Tax price, not value
Property rights are primarily rights to exclude. If I “own” something, what that means is that it is legitimate for me to exclude others who may wish to use or consume it.
Exclusion, very obviously, carries externalities. My choice to exclude alternate uses of a resource affects those who might have benefited from those uses. By convention, we don’t usually refer to the effects of the exclusion at the core of a property right as an “externality”. One could argue, as is often argued of so-called “pecuniary externalities“, that the effect of property rights on alternative users is the sort of externality that should not be discouraged — because undoing the externality would amount to a mere redistribution rather than a welfare gain, or because the operation of the externality is part and parcel of the process by which the market system functions. But, as with pecuniary externalities, there are devils in details.
The social cost of the excluding alternative uses varies dramatically between resources. A Ferrari, for example, may be a costly and valuable resource, but it is plausible to claim that its owner’s exclusive control does not subject potential alternative users to real deprivation. On the other hand, the exclusive right to commercialize a potentially lifesaving medicine may impose huge costs on potential users deprived of access because a patent owner has chosen not to make a drug available where they live, or has chosen to set an inaccessible price. The new urbanists (Yglesias / Avent / Glaeser ) frequently argue that homeowners’ ability to exclude alternative uses of their neighborhoods (a kind of tacit property right) imposes very large social and economic costs by preventing higher-density alternative use of uniquely situated real estate.
I presume that most ordinary property rights don’t burden alternative users so much as to merit policy intervention. It is wise to simply tolerate very small externalities and address their consequences collectively, rather than create annoyances and transaction costs by trying to impose fine-grained discipline. We don’t tax humans for eating beans, despite the fact that methane is a powerful greenhouse gas.
But for some classes of property, most notably patents and real estate, a tax on the externalities of exclusion might be very sensible. You can frame it as a Pigouvian tax, or alternatively as a kind of user fee that compensates the state for its enforcement of a right to exclude despite external harms. But on what basis should such a tax be collected?
Usually property or wealth taxes are levied against the “market value” of an asset, with the scare quotes particularly appropriate. When property taxes are assessed against real property, some appraisal or estimation has to be made of what is often an entirely hypothetical value. Assessment procedures are vigorously contested and frequently reflect social and political concerns unrelated to the question of what a property “would” sell for. Patents are extraordinarily specialized and illiquid assets. Any bureaucratic value assessment would be a farce.
There is, of course, a much easier way to gauge what a property would sell for: Solicit from its owner a price.
The price at which an owner would be willing to sell a thing has a particularly valuable characteristic. It limits the burden to alternative users of the exclusion in a property right. If the price is set low, a user harmed by exclusion can simply purchase the thing and have at. If the price is set high, alternative users may be seriously burdened yet be unable to buy access.
So, for the sorts of exclusion that do impose substantial burdens to alternative users, a natural policy intervention would be to require property owners to declare a price at which they commit to sell the property (for some period of time), and levy a tax of some legislatively determined percentage against that actual, actionable price, rather than a hypothetical market value. Property owners could pay as much or as little tax as they choose. When they set their price, they face a trade-off, between the risk of being undercompensated for losing the asset if the price is too low, and an exaggerated tax burden if they set a price so high that the risk of sale is negligible or the required overcompensation extreme. The owner is free to choose how much she values certainty of continued ownership, but she must pay for that.
The price set by the property owner might constitute an option to buy for all comers, or just for the state. (I’m not sure which would be best. What do you think?)
This sounds very dry and complicated, but ultimately it’s a simple and natural scheme. Suppose that a drug company invents a cure for a rare tropical disease that could cure thousands in the developing world but only hundreds domestically. It might well be the case that the profit-maximizing commercialization strategy would be to make the drug available at a very high price domestically, but not sell it cheaply in poor countries, to prevent reimportation from cannibalizing sales. As long as the tax rate is material, the drug company would try to set its price no higher than the discounted value of domestic profits, less the discounted cost of the new tax. However, since the social value of the drug if the patent were not used to exclude is much higher than that market value of the profits, governments and nonprofits could pool funds to buyout the patent. In theory, this can happen already — governments and nonprofits could band together and negotiate with drug companies to buy out patents. But the coordination costs of that are very high, and once interest has been signalled the patent owner has every incentive to hold out for a price very near the drug’s social value, which is much higher than the market value it would otherwise have realized. A tax on enforcement of exclusion would force all patent holders to decide a value and precommit to a price without the negotiating advantage of knowing they have a captive buyer. Of course, if a company thinks a public-interest buyout is very likely, it might set its price high in hopes of earning a windfall gain from a sale. But there are limits to that strategy unless a swift buyout is certain. The cost in overpayment of taxes and the risk that a buyout won’t actually happen increases with the level at which the price is set.
Firms will set a dear price on patents with such high and unique social value that a prompt buyout is inevitable. But as long those patents are genuinely for new, nonobvious inventions — admittedly a weak point! — that’s arguably a feature, as the scheme creates incentives that don’t now exist for firms to develop goods with high social value but low market value. At present, there is no functioning market in public-interest sales of patents. Instead, firms understandably avoid high-social-value, low-market-value projects. Given the negotiating realities and political perceptions surrounding licensing or sale of patent rights to the public sector, the prospect of a high payout is offset by risks of outright expropriation and public relations catastrophes.
Urban property is another domain where the externalities associated with enforcing exclusive property rights are arguably very large. Suppose a developer or a city government believes that a neighborhood is horrifically underutilized, and wants to redevelop it at high density. Under this proposal, every parcel in the neighborhood would have a prearranged price. The developer (with or without a requirement of political buy-in) could plan to buy the lots she needs and those of near-neighbors with effective veto power, and then do with them what she will. As with patentholders, for most homeowners the best strategy would be to set the price at the actual value that would compensate them for the loss of the house and the trouble and heartache of eviction from their home (which might be a lot!), less the discounted cost of expected taxes. As with patents, some homeowners might strategically try to set very high prices in hopes of a windfall buyout, but again, that’s a costly and self-limiting strategy, unlikely succeed except in very rare cases where some parcel is so unique that alternative development plans that exclude it cannot compete. A real problem here is that this scheme would disadvantage property owners so cash poor they cannot afford any substantial taxation, who might set prices below what would actually compensate for the loss of property. But then these property owners have a hard time paying existing property taxes too. That devil would live in the detail of arranging the actual tax burden.
Just what should the tax rate on stated price be? Should it be a flat or progressive? I don’t know. Maybe some clever modeling can be done to try to elucidate the issues. Qualitatively things are pretty clear: the higher the tax rate, the more costly it will be to enjoy the rights of exclusion that come with property ownership. That’s already true with any sort of property tax. This new sort of property tax simply gives the owner the right to pay the tax in cash or in risk of being forced into a sale. A low tax rate, especially the status quo zero tax rate for patents, is very comfortable for property holders. It encourages people to set an infinite “sticker price” and so force potential buyers to reveal themselves as needful in bespoke negotiations. A high tax rate would be less comfortable. Owners would be forced to either pay up for the right to exclude or bear real risk that their property will be bought-out for a higher value use. In each domain — patents, real estate, whatever — legislators (or city councilpersons) would have to balance the social benefits associated with certain and inexpensively maintained property ownership, the social costs of excluding high-value alternative uses, and of course revenue requirements.
There are more radical, arguably better, solutions to problems created by socially costly exclusive use of real or intellectual property. But within the confines of incremental, neolibbish ideas, I think this one merits some consideration.
This proposal owes something to a recent conversation with Leigh Caldwell (@leighblue), the king of prices. The good ideas are his. The crappy ones are mine.
Update History:
- 9-Jan-2014, 5:10 a.m. EST: Cleaned up a bunch of awkward sentences in this particularly awkwardly written piece. No substantive changes, but I didn’t track the small edits.
I really think this is a terrible idea…
This would impose huge costs on any home owner. How could someone gauge the replacement cost of his home without looking at the cost of similar properties and continuously updating his reserve price? You seem to assume that such values would be fairly constant, but that’s a terrible assumption… Let’s imagine you’d extend such scheme to the stock market. People would need to continuously update the price at which they are willing to transact… There is a term for a person who is forced to show a price all the time: it’s a market maker. Such position usually comes with perks to compensate the person that takes on the liability of always showing a price… And even official market makers are not obliged to show prices continuously… They can usually refuse to show a price before economic announcements.
January 9th, 2014 at 3:55 am PST
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This is a brilliant idea.
I can’t quite agree with acarraro about the burdens of market making on patent holders–maybe for property owners, but since a price would most reasonably be set annually for the annual calculation of tax, it doesn’t seem so burdensome.
You ask if the option should apply to all comers or just the state. It seems to me that the option should not apply to the state at all because of the danger of collusion between owners and corrupt officials to sell for inflated prices. If the system were functioning smoothly, sales would be frequent, oversight would necessarily be spotty or complex, the potential for pre-arranged sales would be great.
If you remove the state as a purchaser of patents, it scuttles the benefit you describe in terms of encouraging high-social-value, low-profit inventions. On the other hand, the patent system is so broken that, especially from tech companies, you might get considerable support for this idea as it would transfer the mechanism of patent protection from the legal system to the market. Totally brilliant and defensible on strong conservative principles!
With property, on the other hand, I sort of agree with acarraro, not because of the burden on owners of determining a reasonable market price. That’s probably not so hard. But a market price for a home is based on the assumption that the owner wants to sell. If my kids are in a good school and my family is good friends with the neighborhood and our house is perfect for us for a variety of reasons, an acceptable selling price could be an order of magnitude or more above any plausible market value. I have no problem with my devotion to my neighborhood costing me a higher tax than it costs my less devoted neighbor, but if it costs me ten times as much… Maybe in the case of primary residences the tax should actually be regressive. This issue doesn’t apply to investment property.
If you can get around the unfairness for devoted residents issue, implementing this scheme for real estate might be quite doable since property taxes are assessed locally, so all it would take is a single, enlightened municipality willing to try the experiment, and if it worked, the idea would spread.
January 9th, 2014 at 5:16 am PST
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Brilliant idea.
I’d argue that the offer price is for all comers, with gov’t being there so that the auction has at least one participant (in theory, gov’t shouldn’t care whether it’s a private enterprise that buys it or someone else, as if it’s private, they will have to put it on offer next time).
This would also solve the general property tax problem where you have to “value” every time. It has incentives boh ways – you don’t want it undevalued, but putting too high a price means you get hit by tax. I’d argue for a progressive tax, but with maybe only two bands (extempt, for houses that fall under social housing, and the rest) – but that could be also done as a tax rebate to social cases so maybe single band would work too.
as for point accarro makes, market makers do it continuously. There’s no such need for this, it could be easily annual or longer.
The option then would work that if someone makes an offer at the price, you have a right to revalue, but any revaluation will be immediately effective for taxes and similarly binding.
That means you don’t have to continually revalue. (and to an extent, people already do it, there’s nothing stopping you from knocking on someone’s door with an offer for their house…)
Of course, you could get neighbors (competitors) to bid your property just to get you a higher tax, so any offer (that would cause resetting the price) would have to be binding too.
January 9th, 2014 at 5:40 am PST
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I’m sure I’ve seen this idea before but I can’t quite remember where. Some old Heinlein story maybe? Where did you hear about it? Or did you come up with it independently?
January 9th, 2014 at 8:19 am PST
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On a basic level, this idea is brilliant, because it solves a bunch of important economic problems while raising revenue, but acarraco is also correct that it is also terrible. It also creates radical price transparency, which is an interesting effect that could go either way, and radical asset transparency, which also can go either way.
The problem is that you don’t know what price would trigger a sale.
First, this imposes calculation costs, as acarraco says: You need to continuously assess what the market price would be on any given asset, to avoid imposing costs or selling too cheap. This is expensive in time, effort and worry, especially for regular people.
What you are taxing, often, will in effect be willingness to accept the risk that someone actually buys the asset. Thus, if you have an asset you don’t want to lose, because your switching costs are high or you have other sunk costs, the price you protect must be very high. When I buy a house, I do things to make it my own that increase its value to me, and that ramp up the cost of having to move. Moving sucks even when you rent, it sucks a lot more when you buy, and if it might not be easy to find a similar place nearby, it can suck quite a lot. There will be a ton of pressure on a regular family to set a radically high price – if your house is worth (you think) $200k, and you price it at only $250k, then if someone happens to like the house, perhaps someone who you very much don’t want to have it (your ex?) then you’re running a big risk. Meanwhile, you impose a huge worry cost that anyone, anytime might have to move: One of the biggest things you buy when you buy a house is the peace of mind that this will not happen. Whereas, if you’re a rental company, you can set the price at $220k with no worries.
In general, it is a huge problem in life that if you invest sunk costs to create value, anyone with the power to destroy what you’ve built can tax you for (almost) all of the created value…
It also very much encourages poison pills of various kinds, credible threats and so on.
This then has to be weighed against the situation where you really should be selling (the patent, the house, the lease, the you name it) and this reveals and enables that.
My guess is that this burden is worthwhile in special cases, but not in the general case. Thus, you don’t want every homeowner forced to deal with this every year. One possibility would be that you can choose to accept assessed value until such time as someone makes an offer at that value plus X%, at which point you can either sell or protect at a higher level which then binds you to sell. If you think the asset price is too high and are willing to accept selling at a lower price, you can name a lower price at any time.
January 9th, 2014 at 9:25 am PST
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As Lawrence D’Anna mentions, much the same idea appeared in a Heinlein story. (I forget which one. One of the later ones.)
One interesting variation that Heinlein suggests: If someone offers you your standing price, you are not required to accept; instead, you can enter into bidding for your own property, and if you push the price up to where the buyer drops out, you can keep the property—but you have to go back and pay three year’s back taxes at the new standing price.
That variation seems reasonable for, let’s say, a single family home, where the resident owner shouldn’t have to think every day about the market value of his house versus the costs and disruptions of having to move. Perhaps less so for a patent for a life-saving drug.
January 9th, 2014 at 10:13 am PST
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The Heinlein story was The Number of the Beast, but I’m pretty sure the idea wasn’t original to him. In fact, I have a vague recollection that the scheme was at one time used to value archaeological artifacts for tax purposes, but I haven’t been able to find a source.
Anyhow, the system might be workable for assets whose value is primarily the revenue stream that they are expected to generate, but it’s a pretty terrible idea for residential real estate or any other asset with a high switching cost. Essentially you’re suggesting that owner-occupiers should pay tax not just on the value of their property, but also on whatever value they place on not being forced to move (this is true even with Heinlein’s three-year back-payment exception). To look at it another way, for any given property an owner-occupier would have to pay a higher tax than an owner-lessor would. Why in the world would we consider that a desirable feature?
Speaking of leases, how would that work? Presumably the new owner would be required to honor any leases or easements granted by the old owner, so what is to stop an owner-occupier from purchasing his property through a holding company and giving himself a long-term lease at below-market rates (such schemes can be elaborated to whatever level of complexity is required to get past any rules against sham contracts). More generally, anything the owner can do to impair the perceived value of the property to others without damaging it for himself can be used to game the system.
And what rights do prospective buyers under the rule have? Can a real estate speculator demand to inspect any property he is thinking about exercising the option on? If not, then is he protected by some sort of lemon law? What about fraud? Say I get a bunch of construction permits for improvements I never make, suggesting that the property is more upgraded than it really is. Would that be actionable?
Given a choice between going down all those rabbit holes and just having a reasonably impartial assessor appraise the property for tax purposes, the assessor looks like a better deal.
January 9th, 2014 at 11:58 am PST
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Something similar has been tried. In ancient Athens, the richest x citizens each had to finance a triereme (naval galley). If, say, Cleon, was asked to do so but thought Alcibiades was richer, Cleon could challenge Alcibiades: “either pay for the triereme, or swap property with me.”
January 9th, 2014 at 12:00 pm PST
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Speaking as the owner of a small software startup, I would definitely not want this with regards to patents. I have very limited capital, but IP that might be worth a lot in a few years, potentially with exponential growth. If I price for expected value, I can’t pay taxes, because I have no way of converting that expected value into short term cash. So it gives a huge amount of negotiating leverage to anyone I’m trying to get capital from, because they can always buy my IP from me at bargain rates if I set the price low, or wait me out as I die under a tax burden if I set it high.
In general, I think this scheme, no matter how the tax rates are set, is going to be a massive transfer of power to capital holders at the expense of small players….
January 9th, 2014 at 1:01 pm PST
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It is doomed w.r.t. real estate because it ignores the fundamental properties of ownership that drive society. In particular, the idea that I can buy something once, pay for it once, and own it forever.
Your scheme in effect says there is no ownership, just various complicated forms of “leasing”.
That might be true in some theory sense, but it’s a non-starter in a political sense.
And there are all sorts of backfire mechanisms. I discover that my neighbor really likes his house, and he’s quite rich. Any redevelopment requires his lot as well as mine. I spend all contact with him making sure he’s utterly paranoid about losing his house, so he sets a very high price and pays a very high tax. I set a fairly low price. For many purposes I’ve now snookered my neighbor into paying for my rights of exclusion.
Or, a group of neighbors set their prices low. The developer buys them out and does his project, but also pretty much sets his prices low. Too low. The neighbors buy him back out. Developer has now been badly skinned. Tax rates are now much too low so government has been badly skinned.
Backfire three – everybody in the nice neighborhood sets terribly high prices. All new comers pay only these terribly high prices. “Utilization” (density) is kept forcibly low forever by in effect a cabal of high tax payers who are still excluding the resource.
You (SRW) really need to accept the actual nature of ownership as it functions in real human society, and understand that clothing, cars, and real estate, are quite different from patents.
January 9th, 2014 at 1:57 pm PST
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I wonder whether the whole idea of Pharma patents is so messed up that it might be better to simply replace the Pharma patent system with prizes. So really big prizes would get awarded to drug developers once clinical trials had shown the efficacy of the drug and the prize would be based on the health benefits and paid for by an international consortium of health service providers.
Then new drugs would be produced and marketed just like generic drugs are today and the price would be a commodity price that would trend by competition to the production cost.
Pharma companies now spend as much on marketing as on research and development. That would still be the case if they were taxed on the value of the patents.
Often research is not best done by those companies that are best at getting lots of drugs sold. Using prizes not patents would separate developing drugs off from that and allow drug research to be done by those who were best purely at drug research.
January 9th, 2014 at 5:23 pm PST
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I vaguely remember a time when the Italian government either closed, or seriously impaired the value of, a number of small to medium Italian businesses. So they said they would pay fair compensation to the owners.
What they saw as “fair” was a multiple of the profits that these businesses had reported to the tax agency. I saw it (and still do) as pure, distilled poetic justice.
January 9th, 2014 at 8:38 pm PST
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The idea of doing valuation based on an actionable counterparty offer or bid price is sometimes used for the settlement of OTC derivatives contracts and works very well. I like it.
For real estate, I think rpl gives the best critique, so I’ll start from there…
“Essentially you’re suggesting that owner-occupiers should pay tax not just on the value of their property, but also on whatever value they place on not being forced to move”
That was my first thought too. I think the answer is to set the buyout price 20% or so above the owner’s valuation for owner occupied residences. That should be enough to cover the owner’s consumption surplus.
“what is to stop an owner-occupier from purchasing his property through a holding company and giving himself a long-term lease at below-market rates”
You’d have to void a lease on sale. Long term leases would be negotiated to include compensation to the tenant in case of early termination by the landlord (sometimes included in commercial leases anyways to permit sale of the building).
“Can a real estate speculator demand to inspect any property”
Seems like the only way to solve the “lemon” problem or prevent the owner from damaging the exterior to lower the chance of a buyout. Maybe we could let people choose between Steve’s proposal and a traditional, but much more expensive valuation? So long as people enter into the alternative arrangement under a voluntary contract with the municipality, there is no longer any civil liberties issues, so we could freely (contractually) restrict long term leases and guarantee the right of inspection by interested speculators (maybe they would have to pay a fee to the owner). There are essentially no property rights that you cannot surrender via contract.
OTOH, I’m not sure that any of this is a particularly good idea, as total property value is a lousy basis for taxation. But it does seem to provide a workable market basis for tax valuation.
January 9th, 2014 at 9:03 pm PST
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Steve,
A hammer is a rival good. If I am using it, you can’t be using it too. So if I make a hammer, does that mean I should be taxed on the value? I accept your premise for land because its value is not a product of labour, but the tax on the house is no more justified than a tax on my hammer. Being a rival good (or exclusive as you say) is not a justification for taxation either on moral or efficiency grounds.
January 9th, 2014 at 11:23 pm PST
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When it comes to real estate, your idea could be a good way to put a stop to the unfortunate phenomenon where prime residential property gets bought in London by people who rarely even visit and simply hold it as a store of value. On the other hand, even though in general I think the basis of all taxation could best be on asset values, I actually have some sympathy for people who want to stay put in “their” area. I struggle with the idea that land value is not a human construct. Canary Warf financial district in London is now ultra valuable land. In the early 1980s I visited a relative who lived on Canary Warf at the time. It was then a post-industrial wasteland of abandoned warehouses. He lived and worked there because his rent was next to nothing. The transformation of the value of that land was 100% down to human efforts to organize and build a financial district that came to rival the land value of the City of London.
Perhaps the answer is not to try and displace people who currently live in prime areas (say Manhattan) but instead to turn say central Detroit into a new Manhattan.
If the aim of taxation were not so much to uproot people but simply to get a “fair” (whatever that means) asset tax then, if the value were disputed, I think it would be reasonable to have a public auction of the asset where the current owner would not need to stump up the purchase price but would simply bid on the basis of what taxable value she was willing to pay the tax on. Perhaps there could even be a system whereby people could transfer home equity over to the state in lieu of the tax and yet stay in their homes perhaps ending up paying rent to the state. But of course that is all from the perspective that people should be helped to stay put whilst the premise of the post is that people should be uprooted if they are not those who put the most value on that location.
January 10th, 2014 at 3:56 am PST
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January 10th, 2014 at 5:07 am PST
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Discussing how it would work or not work for real estate is little point in, in my opinion. It all depends on just how much the asset was taxed. Assign a personal value to a house at triple its market value won’t be a problem if it’s taxed pennies anyway.
But where this scheme really shines is for patents and maybe even copyrights. There’s no sentimental value there, they only have value as a revenue stream, which means governments can risk taxing them quite a bit more, enough to gain a big socially beneficial effect. It’s also fair, as
1. Far more people are deprived of the good when it’s non-rivalrous, so it’s more costly to society. What society loses out on with a house, is the best use the best alternative owner could make of it. What it loses out on with non-rivalrous goods is the SUM of all other uses.
2. Enforcement of these exclusive rights is a far bigger burden on society than enforcing the exclusivity of houses.
In line with point 1, buyouts of patents and copyrights should be to the public domain only. Just transferring exclusive ownership to someone else can’t be justified.
The buyout option doesn’t have to be limited to government. Although that may seem natural for a public good, if enough private citizens can get together to buy out I say let them.
January 10th, 2014 at 7:06 am PST
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If the whole hope is that Pharma patents will be bought out by health care providers/government/charities, then it seems to me that it would just be better to replace patents with prizes. Like Harald @17 says, it would be just as bad to have a new for profit owner of the patent as having the previous owner. Things only improve if the patent gets ripped up and anyone is free to make the drug.
The worst of all possible worlds would be to have the patent remaining in exclusive ownership AND the Pharma company crippled by high tax payments that made developing future drugs unaffordable/pointless. Is a possible danger (of the idea as proposed in the post) that the most important people in Pharma would become those that set the patent prices. Whether companies succeeded or failed would be down to them. That seems capricious to me.
We want new drugs developed but once they are developed, we want anyone to be able to use them at the production cost not the development cost. It is a tragedy that some people who could benefit from medicines don’t get them even though it doesn’t help anyone by having those people left untreated.
January 10th, 2014 at 8:58 am PST
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January 10th, 2014 at 9:42 am PST
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On the IP front, the prize system can only solve a subset of problems, i.e. the ones where there is a large, well-defined public problem. Patent protections may still be required where the innovation is unanticipated or provides benefits we didn’t even know we needed. Then something like Steve’s solution might be useful.
A big benefit is that it seriously discourages purely obstructive patents. If you can’t make constructive use of the patent, it would become very costly to pay the fees for a high patent valuation. This would become acutely painful especially for patent trolls who hold large patent portfolios in the hope gaining opportunistic advantage from a small subset.
I think it’s easiest to think of the inventor setting the level of rent he/she expects to earn from the patent and then set the fee at some fraction (e.g. 1/2) of that rent. I.e. the inventor shares half the expected benefit with the public. To buy the patent, the public (or some third party) would have to pay the full rent to the inventor. This is much like my proposal above for setting the buyout value of the house 20% above the owner’s valuation. To address Josh’s concern, above, we could set the fee at zero for some initial period of the patent, or just start it low and scale it up according to some exponential schedule (Josh expects exponential growth from his IP).
Josh,
In my experience it is tech start ups who overwhelmingly end up on the paying end of IP infringement suits. If somebody wants your patents they are far more likely to get them by threatening to sue over some of their thousands of patents, some of which you are undoubtedly in violation of. Of course, you haven’t even checked because checking is impossibly expensive and besides, exposes you to treble damages (not that you are going to be able to sustain a legal fight that would even last to the point of court assessed damages, given your limited capital). I’m not saying your patents aren’t valuable. But mostly they are a defensive asset, and on the balance small firms are at extraordinary disadvantage in the current system, compared to a system with less protection for IP rights.
January 10th, 2014 at 11:08 am PST
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K@20, I agree that a prize system would probably only be applicable to Pharma patents. Medicines are very different from consumer goods say. You don’t want companies to enlarge the market for a medicine and sell it to people who don’t need it. BUT with consumer goods, persuading people to have smart phones or whatever is all part of the game. Steve’s idea might make more a lot more sense with non-Pharma patents.
January 10th, 2014 at 11:52 am PST
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It’s too bad that, when well-connected property owners get a property assessment that’s a fraction of the market value, for property-tax purposes, someone can’t come in and buy him out at that price.
January 10th, 2014 at 7:41 pm PST
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People get very attached to their houses. As a result, forced sales should occur at three times the value of a house. Arguably we would like for the government to be able to force sales at the normal price for public use.
January 10th, 2014 at 11:20 pm PST
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Summing up my impression on the patent issue:
Good points about patents:
1) They encourage invention.
2) They encourage investment in getting widespread dissemination of the invention.
Bad points:
3) patent trolls
4) Overpricing of patented products.
These factors have very different importance with medicines and with non-essential goods. With medicines, point2 is a non-issue. A good cheap medicine will be adopted immediately across the world with no marketing. Any attempt to foist overuse of a medicine is counterproductive from a health perspective anyway. Point4 is a calamity with medicines. It means that Pharma companies are obliged (as their legal duty to shareholders) to price medicines at the price where the benefit is just balanced by the cost rationing damage imposed by paying for it. A cure for blindness must be priced such that some other cure/prevention will be foregone in order to pay for it such that just as many people go blind.
Steve’s proposal might erode point1, improve point2, cure point3, not improve point4 unless patents were bought out by popular campaigns.
For non-essential goods, Steve’s idea seems great to me because point2 is important and so is point3 whilst point4 isn’t such a big deal.
For medicines, Steve’s idea seems to me to be much less good than a prize system and Steve’s idea would only have a happy outcome if it degenerated into being a prize system due to popular campaigns buying out patents such that medicine developers got a one off prize not a patent. That’s because with medicines, the crucial points are 1 and 4, whilst point 2 is counterproductive and 3 isn’t so much of an issue.
January 11th, 2014 at 5:29 am PST
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To me the whole issue of Pharma patents is shown most starkly by the Avastin/Lucentis controversy:
http://www.washingtonpost.com/business/economy/an-effective-eye-drug-is-available-for-50-but-many-doctors-choose-a-2000-alternative/2013/12/07/1a96628e-55e7-11e3-8304-caf30787c0a9_story.html?hpid=z1
The same medicine is marketed alternatively as a cancer treatment or as a treatment to prevent blindness. In each case the pricing follows the normal rule of charging so much that it is at the borderline of being unjustifiably expensive. That is the only way for Pharma companies to get enough money to continue to discover new medicines and pay dividends etc. BUT in this case the peculiar fact is that as a cancer treatment it doesn’t work very well and needs big doses whilst the blindness treatment works fantastically well and only needs small doses, so the prices are set totally different in each case with the same molecule. People are up in arms about the injustice of it all BUT to me the fact that they are the same thing is beside the point. It is just like different software costs different amounts even though it all costs the same trivial amount to duplicate a software file. The whole cost is the development cost- the production cost is trivial. The issue is how we pay for development costs.
January 11th, 2014 at 8:34 am PST
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It’s fine, great even, under these conditions:
1. The buyer has to be private and they have to have the cash proven sitting in escrow.
2. The price needs to stand for 1 year or less. I’d much rather hear that you were going to encourage quarterly or monthly pricing and tax payments.
3. You can no longer print money willy nilly, you’d want to use a low level target, like 3% NGDPLT.
4. Maybe again #2 and #3, instead when someone offers to BUY over your price, you can cut a new tax check to the government.
The point on 1-4, is that we want to use the greed of potential buyers to get a real price, the “do no harm” provision here is to not let buyer and government be able to collude EVER. Thats why government can never buy.
This would be the primary from of government revenue.
Meaning, you’d have to cancel everything out, start here with the intention of maximizing revenue from land and patents, and then let prices settle.
We’d want to be able to point to Malibu and say we’re setting revenue targets that assume Malibu / Marin is becoming South Beach and Washington DC is going vertical too.
And then when everyone understands the kind of taxes we are going to extract from Malibu land, they can set prices and try to pay billions in taxes while they hold out and negotiate a sale.
All in all good, but you ought to run this stuff thru a conservative filter, one thats most concerned about government collusion, and growth of government.
It doesn’t hurt your proposal… geo-libertarians have this stuff all figured out.
One last note: I think you weaken your argument by letting patents get near land. ANYTHING that can be copied, cannot be owned. The copier owns the atoms, and we’re not the business of chasing down people’s use of atoms, they own them.
Imagine a chemistry set / makerbot that is in your home, if you want to pirate bay some 3d design, or make some drug someone else invented, well NOTHING is worth trying to stop that.
Land is zero sum, patents, you control those by going after people PROFITING off the copies. If you make the drug and sell it, that’s a pot of money to go after to pay for government. But if you make a copy for your own use, and there is no profit, well too bad for IP, we don’t have taxes to pay government to stop that.
January 11th, 2014 at 8:43 pm PST
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Morgan Warstler@26, I can’t help thinking that land perhaps isn’t all that special and that much land value is more a function of human endeavor rather than a value that was conferred by geology. Land values in Flint Michigan are negative aren’t they whilst land values in Manhattan are sky high. Three hundred years ago, the Native Americans living where Flint now exists would have been non-pulsed at the idea that they were on supposedly doomed land wouldn’t they? Canary Warf in London now rivals the City of London but it was a post industrial wasteland in 1980. Dubai and Singapore are other examples of ultra expensive land that basically were nothing special until quite recently. You say that land can’t be copied, but the attributes that turn land from being worthless into being ultra valuable can be copied. Canary Warf is a copy of the City of London financial district. It is hard to copy a thriving metropolitan district BUT it is hard to copy any immensely valuable asset – it would be equally hard to say copy the car maker Toyota.
It seems to me that financial power held in the form of financial assets holds just as much sway in deciding what can and can not be done as does land ownership. Flint Michigan perhaps has worthless land because those who hold financial assets have made the choices they have. I don’t think that unemployment and underemployment come largely from restricted access to land. To my mind it is more from restricted access to financial power. To my mind it is overall financial power that needs to be the sole source of taxation – so just a uniform asset tax.
About Pharma patents- you say that not-for-profit copies of medicines are fine. We would then have all medicines copied by not-for-profit organizations. In the UK essentially all health care provision is not-for-profit. Both the state (NHS) system AND the predominant private system (Bupa) here are not-for-profit. I guess they would readily turn to manufacture of currently patent protected medicines if that was given the go ahead. Then no money would be available for discovery and development of new drugs by the Pharma industry. I do think our current pharma patent system sucks but we need to be careful to get a better system -not just break it even more.
January 12th, 2014 at 4:11 am PST
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Ouch! You’re giving me a headache here…but I had to say that I enjoy your discussions and especially the interaction with other blogs whom I have read. Good context. Thanks!
January 12th, 2014 at 12:13 pm PST
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Stone,
Of course land value is produced by human activities! That’s not the point. The point is that it is *other* people’s activities that raise the value of my land (it’s a positive externality that I receive). The part I contribute myself is the improvement which should never be taxed. Taxing the land value (unlike the improvements) can’t effect the supply or how the land is used so land rents should be taxed as close as practically possible to 100%. If you tax improvements you discourage investment which is detrimental to output, especially in the long run.
As Morgan says, geolibertarians have this stuff figured out which is because Smith, Ricardo and George had this stuff figured out.
January 13th, 2014 at 12:42 pm PST
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K@29, I’ve tried my best to understand that argument. I guess the classic quote from Smith is:
“Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon
ground-rents would not raise the rents of houses. It would fall altogether upon the owner of
the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be
got for the use of his ground. More or less can be got for it according as the competitors
happen to be richer or poorer, or can afford to gratify their fancy for a particular spot of
ground at a greater or smaller expense. In every country the greatest number of rich
competitors is in the capital, and it is there accordingly that the highest ground-rents are
always to be found. As the wealth of those competitors would in no respect be increased by
a tax upon ground-rents, they would not probably be disposed to pay more for the use of
the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the
ground, would be of little importance. The more the inhabitant was obliged to pay for the
tax, the less he would incline to pay for the ground, so that the final payment of the tax
would fall altogether upon the owner of the ground-rent.”
BUT as far as I can see, the argument can just as well be applied to beneficial ownership of any form of pre-existing asset. If I buy stock, the benefits that I may subsequently gather from being the owner are entirely down to other peoples’ activities just as much as if I buy land. If I have wealth I have to do something with it. Taxing it will simply mean that I will try even harder to ensure that it is put to good use so as to gather the funds to pay the tax with. By contrast, creating new wealth by innovation/investment is taxed by capital gains tax which seems to me much less conducive to encouraging development than instead continuously taxing wealth.
Ironically, land owners do actually typically play a greater role in creating the “ground rent value” of the land that they own than stock holders or bond holders do in determining the value of those assets. People often lobby to ensure that the surrounding land is put to uses/developed/restricted in ways conducive to increasing the value of their land. Furthermore, I think it is impossible to disentangle the “unimproved value” of land from the “improved value”. The example I gave of Canary Warf in London shows how once worthless land can be turned into an ultra-prime location. Most of that land was owned by a few key developers. Saying that the creation of that value was a “positive externality” that they gained as a free ride seems completely wrong to me. They built almost all of that ground rent value themselves from nothing just like Toyota or Apple etc or got built. Today do we say that the “unimproved land value” is the value of a hypothetical vacant lot in Canary Warf (so a huge value) or the value of an equivalent plot of post-industrial wasteland elsewhere in South East England just as it was back in 1981 (so a much much smaller value)? Obviously the state plays a massive role in ensuring that property of all kinds gets and keeps its value but that is just as true for Toyota and Apple as for Canary Warf.
January 13th, 2014 at 2:34 pm PST
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Stone,
So long as you credibly commit to not taxing future assets your proposal is fine. It has the same effect as any other random lump-sum tax. But if you put in place a general wealth tax you discourage the creation of future wealth. The effect can be big, at least in theory.
As for your argument that land owners create their own land value, I think it’s rarely true. The typical developer or home owner in a city has essentially zero impact on the ground value of her land. Second, I don’t see how it matters. Why should the land owner have a moral claim to a greater profit from their investment than they would have if equivalent land was in unlimited supply? Returns are supposed to result from the addition of marginal product, not from the monopolization of finite resources.
At best, I think you have an argument for not collecting the land tax across marginal land. I.e., if there is low value land between the City and Canary Warf, land value tax should be collected and spent by two separate fiscal authorities. That way the Canary Warf land owners get to decide who is entitled to what benefits (as a result of their relative contributions to the land value, or whatever).
In principle, all rents should be taxed at 100%. In most cases, though, it is quite impossible to decide which profits are compensation for probability of loss, and which ones result from market failure. Furthermore, non-land capital is generally quite mobile and can often be parked in low-tax jurisdictions. Efficiently taxing capital therefore requires a global approach. The result is the current race to the bottom in global corporate tax rates. It seems to me you are better off taxing land value and using the law to try to eliminate other monopolies where possible, though I have no problem with efforts to harmonize international corporate tax rates and crack down on tax havens.
January 14th, 2014 at 8:43 am PST
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K@31, If I have surplus income I have to do something with it don’t I? Under an asset tax system my choice would be to either buy something such as stocks or land and hope that the yield mitigated the ongoing asset tax OR pay for training new staff, developing new products or something such as that so that perhaps initially my wealth would be depleted because the early stage project had not yet realized a value BUT with the hope that subsequently it might pay off. An ongoing wealth tax would favor someone continuously ploughing wealth back into ventures such as that rather than simply sitting on assets that would exist anyway. Whilst ventures are in the development stage, they are worthless from a resale point of view and so act as a tax haven from an asset tax.
I think a brand such as say Coca Cola constitutes a source of rentable value just as surely as any plot of land does. It is an asset with inherent scarcity that enables shareholders to extract a rent. It is just as hard to create another Coca Cola as to create another Manhattan. It seems to me that ownership of almost any asset works to extract rent in just that way. The exception, like I said, is when an investment initially leaves the investor with the certainty of an illiquid and at least temporarily virtually worthless asset such as funding a start up. The whole point of an asset tax is to favor such genuine wealth creation out of nothing and encourage more of that.
I don’t see why an asset tax couldn’t apply to citizens of a country irrespective of where they held their assets. US citizens have to pay US income tax on overseas income including income from assets don’t they? Why is it any different saying that citizens have to pay an asset tax on assets held overseas?
January 14th, 2014 at 10:29 am PST
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K@31, I also have trouble coming to terms with the claim that all economic rents on anything other than land are a consequence of inadequate anti-monopoly laws etc. To me that massively underplays just how incredibly hard it is to create and maintain a good organization of any kind. People who own shares of good companies can reap economic rents simply because it is so damn hard to replicate the institutional capabilities and public trust that those companies have. The share owners provide next to nothing towards that though of course but can simply harvest rent just as with land ownership. To me many sources of economic rent are actually a reflection of an economy that is working well and that is allowing such precious assets to come into being. To me taxation should be prodding the economy towards creating such sources of rent. If the only way to preserve wealth was to earn enough with it to pay for an asset tax, then we would hopefully get more such sources of earnings.
January 14th, 2014 at 11:12 am PST
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K@31, I’m also not at all sure that returns earned by assets can ever really be expected to be “compensation for probability of loss” as you put it. Ole Peter’s “stochastic market efficiency” explanation seems to make the most sense to me. His idea is that what sets an asset’s capacity to earn is that the price trends to a point where it is not possible to use leverage to increase earnings. A volatile asset could give a significant long term total return (perhaps all down to “economic rent”) and yet the phenomenon of volatility decay would mean that no more could be earned by borrowing money to hold more of that asset. Basically to my mind it means that wealth, in and of itself, is a scarce resource that enables the owner to gather economic rent as an inevitable mathematical consequence -not as an artifact of insufficient anti-monopoly laws or anything like that.
An asset tax might simply lower the price and so increase the yield of the asset. Everything would still comply with “stochastic market efficiency” because if you borrowed money to hold more of the asset, you would get a bigger tax bill so it still wouldn’t pay to do so.
January 14th, 2014 at 12:57 pm PST
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Stone:
“If I have surplus income I have to do something with it don’t I?”
You forget that you can also consume rather than invest your income. An asset tax favours current consumption. A land tax doesn’t effect incentives at all.
“It is just as hard to create another Coca Cola as to create another Manhattan.”
Both have increasing returns to scale because of high initial capital costs. Both also have network effects: dominant brands may be popular just because they are dominant and large cities have networks of professionals and businesses (see new trade theory) which show as positive TFP
externalities in the Solow growth model. These market failures create rents (TFP) which ought to be collected as tax at some level of government, but some of them may be tough to collect because of capital mobility. Maybe you can tax Coke but it’s tougher to tax finance because much of it can be moved to London or Grand Cayman.
But Manhattan *additionally* has land rents which should also be taxed and unlike some other profits, they won’t get up and leave. Note that if Manhattan had 100% LVT and London had 0%, that doesn’t make London a more desirable place to do finance than New York. It just means the land rent flows to the public instead of to the land owner. Or equivalently, in Manhattan you’d have to pay the tax; in London you’d have to buy the land at the price of the capitalized PV of the tax. No difference, as Adam Smith pointed out.
“I don’t see why an asset tax couldn’t apply to citizens of a country irrespective of where they held their assets.”
Because they aren’t going to tell you about them. Tax havens have strong non-disclosure laws, and while it may be possible to break the privacy in rare cases in countries like Switzerland whose economies are deeply connected with other first-world economies, the same does not apply to Caribbean tax havens whose *only* business is keeping your assets away from the IRS. We have no leverage at all over the Cayman Islands. Also, there is paper currency, and if you try to eliminate that the price of bitcoin would go through the roof. You are never going to chase down “wealth”.
“To me taxation should be prodding the economy towards creating such sources of rent”
It is a common trope that rents are required to entice capital, but it is completely false. All capital that isn’t land is produced by labour. So start with land and human capital. At equilibrium the humans will organize themselves to produce output in such a manner that their marginal utility of of consumption (=production) is equal to the negative of their marginal disutility of labour. If they work more or less than that their utility is not optimized and they will automatically adjust themselves toward the optimum. And while their marginal utility of production is zero, the aggregate utility of consumption is vastly greater than the aggregate disutility of labour. At equilibrium, labour gets all the producer surplus and the workers are well incentivized to move to equilibrium. No corporate profits required. The existence of the corporation, to first approximation, doesn’t affect the optimal organization of production in equilibrium. We wouldn’t just all sit around and starve just because nobody invented the corporation.
“To me that massively underplays just how incredibly hard it is to create and maintain a good organization of any kind.”
I’m not sure if you’ve understood the meaning of rent. Rents are intrinsically self-perpetuating like ground rents or increasing returns to scale. There is nothing hard about maintaining them.
January 15th, 2014 at 12:21 am PST
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“The existence of the corporation, to first approximation, doesn’t affect the optimal organization of production in equilibrium. We wouldn’t just all sit around and starve just because nobody invented the corporation”
That part was irrelevant/bogus. Please strike and replace with:
“There would be no shortage of producer surplus (and therefore incentive to produce) if there were no increasing returns to scale or other rent producing market failures. The existence of rents actually *lowers* the competitive equilibrium level of output below the socially optimal level.
January 15th, 2014 at 12:32 am PST
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This idea is so profoundly oppressive, hubristic and un-American that it’s probably inevitable.
Even assuming that the infinite wisdom of central planners could implement this crazy idea elegantly enough so that it wouldn’t be so opaque, arbitrary, unpredictable and abuse-prone as to disincentivize pharma companies from developing the miracle drug in the first place it would have the disasterous (for what’s left of the middle class) effect of concentrating private (or “private” I guess) property in the hands of a tiny, connected elite – which may or may not be part of the larger, totalitarian fantasy on display here (you know SW really wants that fart tax), it’s hard to tell.
Among other things this amounts to a synthetic capital gains tax levied every period (instead of once at the time of sale) which has to be a drag on long term business planning and property improvement. Besides, it has not been demonstrated here that the current system involving consenting adults privately negotiating the price of a desired asset is somehow an ineffective way to allocate capital. Would the government be forced to yearly post prices for all their properties too or does government ownership mean, by definition, that an asset’s social value is always being maximized?
Especially in ZIRP world (also a pet policy on this blog) large, institutional pools of cheaply funded capital would simply outbid all other Mom & Pop owned property worth having and next thing you know almost no one owns their own house or property any more, everyone is a tenant/serf to a small, rentier class at the apex of society. Of course, the rentier class would be able to put on a great song and dance about how they have replaced suburban blight with denser, more efficient, “smarter” and eco-friendly residential housing so the whole thing would be viewed as a tremendous success of social goodness.
Remember when the government’s job was to protect and not dream up ways to fetter liberty and property?
January 15th, 2014 at 3:45 pm PST
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January 16th, 2014 at 12:48 pm PST
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