Will Vitalik Buterin Implement Harberger Tax on Ethereum L2s?

Vitalik Buterin suggested that Ethereum could consider implementing a Harberger tax on layer 2 blockchains. However, he highlighted how this could pose a challenge for these L2s. As such, he proposed another alternative that could work better for these networks. Buterin’s statement came following calls for the Layer 1 network to implement enshrined L2 fees to help create an economic balance. These fees are meant to be payments made to the L1 for the security and network traction they enjoy through Ethereum.

Vitalik Buterin Considers Harberger Tax On L2s

The Ethereum co-founder’s statement highlighted the Harberger tax as one that could work following calls to implement an L2 fee mechanism on the Layer 1 network. He noted that this kind of tax could work since it has both “value capture potential that scales with economic activity enabled and low surveillance requirement. However, he added that the Harberger can be challenging for these L2s and that it goes against the goals of these networks to provide stability for their users and applications.

Harberger tax is an arrangement in which these L2s pay continuous tax based on their value. As Vitalik Buterin noted, such a plan could disrupt these networks’ ecosystems, especially when they try to undervalue themselves to evade taxes.

Vitalik Buterin also raised the possibility of creating an in-protocol to ensure these Layer 2s pay the right amount. However, the Ethereum founder claimed there is no “reliable way” of measuring the execution fees on these L2s. Buterin explained how this challenge is equivalent to a government trying to enforce sales tax by only accessing the RAM of digital payment systems. The crypto founder noted that people will find a way around evading the tax in such instances.

A “Softer” Alternative For Tax On Layer 2 Networks

The Ethereum co-founder suggested that a softer alternative for tax on L2s could be explored. He proposed the idea of creating a “maximally-neutral-L2 proof aggregation layer,” which will tasked with admitting Layer 2 networks that remit fees to the Layer 1 network. He noted that this mechanism would be supplementary as Layer 2s can opt against joining this aggregation layer and only pay the 500,000 gas per proof, which they currently do.

Vitalik Buterin admitted that he wasn’t sure this plan was a good idea. However, he feels it is the right step if Ethereum wants to build a fee mechanism for layer 2 blockchains. He added that this aggregation layer will also be permissionless to build.

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Boluwatife Adeyemi

Boluwatife Adeyemi is a well-experienced crypto news writer and editor who has covered topics that cut across DeFi, NFTs, smart contracts, and blockchain interoperability, among others. Boluwatife has a knack for simplifying the most technical concepts and making it easy for crypto newbies to understand. Away from writing, Boluwatife is an avid basketball lover and a part-time degen.

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