Friday, February 10, 2012

Bowery on the Bowery Tax

I would like Jim Bowery to adumbrate his tax idea here.  I do not understand it.  He offers it as an alternative to both the status quo and to the Moldbug's self-assessed formalist tax (which is itself an alternative to Henry George's land value tax).

I have invited him to this thread to summarize the proposal and hopefully answer questions.  I have no opinion on it other than that it is interesting and I couldn't digest it.

14 comments:

Jehu said...

Bowery's tax is essentially a (largely self-assessed using the protocol that if you undervalue it, someone can call your bluff and buy it) wealth tax with a fairly large personal exemption. His theory is that you pay the state for the protection of your assets beyond the personal exemption. I don't consider this tax to be a terribly bad one, although I'm not a huge fan of the amount of intrusion that would be necessary to actually enforce it. It's probably a bit less intrusive than an income tax, but way more than the combination of a few excise taxes and revenue tariffs.

FH said...

James Bowery was recently interviewed on the online radio show "The Stark Truth" on the Voice of Reason Broadcast Network.

There are two parts to the interview.

Part 2 focuses on Bowery's views on political economy and taxation.

http://reasonradionetwork.com/20120201/the-stark-truth-interview-with-james-bowery-part-1

http://reasonradionetwork.com/20120208/the-stark-truth-interview-with-james-bowery-part-2

Olave d'Estienne said...

I am listening to FH's first link.

Bowery's tax differs from Moldbug's in some important way but I don't know if I ever knew what it was. If I figure it out, I'll post it!

Thanks for participating, both of you.

Jim Bowery said...

Thanks for the invite.

Since it appears self-assessment is a prominent feature of where you're coming from I need to address it before getting into other features of my proposal.

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.

Jim Bowery said...
This comment has been removed by the author.
Jim Bowery said...

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.

Olave d'Estienne said...

Okay, my head about exploded trying to figure this out. Now that I have read the 1992 paper it is starting to make sense.

In the case of the NAT, only assets whose existence is legally recorded in titles, insurance documents, etc., or that are currently reported for capital gains and losses would be individually assessed.

Chief among these are land, vehicles, securities, and intellectual property (i.e. IP not held by the creator, a natural person). Is that correct? Am I leaving out much wealth?

Now, IP or use rights held by a corporation aren't taxed to the corporation, but to the shareholder. Got it. So if a corporation owns a patent, do we need to know the high escrow bid?

Are low bidders required to leave their bids in escrow? I can't think of an incentive for them to do so. I may be missing something.

I assume that the asset's owner can always exchange ownership for the high escrow bid. Can the owner have a preferred buyer among the low bidders?

Olave d'Estienne said...

The total tax haul is partly determined by the total amount of money sitting in escrow, is that correct? We subtract out all the liabilities, and multiply the difference by something like 5 or 6%. Nothing more than that can become government revenue, but we collect enough to pay for the army, courts, and a personal allowance.

This seems to require a lot of money just sitting in escrow. Is that money earning zero interest (to the bidder; I understand that the NAT itself works out to interest being paid to the government? It seems like a big opportunity cost for the high bidders (or maybe all of them).

Are you combining this with a free banking system, or fixed reserve, or the status quo? I was thinking if you allow fractional-reserve someone could use the escrowed money for investments.

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Jim Bowery said...

Chief among these are land, vehicles, securities, and intellectual property (i.e. IP not held by the creator, a natural person). Is that correct? Am I leaving out much wealth?

Think about it like property insurance. If you don't declare an asset, it isn't covered. You can declare your Bazooka Joe cartoon you saved when you were 7 if you want to.

Now, IP or use rights held by a corporation aren't taxed to the corporation, but to the shareholder. Got it. So if a corporation owns a patent, do we need to know the high escrow bid?

No. The only thing that matters is the liquidation value in place of the company. If you've ever been to a bankruptcy auction of a corporation, the first thing they do is offer the whole thing for sale, in tact.

However, there is the matter of public filings for publicly traded corporations. They do have to disclose their assets to the public but they don't have to be individually assessed.

If a corporation doesn't disclose an asset it holds as part of its filings, it can't then turn around and demand that the government do anything about the violation of its rights to that asset.

Are low bidders required to leave their bids in escrow?

Most definitely not. The main point of assessing the tax the lower bids is to get them to move that money to another escrow account where it will be the high bid.

Ideally, there would be exactly one bid in escrow for each asset.

In that circumstance the money in escrow represents the liquid value of the nation's assets. That's why the escrow accounts can replace the Federal Reserve.

I assume that the asset's owner can always exchange ownership for the high escrow bid. Can the owner have a preferred buyer among the low bidders?

The owner can sell to anyone at any time for any amount.

Jim Bowery said...

The total tax haul is partly determined by the total amount of money sitting in escrow, is that correct?

Yes.

We subtract out all the liabilities, and multiply the difference by something like 5 or 6%.

Correct, the liquid value of debt instruments (or other instruments of liability) are effectively removed from the total because they are removed from the natural person's net assets burdened with that liability.

Nothing more than that can become government revenue, but we collect enough to pay for the army, courts, and a personal allowance.

Ideally you end up with a lot of assets being undeclared because they are privately secured. As for military, the ideal is to, like the Swiss, have very little, if anything, in the way of a standing army at the Federal level.

Almost everything goes into the personal allowance. Ultimately you want everything to go out to the citizens equally as a dividend stream. Then the courts, military, etc. are handled by the various bodies politic of the Federation who can decide what local taxation and infrastructure they prefer.

This seems to require a lot of money just sitting in escrow. Is that money earning zero interest

Yes. The way you get interest on your money is to put it into a savings institution that is going to invest it in something at interest -- like a mortgage. However, eventually, someone is left holding the money and wants to just put it somewhere while they figure out something better to do with it. That something better is to put it in an escrow bid where they don't have to pay tax on it because it is the high bid.

It seems like a big opportunity cost for the high bidders (or maybe all of them).

Think about it like this: If they have the high bid on an asset in escrow, they don't pay tax on that money. That is an effective return at modern portfolio theory's risk free interest.

Are you combining this with a free banking system, or fixed reserve, or the status quo?

Only if you count the escrow accounts maintained by the government. Otherwise, no:

Banks (and all other financial institutions) are totally deregulated at the Federal level and they are taxed just like other fictitious persons.

The laboratory of the states or its equivalent at the county level can play with all kinds of ideas about how to manage their human ecologies locally.

Olave d'Estienne said...

Okay, I'm starting to get it. It's clear upon rereading that you really do mean all assets are taxed if declared--including savings account. (Before the discussion I thought it was only land, and then for a while I though it meant only physical property.)

So this proposal has little in common with Moldbug's, a self-assessed real estate tax that, AFAIK, uses a chosen tax rate (rather than the aforementioned rate which alway equals the rate of interest on the national debt).

Almost everything goes into the personal allowance.

This I didn't realize. I hadn't thought of the Swiss Army angle either and I didn't do any math.

Jim Bowery said...

OdE writes: I didn't do any math

US Wealth in 2009 was $54 trillion.

There are about 200 million adults in the US.

The tax base is then about $300,000 per person.

Multiply $300,000 times the risk free interest rate and that's how much each adult gets per year.

The choice of maturity of Treasury instrument to use for the risk free interest rate is at issue, but we can say that historically the number used by modern portfolio theory has been hovering around 3%.

Using 3% as the rate, each adult would receive about $9000/year.

I have reservations about using an interest rate that low because of the tendency for institutional investors to park their funds in longer maturity Treasuries -- rather than doing their job, which is managing risk in private sector investments.

Jim Bowery said...

Randall Burns (econ grad from U of Chicago) has informed me the estimate used by Wikipedia is far too low and that a better estimate is given by Rutledge Capital*:

$182 Trillion

That puts the tax base at closer to a million dollars per adult.

That means MPT's risk free interest rate as the net asset tax rate would yield a yearly citizen's dividend of $30,000 or $2500/month.

*I had been aware of Rutledge's estimate before but tended to discount it as one of those estimates that are inflated by derivatives. Burns explained how the figures were derived, and it appears they may be real net assets as opposed to mere debt instruments that zero out with the net calculation.