 TRD ¿ +u ¿

4.1.2 Hypothesis of econometric relationship

The overview of an additional econometric model, provides further insights into the changes

associated to the primary predictor. The use of ATC as opposed to remittances, allows the

direct impact of a change in remittance transaction cost to income inequality to be assessed.

ATC essentially conceptualises the promised benefits of blockchain-empowered remittances,

reducing the implicit costs of the money transfer segment within the entire process (Aggarwal

et al., 2017). ATC is the preferable predictor to mediate the effects of blockchain, as current

blockchain based remittance firms have proven to significantly undercut market price (ibid).

Subsequently, ATC is expected to positively correlated to income inequality, as higher

transaction costs would lead to higher income inequality. The elasticity of ATC is also

conjectured to be positive, where the effects of income inequality would increase at a

decreasing rate.

REMGDP acts as a control for nationwide dependence on remittance, as stipulated earlier,

dependence on remittance could stifle domestic labour force as households could afford to
not work. Nevertheless, Reeves (2017) provides an alternative interpretation on the ratio,

where lower remittance to GDP ratio would hinders blockchain adoption. This view would

inherently suggest the rapid adoption of Low Income Countries (LICs), which could see an

equalizing effect for global income distribution. However, this perspective overlooks the

imperativeness of internet access, as lack of internet penetration could directly inhibit

blockchain usage. REMGDP not only acts as a control for remittance user demographic, but

predicts the repercussions of national remittance dependence. Nevertheless, this paper argues

that REMGDP would positively correlate to income inequality, as high remittance-to-GDP

ratio would breed dependency and induce unwanted consumption behaviour (Amuedo-

Dorantes, 2014).

IUI is an non-excludable predictor, in the estimation of blockchain-remittance on inequality.

Access to internet is an important prerequisite for blockchain adoption, as blockchain could

not be utilised without stable internet connection. Approximately 63 percent of the world is

expected to have access to internet, whilst only 27 percent of people living in least developed

countries (Statista, 2022). Following the start of the unprecedent Covid-19, Nigerians have

recorded a staggering 60 percent increase in crypto usage (Helmes, 2020). Nonetheless, only

2.6 percent of Africans are cryptocurrency users, which suggests that the assimilation of

blockchain remains sluggish (Triple A, 2021). IUI not only illuminates the impact of internet

on income inequality, but controls for the domestic infrastructure for blockchain supervision.

The supervision of internet and broadband infrastructure have been proven to reduce income

inequality in copious papers (Houngbonon and Liang, 2021; Czernich et al., 2011; Angrist

aand Pischke, 2008), therefore, the predictor for internet usage would be presumed to carry a

negative sign.
Albeit, the role of INF in controlling for changing price levels, it was previously clarified to

persuade the adoption of cryptocurrency. Due to its innate impact in decreasing the

purchasing power of cash holder overtime, blockchain-facilitated cryptocurrency was seen as

a more sustainable form of wealth storage. Since lower-income individuals are stereotypically

wage-dependent, they are more prone to the adverse impact of macroeconomic conditions.

Nevertheless, Monnin (2014) proposes a U-shape relationship for developed economies,

whilst the correlation between inflation and income inequality is positively linear for

developing nations (Nantob, 2015). In light of the mixed verdict, the effects of INF would

remain ambiguous for the time being.

The odd inclusion of TRD ¿ aims to provide the econometric model with greater explanatory

significance, as it’s a popular determinant for income inequality (Dorn et al., 2021; Tsaurai,

2020). The rational is based on derivations of Stolper-Samuelson’s theorem, originally states

that trade openness increased the unskilled labour force in low income countries. Thereby,

increasing the wage of lower-income individuals usually sufficing the category of unskilled

labour, whilst high-skilled workers are less compensated, narrowing the income gap (Stolper

and Samuelson, 1941). Nonetheless, the spill over effects enhances the human capital of

unskilled workers, allowing trade liberation to indirectly bolster the income attainment

capability of lower-income households (Jaumotte et al., 2013). Moreover, Siddik et al (2021)

has quantitatively proven that blockchain accelerates international trade through security,

faith and transparency, potentially harnessing the positive social externalities of the

blockchain ecosystem. Nonetheless, given the mixed verdicts of past literature, the effects of

trade on inequality would also be ambiguous.

Last but not least, UT is the measurement of unemployment, use as a proxy for the

employment rate of domestic labour market. It also acts as an indicator for infrastructural and

cyclical disturbances to the labour force, which is representative of the country’s economic

condition. Although a control variable, there is a repertoire of literature which suggest a

positively linear relationship between unemployment and income inequality (Storer and Van

Audenrode, 1998; Ayala et al, 2002; Tregenna, 2009), which is also presumed in this

analysis.

4.1.3 Data interpretations and results for blockchain-remittances

For the sake of comparison, both econometric models were ran through Pooled OLS, FE, RE

and Linear Squared Dummy Variables (LSDV) specifications. The average transaction cost

of remittances was found to be significant in all specifications, whereas its coefficient for the

focused models of GINI and ln_GINI were 0.785(0.025) and 0.0224 (0.018). Both predictors

are statistically significant below the 5% level, and agrees with the initial hypothesis. Thus,

this econometric model approximates that a 0.79% decrease in average transaction cost in

remittance, could reduce the GINI index by 1 unit. In reference to the example of Coin.ph, a

maximum 6.5% decrease in transaction could potentially improve income inequality by 8.23

units. To put this into perspective, the Filipino Gini Index of 42.3 in 2018, could see a

hypothesized 18.9 percent improvement, through the use of blockchain-remittances. In

accordance to table 1, LSDV1 and LSDV2 includes country-dummies and year-dummies

respectively. The relatively higher significance of each independent variable from LSDV2

compared to LSDV1, suggests that the database models better for time-invariant analysis as

opposed to space-invariant. This contradictory finding essentially justifies why both RE and

FE models are used throughout, in order to apprehend whether within effects are better

explained than between. Nevertheless, the eventual successfulness of blockchain-remittances

on income inequality, would also require the adequate accommodation of a blockchain-

friendly infrastructure.

Focusing on model (2), the independent variables of REMGDP and IUI, controlling for the

infrastructural adaptiveness were both statistically significant. The predictor for internet

usage had a coefficient of -0.0503 (0.000), while remittance-to-GDP ratio was less significant

at -10.6 (0.043). Although IUI is in agreement with the prior presumption, REMGDP for all

specifications exhibits a negative correlation. The two variables are discussed conjointly, as

they both moderate the susceptibility of blockchain implementation, controlling for the

socio-economic background. The unexpected negatively correlation of remittances-to-GDP

ratio against income inequality, rebuts the previous claim that a higher ratio increases

inequality. A contestable reason for this, would suggests that remittances received were

actually funnelled into profitable ventures, which variates from the overdependence

behaviour assumed previously. This interpretation could be predated in the investigations of

Brown (1994) and Adams (2005), suggesting that remittances were primarily used for

consumption and investment. Bang et al. (2015) further extends this outcome to income

inequalities, theorizing that only remittances selected for investment could relieve the

persistent income inequality. The enhanced internet usage would indubitably reduce income

inequalities, as lower-income individuals are able to discover different channels of income-

opportunities. Although the coefficient of REMGDP is relatively influential, the lack of

internet penetration globally naturally hinders its impact. Therefore, as blockchain is seen as

the next iteration of ICT (Swan et al., 2019), the negative correlation could further indicate

the future effects of blockchain technology.

Among the three undiscussed control variables, the relationship of unemployment rate on

income inequality remains relatively pronounce. Whilst INF and TRD variables were mostly

insignificance, which exemplifies the ambiguous nature as seen through the constrasting

literature in the past.

4.2 Controlling for tax evasion with Blockchain

4.2.1 Model Specification

The impacts of tax evasion on income inequality are likewise estimated in a panel data

format, controlling for omitted variable bias, time invariant unobserved heterogeneity and

measurement errors (Wooldridge, 2012). To account for within country differences, the

model is specified in fixed effects (FE) format. On this occasion, the Hausman test agrees

with the FE specification, failing to reject the null hypothesis at 1% level of significance.

Country-specific heterogeneities are subsequently accounted for, which mitigates time-

invariant characteristics such as domestic tax progressivity and socio-economic conditions

from creating biased predictors. Different set of model specifications were similarly used, to

provide a holistic comparison according to varying statistical assumptions.

The estimated influence of tax evasion on income inequality is given by the following

econometric model:

(3) GINI ¿ =α + β 1 ln ⁡TE¿ + β2 UT ¿ + β 3 I NF ¿ + β 4 I UI ¿ + β 5 GOVE ¿ + β 6 TEx INF ¿ +(μi+ v ¿ ¿ ¿) ¿

Here GINI = the index for income inequality, ln ⁡TE = is the tax evasion proxied by the log
amount of offshore wealth of the defined country, UT = total unemployed as a percentage

of labour force, INF= inflation as measured by annual GDP growth rate,

IUI = internet usage as a percentage of the population, GOVE = government expenditure

on education as a percentage of GDP, TExINF=interaction term between tax evasion and

N
inflation rate, the identifying condition is demonstrated by ∑ μ i = 0 controls individual
i=1

effects, the expected value of v=0 as typical conditions for errors, such that the error term

is defined by the sum of μi and vi t , i=1,2,3,… n country, t = 1,2,3…17 time period.

The model utilises the interaction term TExINF, to associate changes in tax evasion habits

according to different inflation levels. Its association was first deliberated as the

decreasing in purchasing power of domestic currency, would more or less incentivise

individuals to shift resources abroad. Nonetheless scatterplots A.7 and A.8 proofs that

Ln_TE interacts differently to low and high inflation rates, where INF_H and INF_L

equates to high and low inflation respectively. The contrasting slope signs between Ln_TE

- INF_H and Ln_TE-INF_L as indicated in correlation matrix A.9, further fortifies the

need to incorporate TExINF as part of the estimation. The varying influence of TE on

GINI as a result to different inflation levels, subsequently signifies an unexplained variable

resulting from the interaction. Nonetheless, to ensure the interaction term won’t cause

multicollinearity issues, the VIF test would be executed. The VIF for model (3) has a

mean VIF value of 1.39, which indicates that no considerable multicollinearity exists

within the stipulated model. Thus, the feasibility of incorporating TExINF into the model

is assured.

4.2.3 Hypothesised relationship of predictors

Ln_TE is the log of recorded offshore wealth according to the country of origin, the database

was created as part of The European Commission’s priority in fighting against tax fraud,

evasion and avoidance (European Commission, 2021). These methods of tax evasions are

confined to the wealthy, manipulating different offshore bank accounts and share companies

through international Finance Centres (IFC). Johannesen et al. (2019) find that individuals

with concealed offshore accounts were highly likely of evading tax. A more recent study

conducted by Guyton et al. (2020), have also analysed American offshore wealth to shed light

on high-end tax evasion. In same vein, the data on offshore wealth consisting of EU-27 and

10 other economic powers, are sequentially used to examine the effects of tax evasion on

income inequality. The implementation of blockchain provides auditors with greater accuracy

and transparency on taxable wealth and income. Enhanced tax detection through

communicating nodes, could more easily flag noncompliance tendencies for individuals

failing to satisfy the consensus mechanism in operation. An example of this could be

illustrated in Brazil’s “bCPF” , where tax registry data are documented on the blockchain

data on the federal, state and municipal level (Collosa, 2021). Since only authorised agencies

are allowed access, the transfer of tax registry profile could increase the accountability of

reported statements. This is under the assumption the transfer of individual profiles onto a

blockchain-based registry, would face detailed scrutiny and levels of authentication.

Moreover, if blockchain were to be interweaved through systems of assets transfer

(documents, rights or payment), this could bring unfathomable benefit for procuring third-

party confirmations (Nawawi and Salin, 2017).

After thorough understanding of the underlying intricacies, the more transparent tax profiles

should perpetuate stronger amounts of tax payments from the rich. The implications of

blockchain could also act as a deterrent to attempts of tax evasion, as higher perceivable risks
would intimidate risk-averse individuals. Consequently, taxation systems would presumably

fulfil their primary role of resource redistribution better, as tax leakages among high-income

strata are reduced. Hence, ln_TE would be expected to positively relate to income inequality,

given that decrease in offshore wealth would lessen tax evasion and thus income disparity.

Albeit the delineation of UT, IUI and INF in the previous model for remittances, a quick

recap the functionality of each controls. UT controls for the current labour market climate,

where high levels could reflect uncertainty and inductively income inequality. IUI controls

for internet access vital for blockchain-based registries, where the higher percentage of

coverage the more expansive the blockchain network would be in discovering tax evasions.

INF controls for the changing domestic price levels, which is by itself, ambiguous to the

impacts of blockchain revitalised tax systems on income inequality. Here, both UT and IUI

are expected to be inversely correlated to widening income distribution, whilst the impacts of

inflation would be left undetermined.

GOVE could be seen as a generic control for effort in improving human capital, particularly

for financial aid towards funding education for lower-income groups. Advanced literacy and

knowledge specialisation would promotes socio-economic mobility, such that receiving

lower-income classes are able to foster higher income earning potential. In the context of

taxation, compulsory lessons for business leaders on financial conduct and management,

could educate financial practices to deter tax avoidance. Nonetheless, parallel to the existing

scholarship (Shapiro, 2006, Rodríguez-Pose and Tselios, 2008), GOVE would be expected to

negatively correlate with income inequality.

The initial approach to identifying the explanation of TExINF, could be justified by

decreasing purchasing power. In the situation where Inflation erodes the real value of

nominal discretionary income, taxpayers are incentivised tax evade as a means of value

preservation. Which would suggest an incentive to shift wealth offshore when inflation is

high, and the vice versa when price levels drop. Contrary to the initially hypothesised, figure

A.9 shows that the slopes were -0.108 during times of high inflation, whilst a positive

relationship of 0.119 existed at low inflation rates. The slopes essentially expresses the view

that allocation of wealth to offshore IFCs are higher during times of low inflation. These

findings are coherent with Arrow’s hypothesis, which states that because risk aversion

increases as income decreases, it leads to a decrease in tax evasion (Arrow, 1965). To further

compliment this view, its logical that the relocation of offshore wealth is more abundant at

low inflation, since assets are relocated offshore in anticipation of domestic rise in inflation.

Whereas, when inflation rates are already significant, risk averse individuals would rather

assume that inflation would decrease, as opposed to the exposure of exchange-rate risk with

no guaranteed benefits. Nevertheless, risk aversion expressed through the interaction term

should reveal an inverse correlation. Given that less risk averse individuals would be more

prone to tax evasion, leading to worsened income inequality as less tax are collected from the

wealthy.

4.2.4 Data interpretation and results on tax-induced income inequality

Most of the predictors except for inflation are statistically significant, indicating the relevance

of the chosen predictors towards estimating income inequality. The primary predictor ln_TE

and TExINF would be jointly discussed, as the two independent variables cofounds the

outcomes of improved tax systems. Ln_TE has a positive coefficient of 0.422 at 5% level of

significance, which is in line with the outlined prediction. Demonstrating that a 4.2%
decrease (increase) in evaded tax as proxied in offshore wealth, could improve the Gini index

by 1 point, ceteris paribus. Prior to including the interaction term, Ln_TE was statistically

insignificant in majority of the tested econometric models. Thus, it would be illogical to

assess the influence of Ln_TE on GINI, without the mediation of the interaction term

TExINF. Vis-à-vis the previous theoretical and graphical deduction, TExINF indicative of

risk averseness has an uninterpretable coefficient of -0.00000204 with a p-value significant at

1%. The sign of its coefficient agrees with previously hypothesis, which further consolidates

the plausibility of it representing risk averseness in tax evasion. The additional interactive

term adds a unique dynamic, conveying the amount of offshore welfare inclusive of risk

averseness. The mediation of TExINF , provides a behavioural element to the change in

wealth, which provides an overall sentiment as to why the econometric relationship projects

tax evasion at lower rates of inflation. Through a more transparent ecosystem supervised

through blockchain, revamped blockchain-backed tax registries could close information

asymmetries related to disclosure. Moreover, the sophistication of blockchain could filter the

risk averse from attempting tax evasion, since the perceived chance of fraud detection

would’ve presumably increased. Hence, blockchain is speculated to shrink the coefficient of

ln_TE, as the improved blockchain-backed tax infrastructure would decrease the influence of

offshore wealth on income inequality. Whereas, the increased consciousness of prospective

tax evaders towards the traceability of blockchain, expands blockchains’ ameliorating impact

on income inequality.

The increase of IUI in the issue of tax issue, similarly emanates its intrinsic ability to

heighten economic positions and income earning potential. On this occasion, the control for

internet usage could also proxy for potential blockchain penetration, as internet accessibility

is a prerequisite to blockchain-empowered tax registries. Heightened security of tax systems

expropriates the tax payments from wealthy individuals, back to welfare functionaries

typically beneficial to the underprivileged. GOVE is an example of such redistributive

measure, which could decrease the Gini index by 1 unit for every 0.4% of GDP spent on

education.

5. Conclusion
This study is one of the first to explore blockchain’s impact on income inequality empirically.

While there are inherent flaws with the use of mediating econometric models, the logical

relationship behind blockchains’ and income inequality is now supported with empirical

rigour. The results indicate that blockchain subsequently improves financial inclusivity and

tax system efficiency, which are in return determine the skewness of income distributions.

Through the theoretical conceptualisation and the empirical exploration, the novel blockchain

technology consistently reduces cost in businesses, solicit more effective coordination and

reshapes institutional structures. Whilst the decrease in average costs are essentially

applicable to all uses, the change in institutional enforcement in tax collection would

essentially deter the pertinent income inequality gap.

The theoretical deliberation across remittances, credit accessibility and tax evasion,

establishes an imperative foundation for the comprehension of the later empirical

relationships. Credit accessibility serves as an epistemology towards blockchain applications,

were it consolidates the role of blockchain on income inequality on a theoretical basis. In

terms of the mediating effects of blockchain on inequality through financial inclusion and tax

evasion, the high statistical significance in both panel data regressions suggest the relevance

of the chosen predictors. Additionally, private institutions are more fond of the consortium
and semi-decentralised blockchain framework, as incumbents are eager to absorb market

disruptions to secure their market position and earnings. Public issued blockchain on the

other hand, could more easily go through trial runs and innovate bureaucratic government

practices. The blockchain-revolutionised tax registry in South America could lead an

adoption trend, whereas Estonia has already virtualized 99% of its governmental services

partially supported by their state-backed KSI blockchain (PWC, 2019).

Overall, the key implications of the successfulness in improving inequality, relies on the

domestic infrastructure in place on one hand, and the regulatory compliance on the other. To

truly discern the industry dynamics of blockchain, blockchain related data such as degree of

adoption as a percentage of the population, government expenditure on blockchain or even

percentage of company adopting of blockchain or distributed ledgers , would be preferable

data sources for future assessment of the topic. Thus, this study recommends the need to

revisit this relationship when relevant data sources are made available, such that the

enforcement of blockchain strategies become a priority in macroeconomic policymaking.

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Appendix
Table 1
Table 2
Table 3

A.1 VIF test for model (3) – tax evasin on income inequality

A.2 VIF test for model (1) – remittances on income inequality

A.3 Hausman test for model (1) – remittances on income inequality

A.4 Breusch and Pagan LM test for model (1) – remittances on income inequality

A.5 Gini index against tax evasion scatterplot

A.6 Breusch and Pagan test for model (3) - – tax evaasion on income inequality
A.7 Interaction term ( TExINF) at low inflation

A.8 Interaction term ( TExINF) at high inflation

A9. Correlation matrix for tax evasion against high and low inflation
A.10 Heteroskedasticity plot for pooled OLS specification of model (1)

A.11 Hausman test for model (3) – Tax evasion on income inequality