Month: October 2017

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.

That is a reader request.  I used to think the ideal tax rate on corporations should be zero, but that is no longer my view.  For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income.  Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.

Furthermore, tax-exempt institutions such as non-profits and pension fund would end up owning too many corporations, to the detriment of (non-tax) efficiency.  While pension funds eventually must pay out that income in the form of pensions, those often go to high-wealth, low income elderly individuals, and thus would never end up taxed at such a high rate.

I now think that for the United States the tax rate on corporate income should be in the range of 18-25 percent, depending of course on what other decisions we make with our budget and tax systems.  It also would work to simply target the OECD average of the corporate rate.

A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation.  That depends how easy it might be to partially evade the consumption tax, say by spending money abroad.  In general, to the extent evasion is possible that favors lower marginal tax rates but levied on a greater number of distinct points in the system, including in this case on the corporate veil.

I thank Megan McArdle for a useful conversation related to these points.