Should we move to self-assessed property taxation?

by on October 24, 2017 at 12:26 am in Economics, Law, Uncategorized | Permalink

Eric Posner and Glen Weyl recommend a version of this idea in their recent paper “Property is Only Another Name for Monopoly.”

The core proposal is you announce how much each piece of your property is worth, and you are then taxed as a percentage of that value (say 2.5%).  At the same time, you have to sell your property for that same value, if someone bids for it, thereby lowering or eliminating the incentive to under-report true values.  If you think this through, you can see it minimizes holdout problems.

I think of the proposal as trying to force “willingness to be paid” people to live at “willingness to pay” valuations.  Microfoundations as to why WTBP and WTP so diverge would be useful!

In the meantime, my main worry concerns complementarity.  Say I own eighty pieces of property, and together they constitute a life plan.  The value of any one piece of property depends on the others.  For instance, if I lived in a more distant house, the car would be of higher value.  The ping pong table would be worth less in Minnesota, and having a good slow cooker enhances the refrigerator.  Don’t get me started on the CDs, but of course they boost the value of the stereo system and for that matter all the books.  I’ll leave aside purely “replaceable” commodities that can be replenished at will, and with no loss of value, through a click on Amazon (Posner and Weyl in any case think those replaceables should be taxed at much lower rates).

So how do I announce the value of any single piece of that property, knowing I might have to end up selling its complements?

In essence, I have to calculate how much the rest of the economy values each piece of my property, for me to know how much any single piece is worth.  That recreates a version of the socialist calculation problem, not for the planner, but for every single taxpayer.  And you can’t rely on the status quo ex ante as a readily available default, because that status quo can be purchased away from you.

The authors do consider related issues on pp.76-78 and 89-90.  For instance, they allow individuals to announce valuations for entire bundles when complementarity is strong.  You choose the bundle: “My house and all its items for three million tokens.”

But your human capital and your personal plans are non-marketable, non-transferable assets that can’t be put in this bundle.  So the incentive is to assemble highly idiosyncratic assets that no one else can quite fit together, and so no one else will wish to buy from you, and then you can announce a low valuation.

If that strategy works, the tax system doesn’t yield enough revenue and furthermore you’ve had to distort your consumption patterns.  If that strategy doesn’t work, someone might buy your life’s belongings/plans from you anyway, leaving you without your beloved customized snowmobile, your assiduously assembled music collection, and what about all those shoes you thought fit only you?

Ex ante, individuals are forced to assume huge, non-diversifiable risk, namely that someone will snatch away their whole “commodity life” from them.  So many of us, even if we could bear the asset loss, just don’t have the time to rebuild that formerly perfect mesh of plans and possessions, the one that took decades to create (think about risk-aversion in terms of time).  Furthermore, what if a wealthy villain or personal enemy wished to threaten to denude you in this manner?  Or what if you simply make a big mistake reporting the value of your bundle?  Isn’t this much much harder than just doing your income taxes?

To protect against these risks, ex ante, people will value their wealth bundles at quite high levels, and the result will be that wealth taxation will be too high.  Since I don’t favor most forms of wealth taxation in the first place, why push for a method that also will tax people on the risk of losing most of their carefully assembled personal wealth and plans?  Is “planning plus complementarity” really something we wish to tax so hard?

Don’t forget the “planning plus complementarity” process as a whole tends to elevate the value of assets, not reduce them.  Posner and Weyl boast that their scheme lowers the value of assets (p.88: “Under our system, the prices of assets would be only a quarter to a half of their current level.”).  Lower asset values may boost turnover, but is it not prima facie evidence that the value of aggregate wealth has gone down?  (I am not convinced by the way, that once lower rates of income taxation are taken into account, that asset prices would in fact be lower in their system.)  Why is that good?

So I wish to announce a high valuation for keeping the current system in lieu of this reform.  My personal plans depend on it.

Addendum: I consider several of Glen’s ideas too much along the lines of what Hayek labeled “rationalist constructivism.”  Here is my earlier post on quadratic voting.

Second addendum: You might instead prefer this method for only a limited set of issues, such as eminent domain.  But then you have to end up taxing wealth values, if only for credibility and future reporting incentives, even when efficiency may dictate simply transferring the resources with compensation.  There just aren’t that many situations where a wealth tax is what you optimally should be seeking to do.  And keep in mind, so often the real preference revelation problem is not for the homeowners, but whether the government really needs your asset or wealth!  Or maybe they are just taking it because they can.

1 Benny Lava October 24, 2017 at 12:31 am

Forcing some to sell when they don’t want to is something I’m sure every libertarian on this blog will get behind. Especially concerning real estate and focing someone to sell at a lower price than they’d like.

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2 dan1111 October 24, 2017 at 2:28 am

+1 there are lots of little problems with the idea, but this hits the nail on the head.

This is an explicitly anti-property-rights argument (just look at the title, and the abstract, too). I would like to see a response that addresses this head-on.

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3 dan1111 October 24, 2017 at 5:16 am

The problem with not having property rights is that someone else can take your property–and not just get the land, but stop you from doing whatever you were doing on the land. That has value to others, so you have to pay tax based on land value + X, where X is the value to others of stopping you from using your land.

Businesses could exploit this to shut down competition, and, as such, the idea ironically greatly empowers monopolizers. Established businesses could keep others from starting up in their area. Big corporations who had the resources to buy out competitors would be favored.

X would vary greatly. A store or restaurant can often move locations easily so there isn’t much value in buying it out; an apple orchard cannot; a gas station is somewhere in between. Imagine if two companies were racing to market with a similar product. What is the value of buying your competitor’s factory and delaying their release by months? It could be hundreds of millions of dollars.

This would place a huge extra cost on business activity, and of course there would be plenty of deadweight loss caused by it.

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4 OldCurmudgeon October 24, 2017 at 12:33 pm

>so you have to pay tax based on land value + X, where
>X is the value to others of stopping you from using your land.

I don’t think that’s quite right…The difference is you would have to pay tax on your subjective value* of the property, as opposed to just it’s objective value. Ironically, libertarians might actually prefer this; the existing owner in this system ends up better off than under our current eminent domain system.

*edit: actually subjective value + transaction costs, which is a big flaw from a public choice perspective.

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5 OldCurmudgeon October 24, 2017 at 12:40 pm

As an aside, the system is used in motor sports. Typically, there is a maximum dollar value for cars racing in the amateur classes. The rule is ‘enforced’ by a requirement that anyone can purchase any car you enter for that max dollar amount.

6 byomtov October 24, 2017 at 5:09 pm

Also horse racing, I think. The difference is that you don’t have to enter the race.

7 Neil October 24, 2017 at 9:55 am

Truly this has to be one of the worst ideas I’ve ever heard — eminent domain but for everyone!

The Straussian reading is that Cowen knows exactly how insane this is. He’s given up — econ was hip in the late 00s but now it’s much hipper to mock economists, so he’s now providing grist for that mill.

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8 GoneWithTheWind October 24, 2017 at 11:07 am

Property tax should be assessed not based on property value but on it’s share of the resources that the taxes pay for. Your property tax is made up of a dozen or so separate assessments. For example police costs or firefighting or water and sewer, etc. So I would suggest two simple changes to property taxes: 1. Everyone pays. That is be it a church a business a government building or a farm everyone pays and no one gets a free ride. 2. everyone pays in proportion to their use or likely use of each assessment. If you have no kids you pay a minimal amount for the assessment related to schools. If you have three kids you pay a much higher percentage for that assessment. If you live in apartments where police are often called to deal with problems your tax on that assessment is higher whereas if you live in a quiet neighborhood you pay less. Fairness and equality! No one pays nothing and everyone pays in proportion to what they use.

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9 A Definite Beta Guy October 24, 2017 at 12:07 pm

Then it’s not a property tax, it’s a user fee.

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10 John de Rivaz October 24, 2017 at 12:13 pm

Whether it is called a tax or a fee, it still may be a better way of funding communal services.

11 GoneWithTheWind October 24, 2017 at 1:12 pm

“it’s a user fee”
Yes! You got it! That’s (mostly) what property taxes are. They pay for the civic local government needs. My property tax bill breaks it down by use. The fire department, the police, education, sewer and water, etc. It seems quite fair to me that if your home or building is going to be protected in the event of fire that you or the owner of the building pay that fee/tax. It shouldn’t be based on the value of your property, it should either be the same for everyone or if possible pro-rated to the risk or usage of that service. Unless a $400k house is more likely to burn than a $200K house (or a $700 a month apartment) why should their share of the cost of the fire department be different? Why should a church, public building or a school pay no tax if they get the services?

12 Boonton October 24, 2017 at 2:27 pm

This could be addressed by setting the tax rate very low thereby allowing people to drastically inflate their price to the point that they would only be ‘forced’ if someone came along willing to pay far above market value.

If someone changes their mind and decides they do want to sell, they would still sell for a ‘normal’ price the market will bear.

Or perhaps you could do something like this: You can opt to decline the offer to sell from the really willing buyer, but then you pay the 2.5% tax (or whatever the rate is) AND the buyer must pay double that tax. That would eliminate the buyer who wants to screw around with you by offering every year to buy that house he knows you don’t really want to sell.

I think the libertarian objection here misses that property rights are actually bundles of rights. Today when you buy something you get not just the right to use that thing but you also get the right to keep it, refuse to sell it no matter how much above market value a willing buyer might be open to paying for it. Suppose you could break those rights into two things….the right to own the property versus the right to refuse to sell it.

I could see myself being willing to buy a house but have to give it up if someone comes along and offers me my reserve price and getting a discount for that type of ‘reduced property right’.

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13 Benny Lava October 24, 2017 at 3:14 pm

I wonder what the authors think about Grandma living on a fixed income and lowballing the number out of sheer cluelessness and losing her house to an investment firm. I’m sure the public would have a thing to say.

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14 Neil October 24, 2017 at 3:29 pm

In this rationalist dystopia, it seems that pretty much anyone could at any time be off by a significant enough percentage that they’d immediately get bought out by real estate firms in search of an arbitrage opportunity.

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15 Benny Lava October 24, 2017 at 4:50 pm

There would probably be third parties to handle your taxes. They would assess it for you and insure your assessments. So really this new system would be a net benefit to the new class of appraisers and insurers that would handle most real estate. How expensive would this be?

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16 dan1111 October 24, 2017 at 5:37 pm

+1

17 Jack cav October 25, 2017 at 9:07 am

Good point

18 Anonymous October 24, 2017 at 4:23 pm

After that happens a couple times, it will become common knowledge that you don’t lowball your number. Same with Grandma knowing that she should lock her door .

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19 Hazel Meade October 25, 2017 at 11:26 am

It is still problematic because you HAVE to accept an offer. What if you just don’t want to move? In the current real estate market, you don’t have to sell just because someone makes you a good offer. If your house isn’t on the market, it’s not on the market.
Plus you have the problem with keeping up with the market and if you don’t get your house assessed regularly, in order to keep increasing the claimed value, you might fall behind and some bargain hunter will jump on it. Sucks to be you!

Or if someone just happens to really, really like your house – maybe they dig the bathroom or they just like the location, what are your options?

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20 Boonton October 25, 2017 at 5:54 am

Indeed today Grandma lives in a bubblewrap world of perfectly safe financial products and libertarians fought to put them there.

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21 David Zetland October 25, 2017 at 3:35 pm

Agreed. I emailed with Posner, who was very sure he was right. Very annoying example of “i got mine, fuck you.”

(and I’m a huge fan of property taxes, so this fail is the type that gives academics — and economists — a bad name.)

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22 Just An Australian October 24, 2017 at 12:32 am

This is a typical economist plan since they assign such a low value to the non-financial costs of transactions, particularly those associated with creative disruption. I’m heartened to see that you don’t partake in that stupidity.

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23 Kevin Burke October 24, 2017 at 12:33 am

It seems like a property tax based on the land’s best use gets us close to this without being totally unworkable due to the problems Tyler describes.

This would certainly be an improvement in places like California.

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24 Justin October 24, 2017 at 12:36 am

Why so many examples using shoes, CDs, and other personal items? I’m not aware of any jurisdiction (in the US, at least) that taxes any property smaller than an automobile.

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25 peri October 24, 2017 at 10:23 am

I appreciate when commenters step up and help me to feel I’m not losing my mind.

Incidentally, our untaxed cd player just died. I was planning to replace it, but an internet search sorta made it seem like a cd player is a nostalgia item.

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26 Pat October 24, 2017 at 7:48 pm

I expect in practice you’d ignore personal items such as these and most consumer durables; in the same way an income tax ignores the imputed income from consumer durables.

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27 Enrique October 24, 2017 at 12:52 am

Maybe the seasteaders could test this idea.

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28 Steve Sailer October 24, 2017 at 12:55 am

What problem is this supposed to solve?

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29 Sam Haysom October 24, 2017 at 1:17 am

I imagine one of both of the authors have an aged parent who won’t move into a nursing home.

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30 Just An Australian October 24, 2017 at 1:30 am

+1 well done

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31 dan1111 October 24, 2017 at 2:20 am

Hahahahaha.

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32 george October 24, 2017 at 2:35 am

The authors need to be forcibly moved to a nursing home.

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33 Steve Sailer October 24, 2017 at 3:30 am

Do either of the authors have an aged parent who recently retired?

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34 dan1111 October 24, 2017 at 4:10 am

It looks like this fits as a possible motive, but then again, who are we to judge?

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35 peri October 24, 2017 at 10:29 am

Hurricane Harvey recently performed a similar function in my elderly parents’ town. Some of their friends drove (or floated) away from their homes, and went straight to the retirement home to sign up. Their houses will be sold as is, for half what they were worth a couple months ago.

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36 alz9794 October 24, 2017 at 9:14 am

There are any number of issues with this approach, but if people really do need to value EVERY piece of their property, then some people will need to put vastly higher values than others for the exact same physical item.

For instance, consider the Seinfeld episode in which George buys John Voight’s car, thinking it is Jon Voight’s car. Now extrapolate to our current celebrity based society … and Scarlett Johansson (or fill in the blank with a famous person) is going to have to put a $1,000 price tag (more?) on every single piece of underwear she has ever owned just so she doesn’t have to go buy a new pair every day, despite the exact same physical item being available at some store for a retail price much less than a grand.

The problem, of course, is that people are not professional assessors of the items they possess. It would be a huge waste of time (As Just an Australian mentions above) and productivity having people try to determine how little a price they can put on their property so as not to have to sell it.

I know these proposals are primarily meant to deal with land/homes (I’ve reviewed enough papers and grants on the topic), and that may be an even worse setting as one cannot just run down to Wal-Mart and buy a new home as one can a new pair of underwear. The transactions costs for purchasing a home are huge, and involve so much more than just the purchase price.

The simple answer to Steve’s question is: They have a tool, it is useful in some settings, and they are trying to use the hammer to turn a screw. But if you’re building your reputation on the hammer, then you want as many people as possible to think it is useful for as many jobs as possible.

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37 Heedless October 24, 2017 at 12:58 am

A few basic concerns:

Property can fluctuate in value, often quite radically. If someone discovers oil, are we going to force them to sell for the old price? If we don’t, how do we prevent people from raising their self assessment a year before they sell?

If the law requires that a property be sold for less than people are willing to pay, then it will attract a large number of prospective buyers. Will the seller be allowed choose a particular buyer, possibly a friend who immediately flips it for them at the market clearing price? Or will we hold a lottery and let chance decide who gets the windfall?

This just seems poorly thought out.

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38 Anonymous October 24, 2017 at 4:43 pm

You find oil, you change your price, same day. This probably can’t work as a tax law that the majority of people are ignorant of and only administer once a year, which is its lethal flaw. It could be permitted to decline the first buyer over a certain time period and update your price immediately, to deal with people “forgetting” to adjust their price in time, but generally the whole idea is that you aren’t protected from somebody coming and buying your stuff if you undervalue it. That’s why you don’t undervalue it.

I’m not sure what your third paragraph addresses. The law has no max price, the optimal case is where everyone’s prices are high enough that few trades happen – everyone has reported their price accurately and nobody can use the land better than them. Flipping your land over to a friend does nothing, as that friend then has to declare its price, and if it is again too low, the other buyers can take it. The only way to protect it is to report a price you’d actually be happy to get rid of it for, or that nobody else would want to pay (if you want to play it risky).

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39 Heedless October 26, 2017 at 5:38 pm

Of course the law sets a max price. That’s the entire point.n you can’t sell for more than the denlarged taxable value.

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40 Heedless October 26, 2017 at 5:39 pm

That is, you can’t sell for more than the declared taxable value.

Farging autocorrect.

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41 oldcurmudgeon October 25, 2017 at 1:39 pm

>If someone discovers oil, are we going to force them to sell for the old price?

Great hypo btw…

Presumably, the alternative is give the newly-discovered mineral value to the current owner. IMHO, the current owner is less deserving of that windfall than the tax purchaser; in your hypo, the current owner didn’t do any work or take any risk to discover that latent value. The tax purchaser did.

Or, for that matter, why limit claims to that windfall to just the current owner? Can’t the previous owner (i.e., the person who sold to the current owner) make the same argument? They both sold land that had huge latent value.

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42 MichaelG October 24, 2017 at 1:18 am

Tell me again why property taxes are a good idea? Can’t governments live on income taxes and/or sales taxes (VAT?)

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43 dan1111 October 24, 2017 at 4:18 am

One argument I see is that it gives an incentive to put property to productive use.

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44 The Other Jim October 24, 2017 at 7:44 am

Yeah, you don’t want people just LIVING ON IT, and arranging it in a way that pleases them.

We demand productivity! For the State!

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45 BMS October 24, 2017 at 1:56 pm

Living on it is a highly productive use. Nobody was saying otherwise.

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46 Anonymous October 24, 2017 at 4:30 pm

Surely you’ve heard about the Chinese investors buying apartments in crowded Western cities and neither living in them nor renting them out? That’s one of the problems this is intended to solve.

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47 TuringTest October 24, 2017 at 9:17 am

Tell me again why income taxes and/or sales taxes (VAT) are a good idea? Can’t governments live on property taxes?

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48 Art Deco October 24, 2017 at 4:25 pm

State government’s could. Local governments would have to rely on superordinate governments to collect income taxes on their behalf. A great many municipalities (and some counties) are residential loci without much retail trade therein, so aren’t good candidates for sales taxes.

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49 Benjamin Cole October 24, 2017 at 1:19 am

Interesting proposal.

I see problems due to property zoning. Connected types would force-buy property, get it up zoned. Of course, even now people buy property and get it up zoned with enough pull. But sellers are not forced to sell (unless to make way for a baseball stadium in Texas).

Actually, property zoning is probably the largest macroeconomic structural impediment in the US today, flummoxing expected results on monetary policy, and current account trade deficits (which lead to house price booms).

I hope Tyler Cowen becomes an anti-zoning nazi. A libertarian stance, no?

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50 TuringTest October 24, 2017 at 9:18 am

Ha! Tyler is not a libertarian

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51 Ray Lopez October 24, 2017 at 1:56 pm

As you say, ‘up zoning’ is done all the time, in northern Virginia that I’m familiar with, and, as you say, probably in more free-market oriented Texas.

My only issue with TC’s analysis is this: “And keep in mind, so often the real preference revelation problem is not for the homeowners, but whether the government really needs your asset or wealth! ” – doesn’t TC agree that having a perpetually expanding budget deficit is bad? Or does he believe so much in Ricardo Equivalence that if econ growth > debt growth, then debt doesn’t matter? (we owe it to ourselves, just another form of taxation)

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52 Benjamin Cole October 24, 2017 at 1:21 am

PS yes by all means tax property, and not income.

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53 prior_test3 October 24, 2017 at 1:32 am

‘just don’t have the time to rebuild that formerly perfect mesh of plans and possessions, the one that took decades to create’

Sympathy for the complacent?

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54 Sam Haysom October 24, 2017 at 1:56 am

Because you deal with disappointment so well.

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55 prior_test3 October 24, 2017 at 5:04 am

?

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56 NOR October 24, 2017 at 2:17 am

Willingness to pay is a function of income! Cue the stories of Scrooge McScrooge coming along and buying up everyone’s house right before Xmas. Try googling ‘gentrification’ – forcing out low income residents is already such a popular idea…

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57 yo October 24, 2017 at 4:42 am

Then take the cash and move to Bali? I couldn’t imagine a better tourism subsidy.

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58 george October 24, 2017 at 2:49 am

Leave it to armchair academics to come up with schemes that ultimately destroy economies. First of all you just threw property rights out the window. No successful economy has ever existed without secure property rights and the rule of law. By force selling property you deprive people of the fruit of their labor…not so important to men and women who make their money sitting in chairs. You also have committed first-stage-only thinking. What happens when people are faced with a choice of forced sale at low prices or high taxation due to over valuation. You get people who begin to find other ways to save money. Remember…someone can lose their property by having desirable land but not the means to pay excess taxes. Not that Tyler seems to care. In a bewildering discussion of minutia he completely ignored the morality and fairness of such an idea. How long before the politicians who implemented the.idea are voted out.of office? I suspect that men and women who would deprive citizens of their rights in order to maximize tax receipts might have to removed through force and violence.

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59 Ray Lopez October 24, 2017 at 2:00 pm

@george – Do you have the same respect for intellectual property as you do for real property? I suspect if you’re typical, you do not. The laws of Fee Simple Absolute (real property) were developed in a more simple age. Today real knowledge is created by mathematics, and physics, but ironically it is illegal (not permitted) to patent math or physics formulas. They are considered not ‘invention’ but ‘discovery’ as if they always existed, which is absurd.

I would like to see society get righteous indignation not over the theft of a piece of land in the center of town, but over the theft of an idea without compensation. Only then can the modern economy break the Great Stagnation.

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60 George October 24, 2017 at 6:26 pm

@Ray Lopez – Interesting….I was completely silent on intellectual property because I was simply addressing Tyler’s post. I actually have made a living for the last 38 years with mathematics and physics. I have published a few papers (I’m not an academic), but most of my work was unpublished in order to protect intellectual property. There is, in fact, a way to patent math, but the patent laws require full disclosure, and it is very hard to police the unauthorized use of mathematics in other people’s systems. That is why I abandoned that route, also.

I don’t see the need to have one not the other…I consider theft of ideas as serious as theft of land or possessions. Both are depriving you of wealth that you earned or created. I believe that we haven’t been aggressive enough with countries like China and others, which steal intellectual property of all kinds, not just technical. Yet, I don’t see why you create a false choice. Theft is theft. I have translated mathematics into food, property, clothing, etc. by virtue of economic transactions. I don’t see one type of property as different from another.

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61 Ray Lopez October 24, 2017 at 11:50 pm

@George – thanks, that’s nice you made money from math, though trade secret is the weakest kind of IP. Fermat’s Last Theorem was a kind of trade secret if you believe Fermat’s margin notes. As for patenting math, it’s hard to do in the USA, you have to tie it to hardware and even then there’s a number of US Sup. Ct cases over the last 20 years that have made it harder. The reality is that physics, maths and discoveries of biological organisms per se are not easily patentable. That should IMO change. As for this academic proposal, it will simply speed up real estate transactions and raise more revenue than current law. In the USA there’s the right to take over anybody’s property using “eminent domain” laws which is done all the time (two of our DC properties were taken over this way, in one we got above market prices by threatening litigation, in the other we had to go to court and actually won, much to everybody’s surprise, and the losing party, a corporation, had the case sealed so it would not become legal precedent).

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62 Anonymous October 24, 2017 at 4:51 pm

“By force selling property you deprive people of the fruit of their labor”
You are free to ‘deprive’ me of the fruit of my labor, my PC that I bought for $1000, if you pay me $1500. I won’t be sad at all.

“You get people who begin to find other ways to save money. ”
Good. Land is for habitation, if you want to save, get a bank account, not more apartments.

“What happens when people are faced with a choice of forced sale at low prices or high taxation due to over valuation.”
If the market is willing to buy just below a certain price, that price isn’t “over valuation”.

“Remember…someone can lose their property by having desirable land but not the means to pay excess taxes.”
They get tons of money in return, which they can use to both pay taxes and have other land they can use better. Hard to feel sorry for them.

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63 George October 24, 2017 at 6:40 pm

@Anonymous – hold your breath for that computer transaction. What might actually happen is that you are forced to sell the computer for $600 in order to pay for taxes on other possessions. Even if you don’t lose money, you are forcing people to sell their possessions. Today’s price might not be a good one when you look over the fullness of time. The point is one of 1) morality – you are depriving people of their possessions by holding a gun to their heads and essentially saying “price this so it doesn’t sell, then pay us a lot of taxes, or we’ll force sell this at a lower price”. 2) As I said, no successful economy is possible without secure property rights…and this definitely removes those rights.

Your second paragraph is nonsense. Nobody cares what you think land is for. It’s not your land that you’re discussing. Please read Tyler’s book on economics. If you think you can use land for habitation without the expenditure of wealth and effort, then the book probably won’t help you.

If you have to price land at a level where the taxes are too high, and you value the land more than any sale price, then you have been a forced to sell at too low a price.

Finally, it doesn’t seem to bother you that the state can take away your rights so easily in this proposed scheme. You only seem to care that you can arbitrarily decide what is a good value for them, not matter what their opinion is. That kind of society will be a terrible place to live in. The story won’t end with how you tax property. All kinds of intrusions into your rights will happen. If you can so callously advocate taking other people’s property like that, I don’t suppose that you will be swayed by any discussion of morality or good vs evil.

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64 wiki October 24, 2017 at 3:28 am

Ronald Coase would have a field day taking these guys apart. The blind obsession with a narrow view of monopoly and the unwillingness to deal with asymmetric transactions costs.

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65 Ray Lopez October 24, 2017 at 2:04 pm

That’s very true. The railroad and farmers sparks/wheat example was a real eye opener when I studied it in uni. But Coase says nothing about how to expand the economic pie, rather than divide it. And who expands the pie? Inventors. The most screwed over class of people. As TC has rightly observed, all most nerds need to invent is praise from society. An “atta boy” and a pat on the back by a business manager or venture capitalist. It’s slavery and IMO someday will be seen as such. Lab rats of the world unite! You have nothing to lose and a world to gain.

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66 wiki October 24, 2017 at 3:28 am

That’s “would have had.” RIP

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67 John F October 24, 2017 at 4:48 am

Why stop at capital! A person’s most valuable monopoly is on themselves, aka on their own “human capital,” which may be totally unique in one way or another. E.g. Alexander Grothendieck was a stellar mathematician who retired at age 42 but lived to 86. Given his previous contributions, in expectation his early retirement was *extremely* inefficient. I am certain his money-value for retirement was far less than society would have valued his continued working as a mathematician. This scheme would also eliminate most disability fraud.

I can’t figure out what if anything would go wrong in equilibrium (or really even figure out what the equilibrium would be). But this proposal just “feels” wrong. However I am in favor if Singapore wants to give it a shot.

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68 Al October 24, 2017 at 11:30 am

+1

Exactly the argument I came looking for.

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69 Ray Lopez October 24, 2017 at 2:08 pm

A concrete example on how you would tax human capital based on self-reporting would make your point more clear. Outside of a sci-fi example, I can’t think of one. But it’s good that you recognize, unlike most people reading this blog, that real wealth is created these days from intellectual property rather than providing liquidity or being a middleman or even assembling stuff from raw materials, no matter how important these traditional things are.

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70 Anonymous October 24, 2017 at 4:58 pm

Isn’t this exactly how this works RIGHT NOW? Alexander Grothendieck lost a couple millions in opportunity costs because he opted to retire early. Clearly, the value of retirement was to him higher than the price society was willing to pay to get him out of it. Or how else would you implement it?

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71 John F October 24, 2017 at 8:50 pm

No, the plan is different because it taxes wealth. Toy example,

Two people, A, B both value retirement overworking at $100/year, which is the price they post under the proposed system. Also,
– Person A has a job that pays $100/year.
– Person B is retired.
Both people are enjoying $100/year in wealth–Person A’s is accounting wealth, Person B’s is implicit wealth. But they have the exact same wealth and post the exact same price. Then under the proposal, both A & B would have to pay the same tax rate.

Basically I think of the tax payment as requiring a person to buy out their own wealth each year. The problem is that wealth can be implicit, but to pay the tax only monetary wealth will do.

Grothendieck revealed that he valued his peaceful retirement years at millions of dollars. He was not rich (actually he was a communist). This choice is not allowed in the new system. He has to pay taxes on the millions.

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72 Hazel Meade October 25, 2017 at 11:31 am

A tax for not working. You’re an evil genius!

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73 John F October 24, 2017 at 8:53 pm

After rereading my original post, I see that my point was unclear. P.S. thanks for the comment

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74 Anon October 24, 2017 at 4:51 am

Here is a way to salvage some of the system: when someone bids on your property, they can set the upper and lower limit for their bid. If you refuse to sell with the lowest price someone offers, an auction commences and you are offered prices up to the maximum bid set buy the would-be-buyer. If you refuse the even the highest bid, your property tax gets retroactively raised to reflect the highest bidding value.

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75 Hazel Meade October 25, 2017 at 11:36 am

Strike the retroactively part and maybe this could work.
At that point, it’s more or less equivalent to having market prices directly set assessed values, thereby eliminating the tax assessment part of the process.

Of course, problematically nobody can see the inside of your house or inspect it before bidding (or if they could that would suck). But that would probably be factored into the bid.

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76 John F October 24, 2017 at 5:14 am

“incentive is to assemble highly idiosyncratic assets that no one else can quite fit together, and so no one else will wish to buy from you, and then you can announce a low valuation.” I think this is exactly right. On top of that, there could be an incentive to destroy value, as long as the cost to “the market” was sufficiently more than the cost to the stakeholders.

A poor neighborhood in Chicago might worry about a developer buying up local property in order to gentrify and flip it. On the margin, this makes a high-crime environment more desirable for the neighborhood residents. Ten extra murders per year is far more costly to would-be gentrifiers than it is to those people used to a high murder rate. (More costly as revealed by how many extra resources each group commits when the murder rate goes up.) Increasing the murder rate would be a monetarily cheap way to keep your house.

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77 Brian Donohue October 24, 2017 at 6:26 am

“Since I don’t favor most forms of wealth taxation in the first place…”

Do you prefer (a) payroll taxes, (b) income taxes, (c) sales taxes, or (d) other? How about a ranking.

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78 rayward October 24, 2017 at 6:26 am

At the micro level, this is similar to a partnership (or shareholder) agreement with a provision that allows a partner to set a price for her equity interest and offer to be a buyer or seller at that price the other partner having the option of being the buyer or the seller. I call such a provision a Russian roulette provision. Obviously, I don’t like them. Over the life of a partnership (or marriage for that matter), disagreements will arise, and like a marriage, the partners will work out their differences in due course, saving the partnership (marriage) and themselves unnecessary loss. Rather than a Russian roulette provision, I often include a mediation provision, a procedure for the partners to work out their differences under the direction of an independent mediator. I come across Russian roulette provisions prepared by other lawyers, who no doubt believe that it’s a good thing to put a loaded gun in the hands of an angry partner. The prevailing form for resolving differences of opinion about property values in the context of ad valorem taxes is similar to the mediation provision in my partnership (shareholder) agreements, with an independent expert in property valuations resolving the disagreement. Isn’t this far better than having a Russian roulette procedure suggested by Posner and Weyl, avoiding the unnecessary loss to both the property owner and the community, the latter suffering a loss because the owner of the property who makes the highest and best use of it being deprived of his property because he undervalued it in the process. My job as a lawyer is often to protect the status quo, to avoid unnecessary loss resulting from the irrational actions of clients and their business partners and associates. Sure, playing Russian roulette is efficient in that it resolves the dispute quickly, but at great loss to the disputing parties and the community in which they do business. Academics may be good at devising academic solutions to academic problems, but they are not very good at resolving real world problems among real world participants.

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79 Alan October 24, 2017 at 6:56 am

We already have the pric3 you need for relative valuation. We are solving a political problem (lack of will and resources to re-assess).

Pay tax on the ACTUAL SALE PRICE, with community averaging limits to avoid evasive sales. When the property sells next, tax at the new zale price. This works well with residential. Not convinced it works well for commercual. Remember, the rate can vary.

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80 Per Kurowski October 24, 2017 at 7:17 am

Why not everyone assigns the value to his own property, but that valuation needs to be posted on a web site so that everyone can see it… and be able to comment on it? 🙂

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81 The Other Jim October 24, 2017 at 7:46 am

Per Tyler’s example, I bet the (psychotic) authors of this piece would just take the Dem view — if you own 80 pieces of property, you deserve some punishment anyway.

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82 John de Rivaz October 24, 2017 at 7:47 am

The advantage of income taxes and sales taxes is the that income is there to pay the former. With regards to sales tax, if someone is making a purchase and he doesn’t want to pay the tax then he declines the purchase.

Property, or capital, taxes on the other hand may not be covered by income, in which case they amount to confiscation of property. People on average are docile, but if faced with an injustice (which this will be seen as) they are likely to become violent and feel morally entitled to behave violently. If a tax system entirely based on capital taxation were to emerge, it would ultimately produce results similar to the Russian, French and German (WW2) revolutions, with massive destruction of lives and property.

In the UK, the “community charge”, a tax per person regardless of income, produced riots and massive unpopularity. Local authority charges based on property value are equally unpopular, but a local income tax hasn’t appeared yet, although it is suggested by minority parties from time to time. i don’t know of any country that has local income tax. If anyone here does, maybe they can post details.

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83 Cambias October 24, 2017 at 8:40 am

This system, almost word-for-word, is described in Robert Heinlein’s 1980 novel _The Number of the Beast_. That was the same era as Howard Jarvis’s property-tax “revolt” in California. Was this notion being bruited about back then? Or are the authors of the paper just closet SF fans?

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84 entirelyuseless October 24, 2017 at 8:56 am

Better solution: no property taxes.

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85 Matthew October 24, 2017 at 9:51 am

Super silly application of a great self-assessment mechanism used by Danish kings. In the late middle ages they would levy a toll on cargo passing between the North Sea (or to them the East Sea) to the Baltic Sea using just this notion. The obvious and supremely important difference being that the cargo of a ship is *in transit to be sold*. So there’s nothing offensive in that case about forcing a sale at the self-assessed value. As described here, this Posner-Weyl scheme sounds like Panglossian-libertarianism: markets should provide a self-enforcing solution, therefore we will behave as though they do. The ought is. Isn’t it?

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86 Albigensian October 24, 2017 at 10:46 am

One way around the “forced sale” aspect would be to assign the current owner the right to pay the difference between what’s offered for something and what’s been bid for it.

But, what of items that have value to you that’s far above market value? For example, something you inherited from your grandmother and which you treasure just because you remember her using it.

And what of items that are somehow installed, should you have the right to bid on my built-in bookcases, or must I be taxed on their replacement cost even though that’s far above their market value.

Oh, well: at least you won’t be able to bid on my medical implants?

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87 OldCurmudgeon October 24, 2017 at 12:58 pm

>And what of items that are somehow installed

Presumably, each owner would need to be able to define/change the grouping of property.

Might allow for mild gaming (e.g., this car and this office building for $150 million), but serious abuses would be policed by the ability to disaggregate the bundle.

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88 John F October 24, 2017 at 9:44 pm

To an economist, nostalgia is just a gussied up word for inefficiency. Similar to Christmas 😉

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89 Techy October 24, 2017 at 12:45 pm

I think that the damage to national welfare is actually understated in this paper.

When one shops for or sells a home, real estate agents are quick to tell you what features are valued by other buyers and they strongly discourage you from doing anything ideosyncratic with your house. In fact to sell a home one typically paints over or undoes any quirky personal design choices. This has the effect that the vast majority of homes for sale are at least reasonably useful and appealing to most potential buyers.

Under the proposed system I would have a strong incentive (lower taxes) to behave in the opposite fashion. In my case that might mean converting the second floor to a greenhouse for herbs and vegetables and doing away with bedroom closets since I am a wardrobe minimalist. My wife would be revolted until I showed her how much lower our tax bill is now that our house is appealing only to me and repulsive to most other potential occupants.

Extrapolate out across the country and a nation of quirky individualists determined to lower their tax bills would turn our suburbs into a mish-mash of hobbit’s lairs, princess’ palaces, cat-houses, geodesic domes, windowless bunkers and stoner sweatlodges. This would make it awful to move, difficult to locate anything moderately desirable and reduce the market value of our national real estate by trillions of dollars.

The market for housing provides an incentive for legions of people with very poor taste to defer to the wisdom of the crowd simply to protect their resale values. Invert that incentive and the kitsch, chintz and solipsism of millions of anti-talented designers will be unleashed on our nation’s asset base.

Woe unto to the nation that considers this a good idea.

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90 OldCurmudgeon October 24, 2017 at 1:13 pm

IDK. It’s hard to see people purposely destroying their own wealth. After all, almost everyone voluntarily moves (i.e., sells) a few times over the course of their lifetimes.

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91 George October 24, 2017 at 6:44 pm

@OldCurmudgeon

There are countries that tax homes based upon outward appearance, as a way of estimating the home’s value. In those countries, the outer appearance of the homes is pretty shabby, while the insides can be lovely. I have seen this in more than one country. The locals matter of factly state that as the case. Incentives matter.

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92 Bob October 24, 2017 at 1:07 pm

This is derivative of James Bowery’s “Net Asset Tax” proposed in 1992:

https://web.archive.org/web/20091024212245/http://geocities.com/jim_bowery/nat.html

Bowery has updated his view and now prefers liquidation value in place to self-assessment value for the tax:

https://blode0322.blogspot.com/2012/02/bowery-on-bowery-tax.html?showComment=1328982078963#c100395776784876797

The problem with self-assessment is it doesn’t differentiate between asset valuation that is unique to the current owner and “no-brainer” asset value. This difference is crucial to the economic incentives.

Self-assessment was my first thought back in my 1992 white paper. I figured that one might make up for the over-assessment by lowering the general tax rate, but even then I was not certain it was the right way to go, so I listed it merely as a possibility to explore. I now see it was wrong.

If you merely lower the overall tax rate, you still don’t differentiate between someone who is collecting profit from a no-brainer position and someone who is uniquely capable of realizing value from the asset.

Therefore I had to go to liquidation value in place — which had the side effect of solving monetary policy as well. In addition, there is the prospect of bringing to bear the body of economic thought called “modern portfolio theory” by applying what it calls “the risk free interest rate” as the tax rate. The risk free interest rate on liquidation value in place is “no-brainer” return. Finally, this kind of assessment is more in line with the neo-classical Paretian definition of economic rent.

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93 Bob October 24, 2017 at 1:09 pm

Here Bowery summarizes his proposal:

https://blode0322.blogspot.com/2012/02/bowery-on-bowery-tax.html?showComment=1328992709585#c7548318716047529199

My proposal in a nutshell:

For an asset protected by law (herein after “asset”) it must be publicly declared by the owner who must be a natural person. Corporate assets are indirectly protected by law when their shares are so protected. An asset has an assessed value equal to the highest bid in escrow with the government. Lower bids for the asset which remain in escrow are added to the assets of the bidder but the highest bid in escrow is not counted as an asset of the bidder.

Fictitious persons (corporations, etc.) are not assessed. However, the natural persons who hold the derivative assets are assessed, for example, the liquid value of their shares held in the fictitious persons.

A natural person’s tax liability is:

(“Assessed value of assets” – “Assessed value of liabilities”) * “MPT’s risk free interest rate”

Liabilities are assessed as their liquidation value to the creditor. For instance, a mortgage lender can sell a mortgage on the open market and the new owner receives the mortgage payments. The mortgage is therefore an asset to the mortgage lender and is assessed as usual. To the home owner, the mortgage is a liability subtracted from his total asssets but the value subtracted is not the amount shown in the mortgage contract — it is the liquid value of the mortgage to the lender if he sells it as an instrument to the highest escrow bid.

A KEY POINT:

The most common criticism of this system is that it can be “gamed” by anti-competitive forces who try to shut down entrepreneurial startups by bidding for ownership at such a high price that it imposes an immediate tax burden so great as to overwhelms the cash flow of the startup. The start-up is either forced into bankruptcy or is forced to sell to the the anti-competitive entity, which then shuts it down as a cost of maintaining its monopoly position. The answer to this, which is obvious after moment’s reflection, is that the startup can defer its tax liability (not counting it as a liability in computing its tax liability, of course) up to the point that its liquid value is equal to its deferred tax liability. At that point the government forces liquidation. The startup can, of course, place a bid in escrow for itself to maintain its liquid value above its deferred tax liability. Any such deferred tax liability accumulates further interest liability compounded at the tax rate.

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94 Bob October 24, 2017 at 1:35 pm

So I wish to announce a high valuation for keeping the current system in lieu of this reform. My personal plans depend on it.

Your personal plans depend on you actually having those assets in your possession i.e. on property rights, which unless you’re a one man army and police force, or unless you pay for your own personal army and police force, you depend on the government for.

So you don’t want to pay for the cost of maintaining those property rights by taxing the value of those property rights? You’d rather tax other people and various economic activities via income, sales, etc. taxes? You don’t see how this sort of parasitism is not only unethical, but is also a perverse incentive structure that will degrade economies and societies over time?

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95 George October 24, 2017 at 6:48 pm

The current system does tax property… The discussion is over how to properly value the property. Many of us prefer a system where an estimate is made based upon recent sales of similar properties. It might not be an exact way, but no one is forcing you to sell anything in the present system.

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96 oldcurmudgeon October 25, 2017 at 1:52 pm

>but no one is forcing you to sell anything in the present system.

They can and do via eminent domain. And when that happens, you’ll only get market value as compensation, and not your subjective value.

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97 Mark October 24, 2017 at 2:09 pm

Is there a significant difference between “willingness to be paid” and ‘willingness to accept”? If not, the microfoundations are well-established, and the importance of the divergence is clear. This doesn’t even include the difference in context for home buyers vs sellers, and the magnitude of transaction costs with important differences for those in the market vs those who would be “forced” into the market.

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98 Doug October 24, 2017 at 2:43 pm

Can’t we just all step back, and recognize that this is an idiotic idea, and in practice, pretty much everyone would hate to live under this system?

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99 Doug October 24, 2017 at 2:46 pm

I would class this in the same category as hey, let’s convert all money into time, and have a clock on your arm, and if the time on your runs out, you die. Or hey, let’s have a day when all crime is legal.

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100 John October 24, 2017 at 4:10 pm

Why is it an idiotic idea? And why would people hate to live under it in practice? What’s your evidence for this view when it’s never been put into practice?

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101 Doug October 25, 2017 at 4:27 pm

It is an idiotic idea, and no one would want to live under it in practice because in the real world there are things that are often overlooked in fantasyland theories like these, including transaction costs, sentimental attachment and other “irrational” preferences, and a**holes.

You really want to be in a position where you can lose your house and be forced to move any time someone feels like paying you the market value in order to take it? What about your car? Wouldn’t it be kind of inconvenient to have your car subject to being taken away from you at any time? I suppose you could then go force someone else to sell you their car, but is that what you want? To hop around from car to car everytime someone wants yours?

What about your laptop or cell phone? Even if they give you the full retail price for your used laptop or phone, isn’t it kind of a huge hassle to go get a new one, transfer all your data, and make sure the data is sufficiently wiped that whoever buys it can’t see your naked selfies or get your banking password?

What if you own a boat and have a long term lease to store it at a marina? Do they have to assume your lease too? Your insurance? What if the marina doesn’t want them or the insurer won’t cover them because of prior boating accidents?

What about stock? The market value can be $10 one day, and $15 the next day. How often do you have to revalue your stock in order to avoid being forced to sell it at below market prices, or being forced to pay taxes at above market prices? What if you own an interest in a partnership or closely held corporation that runs carwashes? Can you be forced to relinquish control over the business you created whenever anyone wants to pay you the market value? Or if your partner is forced to sell, can you then be forced to be partners with any random guy off the street, who may have no experience or knowledge about the business or who may have a completely incompatible management philosophy?

I could go on a lot longer, but the bottom line is this idea is just absurd and silly.

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102 Doug October 25, 2017 at 4:41 pm

Let’s not forget the fact that this would require you to create and maintain a constant inventory and valuation of every one of your possessions, and make that inventory public, so that anyone who wants what you have can see it and purchase it if they choose.

This idea would require an absolutely insane amount of documentation, at an enormous cost both in dollar terms, and in terms of loss of time and privacy.

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103 John October 26, 2017 at 2:05 pm

To see if it really is absurd and if nobody would like to live under it, why don’t we do some arithmetic?

The U.S. government’s total revenue is estimated to be $3.654 trillion for fiscal year 2018.

About 10 years ago, John Rutledge estimated the total value of assets of the US economy to be $188 trillion, or 13.4 times GDP.

Current U.S. GDP is $19.250 trillion. If we multiply that by 13.4, we get an estimate of $257.95 trillion for the total value of assets of the US economy.

This means that a wealth or asset tax of 1.4%, with no other taxes, would yield the US government’s total revenue for fiscal year 2018. In other words, all current taxes on income, sales, capital gains, payroll, estate, value added, excise, etc. could be eliminated and replaced with a single tax of 1.4% on assets.

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104 John October 26, 2017 at 2:11 pm

The median NW (net worth) Americans is $68,828. This means the median American would be paying $963 in taxes under this system. So it would be immensely popular.

The highest median NW for household by age is $194,226 for 65 to 69 year olds. All other households have lower median NW. This means the median 65 to 69 year old household would be paying $2,719.16 in taxes. That’s taxes in total under this asset tax regime. All the other median households in other age brackets would be paying even less since they have lower NW.

What you’re asserting is that most Americans would not like to live under a tax regime in which the vast majority of Americans pay negligible amounts in taxes to yield the same amount of government revenue. The burden is on you to show that most Americans would not like to live under this system.

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105 Doug October 26, 2017 at 9:37 pm

You are ignoring everything I just said, and the main premise of the proposal laid out in the original post. The proposal was not to simply move to a property tax (which, though possibly a bad idea, I would not call idiotic), it was to impose a property tax, PLUS require each person to assess the market value used to calculate the tax on each piece of property that person owns, with the caveat that any other person may force the sale of that property at assessed value. That is the primary premise of the original post, and that is what is idiotic.

Even if median taxes were reduced to $2,719.16, I do not think the average person would want to live in a system where they could be randomly ejected from their own cars or homes at any time by any random stranger that can afford to pay the assessed price. I also think that this proposal would completely destroy the economy by virtue of the uncertainty it would engender. So yes, I am still asserting that this is pure silliness.

106 John October 27, 2017 at 4:11 pm

I’m not just talking about real estate. I’m talking about net asset value, hence the stats I cited of net worth, which includes real estate property and other assets.

There’s absolutely nothing idiotic about assessing asset value according to the market.

My view differs from the original post in that I don’t think every single piece of property one owns, like consumables, is to be subject to the net asset tax, unless one wants to. If one wants to register a roll of toilet paper one owns as an asset and pay taxes on it, they can. Most people won’t.

Actually the figure of $2,719.16 would be for the median 65 to 69 year old household. Most people would pay significantly less. The median American would be paying $963. You had no idea how ridiculously low a wealth tax would be and therefore how untenable your claim that it would be unpopular, so you resort to some lame strawman about people being randomly ejected from their cars and homes.

107 Doug October 27, 2017 at 7:27 pm

Reread the original post. You seem to be defending some idea of your own that is completely different than the propisal at hand.

The only thing that is lame is the original proposal, which inexorably leads to the problem of being ejected from your car or house at the whim of anyone who can afford to pay the assessed value. This is the proposal in the original post:

“The core proposal is you announce how much each piece of your property is worth, and you are then taxed as a percentage of that value (say 2.5%).  At the same time, you have to sell your property for that same value, if someone bids for it, thereby lowering or eliminating the incentive to under-report true values.”

What part of “you have to sell your property for that same value if someone bids for it” do you not understand?

108 John October 27, 2017 at 10:36 pm

I did read the original post. I’m defending a variation of the idea. It’s not completely different; many of the principles are similar.

109 byomtov October 24, 2017 at 5:08 pm

Yes. It’s idiotic. The question is why Weyl and Posner think it has any merit.

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110 George October 24, 2017 at 6:50 pm

@John – Generally, if you put forth a proposal, it is not incumbent upon others to have to prove that it is stupid or venal…rather, it is incumbent upon you to prove that it is a good idea. One doesn’t have to live in this system to tell that Doug is right.

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111 John October 24, 2017 at 7:20 pm

I don’t see why it’s not necessary for people to justify their criticisms.

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112 byomtov October 25, 2017 at 6:07 pm

John,

I think Doug presented some very good criticisms. I also provided some criticism below, having to do subjective value.

113 John de Rivaz October 24, 2017 at 3:00 pm

Maybe a better subject for debate is “How can government monetise itself?”

Some rather poor suggestions do come up from time to time. The British government suggested raising tax money to fund its antiquated court system by charging extortionate probate fees to people who had volunteered to be executors of friends or relations wills, for example. (They can recover them from the estates after probate, but this is uncertain and can be much later.) Fortunately this ghastly scheme was scrapped on account of the recent snap election, and as far as i know not rekindled.

A somewhat better solution in my view would be to tax automated machinery on the value of its output. A model already exists for cryptocurrency mining pools. People using them have automated machinery that is creating wealth in the currency mined, and the mining pool gets a proportion. No one resent this as far as I know.

There are already concerns about automated machinery taking jobs, and a solution of universal basic income has been suggested. This would have to be raised somehow, and an automation tax on machines would seem the answer.

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114 Zach October 24, 2017 at 3:57 pm

I think it’s unanimous that people would hate to live under this system.

But I think there’s an interesting question to be asked about why it would be so terrible. Is it just a bad idea, or is it a thought experiment that can shed light on some of the assumptions of economics?

My stab at why this would be so terrible: it misunderstands the difference between stocks and flows. Namely, it doesn’t appreciate that there is an economically meaningful difference.

Most people don’t want to be in a state of constant liquidation. They want to accumulate goods that they like and trade away goods they don’t like, but they fundamentally want to accumulate goods that they like more than money. Transactions are just inventory management; what they care about is the inventory.

In this system, there’s no such thing as an inventory. Everything’s implicitly for sale at all times. The best you could do is some sort of “just in time” system where you accumulate goods just before you need them and liquidate immediately thereafter.

That’s a great system for commerce! The same amount of capital works much harder with near zero inventory. But a human under this system would feel like a hobo with a bank account.

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115 Art Deco October 24, 2017 at 4:29 pm

TC seems drawn to diverting thought experiments that you could not implement if anyone wanted to. (I harbor a suspicion that when someone says ‘Coasean solution’ they’re referring to something that will never work off the economists’ drawing board).

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116 Li Zhi October 24, 2017 at 4:13 pm

TL;DR. I started reading TC’s OP and got to him talking about “true value”. Oh my. How sad. Just wondering: what is the “true value” of the Weinstein Company?The difference between property and property “on the market” isn’t subtle. How do we establish “true value” for something not on the market? While real estate appraisers typically use the “equivalent” method (finding local sales prices of “equivalent” property), this method breaks down if the seller isn’t willing to sell at that price, doesn’t it? Or is price not an agreed upon number? Beam me up, Scotty; I see no evidence of intelligent life here.

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117 Li Zhi October 24, 2017 at 4:21 pm

But the cool thing about a central authority defining and imposing a “true value” is that we could then apply it to everything, including relationships. Families, wives, husbands, brothers, sisters, sons, and daughters, mothers and fathers. Hello Mr and Ms Smith. We’ve put your kids on the market to establish their price. Feel free to bid on them.

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118 byomtov October 24, 2017 at 5:16 pm

I think Tyler’s analysis is interesting, but is hardly the biggest problem. What about subjective value? It’s real. Should I pay extra taxes to protect my right to live near friends and family, or to have an easy commute, or to be familiar with nearby merchants?

Look at it from a service point of view. These conveniences don’t make it more expensive to provide fire and police protection, for example, or to keep the street in repair.

These people are nuts.

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119 John October 24, 2017 at 6:11 pm

This doesn’t deny “subjective value.” Nor does it demand that you pay more to live near your friends and family. If your friends and family live in Bumfuck, Iowa, you’re not going to pay more to live there than in Manhattan.

It’s not complicated. It’s a wealth tax, or an asset tax. It’s a tax on a percentage of the assets you own, whose value is determined by markets, as opposed to a tax on income, sales, capital gains, etc i.e. a tax on what you do with your assets.

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120 Ken Arromdee October 24, 2017 at 6:33 pm

“If your friends and family live in Bumfuck, Iowa, you’re not going to pay more to live there than in Manhattan.”

If your friends and family live in Bumfuck, and so do you, selling your house at market value would be a loss for you since you would lose the intangible benefits of living near them. This means that you must raise the valuation of your house to prevent someone from buying it for a price that is greater than market value but less than market value + intangible value. The fact that you live next to your friends and family and gain value from that is being taxed.

It’s possible that you will pay more to live in Manhattan anyway, but that’s because the factors that increase cost for Manhattan are larger than the living-near-family tax, not because the living-near-family tax doesn’t exist.

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121 John October 24, 2017 at 7:14 pm

The “market value” of your house is whatever you decide to sell it for to a willing buyer, at the time you sell it. The house next to yours might be identical in material features and sell for 100K, but that doesn’t mean the “market value” of your house is 100K as well if you won’t sell until someone comes around offering 200K.

I don’t see how your example is an objection or changes anything. Assets are valued by people based on millions of subjective reasons and whims. When you tax anything, you’re taxing whatever subjective reasons and whims people assign to whatever is being taxed. Are you suggesting that houses shouldn’t be taxed because people like houses for intangible things like how they look, smell, or “feel”?

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122 byomtov October 25, 2017 at 6:11 pm

When you tax anything, you’re taxing whatever subjective reasons and whims people assign to whatever is being taxed.

No.

You tax according to certain objective numbers.

If I earn the same income as you, and have the same deductions, exemptions, etc. we pay the same income tax. The fact that I might really enjoy my job, while you dislike yours, doesn’t enter into it. Nor should it.

123 John October 26, 2017 at 1:55 pm

A property tax is a tax on a house, regardless of the percentage of the tax. People may assign all sorts of different subjective whims and intangibles to their particular houses, and these whims and intangibles are taxed via the property tax.

124 Doug October 26, 2017 at 9:42 pm

Market value presumes two things, a willing buyer AND a willing seller. This proposal eliminates the second part, i.e. the willing seller, by forcing people to sell property that they do not want to sell.

125 John October 27, 2017 at 4:17 pm

It doesn’t force people to sell. If a particular asset, like a home, is more valuable to you than to the next bidder, then you will assess it at a higher price than the next bid. If it’s not more valuable, then you won’t assess it higher, and you’ll take the higher bid.

126 Doug October 27, 2017 at 7:33 pm

Please explain to me how this doesn’t force you to sell: “You have to sell your property for that same value, if someone bids for it, thereby lowering or eliminating the incentive to under-report true values.”

127 John October 27, 2017 at 10:43 pm

A wealth tax doesn’t force you to sell. It forces you to pay taxes on assets you own. If you want to hold a particular asset, you assess it higher than the next bid and pay a tax based on that assessment.

Tyler posted a more recent blogpost on wealth taxes here:

http://marginalrevolution.com/marginalrevolution/2017/10/thoughts-replacing-income-consumption-taxes-wealth-tax.html

If you want to continue this discussion, post your comments to the more recent post. Thanks.

128 Ken Arromdee October 24, 2017 at 6:37 pm

Perhaps a sexual market value tax. You are taxed on your value in the sexual marketplace. You get to self-assess, but anyone can pay that value and you are required to prostitute yourself with them (regardless of age, gender, what kinks they have, , etc.) If you don’t want your body sold, just don’t under-assess.

This is a bad idea, and I hope people can see why.

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129 byomtov October 26, 2017 at 3:08 pm

Great example, Ken.

Essentially, the people proposing the self-assessment are saying you should be taxed for not wanting to sell something you don’t want to sell.

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130 John October 24, 2017 at 8:21 pm

But your human capital and your personal plans are non-marketable, non-transferable assets that can’t be put in this bundle. So the incentive is to assemble highly idiosyncratic assets that no one else can quite fit together, and so no one else will wish to buy from you, and then you can announce a low valuation.

Yes, this incentivizes human capital formation, and that, believe it or not, is a good thing.

It doesn’t follow that incentivizing human capital formation results in people not wanting to purchase goods and services produced by said human capital. The asset tax replaces taxes on income, sales, capital gains generated by the human capital.

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131 John October 24, 2017 at 8:21 pm

The U.S. government’s total revenue is estimated to be $3.654 trillion for fiscal year 2018.

About 10 years ago, John Rutledge estimated the total value of assets of the US economy to be $188 trillion, or 13.4 times GDP.

Current U.S. GDP is $19.250 trillion. If we multiply that by 13.4, we get an estimate of $257.95 trillion for the total value of assets of the US economy.

This means that a wealth or asset tax of 1.4%, with no other taxes, would yield the US government’s total revenue for fiscal year 2018. In other words, all current taxes on income, sales, capital gains, payroll, estate, value added, excise, etc. could be eliminated and replaced with a single tax of 1.4% on assets.

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132 John October 24, 2017 at 9:08 pm

test

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133 John October 24, 2017 at 9:23 pm

The median NW of Americans is $68,828. This means the median American would be paying $963 in taxes under this system. So it would be immensely popular.

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134 John October 24, 2017 at 9:23 pm

“NW” here means net worth.

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135 John October 24, 2017 at 9:25 pm

The highest median NW for household by age is $194,226 for 65 to 69 year olds. All other households have lower median NW. This means the median 65 to 69 year old household would be paying $2,719.16 in taxes. That’s taxes in total under this asset tax regime. All the other median households in other age brackets would be paying even less since they have lower median NW.

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136 John October 24, 2017 at 8:32 pm

test

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137 liberalarts October 25, 2017 at 7:55 am

This has the whiff of Henry George. Of course, Henry George is always interesting and rarely practical. Essentially, it means that all property is rented at the opportunity cost of the short term price. Capital improvements would be discouraged. The idea might be better if instead of “owning” the property under these conditions, one entered into a 30 or 50 year ownership at the stated property value, locking in both the value for taxes (could be adjusted for inflation though) and the ownership of it for that long period. Thus, improvements and complementarities could be guaranteed for a good period of time.

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138 Plucky October 25, 2017 at 10:15 am

Other big problems:

– Transaction and search costs. This taxation system forces people to realize transaction costs even when there are no transactions. A rational person would incorporate the transaction cost into the price, and then get taxed on that value, forcing him to realize a piece of that transaction. Similarly with property whose replacement requires search and acquisition costs. As rational person would incorporate those into the self-valuation, and then be taxed on costs that were not incurred

– Fraud. Along with every property listing would have to come some sort of description. A very simple way to avoid a tax on something valuable that one wished to keep would be to misrepresent what it is or its condition. Example: Someone buys a decrepit classic car for $20k and then restored it to excellent condition that would sell for $100k. He wishes to keep the car but not pay taxes on the improved value, so he reports that it is still in crappy condition, self-reports the value as $40k, and if asked about it claims the increase is due to emotional attachment. This would be nearly impossible to police ex ante. It would require systematic auditing of everyone’s personal property, which would be both totalitarian and preposterously expensive.

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139 Anthony Park October 25, 2017 at 10:36 pm

You could reverse the onus and apply to asset taxation. For example, the valuation by government is also an offer to buy the asset. So, if the government wants to tax say a property at 2.5% and gain $5000 revenue, they must be willing to pay $200,000 for the asset if the owner asks. If they start to overvalue assets, presumably some owners will take profit, thus providing a disincentive to over-tax assets.

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