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> This inevitable consequence is that people would be forced to "value" their house at the maximum they think it might be worth in 12 months time or risk losing their home, or even higher to signal that they really don't want to leave their home, all the while paying more tax than they need to because the actual market price for houses would be lower.

This is mostly a thought experiment so there is not an actual detailed implementation plan by the authors. But my sense was that it's not that you actually have to sell immediately but more like someone can offer to buy at $X and then you either have to sell or $X becomes the new declared value for future tax payments.

Extortion is a risk in this modified implementation. "Is that a $1 house? I'll buy it for $100. No? Enjoy your tax bill. If you want the bill to go away, sell it to me for $0.50."

If I had to propose a mechanism, I'd suggest using prediction markets instead.

But for that to work you have to actually be willing to buy at $100. So you can come along and try and buy my house for 2x the market rate, but then I can just sell it to you and you're screwed.

Of course in the real world there would need to be some way to prevent "predatory" offers (where the "buyer" can't or won't actually close the deal if you accept the offer) but that seems solvable to me. You may have to put down a non-refundable deposit or escrow the sale price, etc.

If the solution requires the full payment to be in escrow before the seller is even aware of this particular unsolicited buyout order, it will become difficult for lenders to provide mortgages since they will have no guarantee that the seller isn't already in a negotiation with another buyer.

So it might be better to establish a prediction market for any such asset that settles on the owner of the asset on, say, a quarterly basis. Instead of predicting the value of the asset, it predicts the owner of the asset at a particular price level. Instead of presenting the current owner with a bid directly, ownership transfers and tax payments would be handled exclusively through the market platform.

...

That said, this is all getting pretty complex.

I think the pathological cases should be made impossible before anything like that is considered for a world with humans.

Y’all underestimate the number of people with enough money to screw someone (or everyone) over just because they can.

Like when someone made a phoney valuation for a web site at $44B.

But, in that case, the owners did walk away with $44 billion.

Yeah, it sounds like an optimal whipping algorithm for maximizing slave labor.

I think it is still fair to point out that it is a thought experiment on how to extract as much value in the form of taxes.

It makes sense only if you see taxes as a positive good, ignore the concept of ownership, and are pretty loose with the human suffering implications.

That's one (pessimistic) way to look at it. Another way to look at it is it's a thought experiment on how to solve the disconnect between a property owner's asset value for the purpose of sale vs. its value for the purpose of taxes. If you're against the very concept of taxes, then obviously nothing is going to make you happy, and the discussion is pointless.

Today, we have this illogical situation where you can sell your property for $X but when the taxman comes, it's all "oh, but my property is only worth $Y!" It doesn't make sense.

Why do you think the disconnect is illogical and needs to be solved? Do you know that isn't how it actually works? The taxman tracks the real real appraised value too.

When you pay taxes, there is a disconnect between your total income and adjusted income. Is that similarly illogical?

The original thought experiment is not really about extracting maximum tax revenue (the overall level of taxation is pretty orthogonal to how you assess and collect taxes) but more in the spirit of how to promote more efficient allocation of resources in economic terms. Think of it as a Pigouvian tax on inefficiency.

I think that this is both an incorrect and amoral way of thinking about externalities. Externality costs Must be real incurred costs, not just hypothetical opportunity costs. Otherwise they are useless for economic analysis and lead to repugnant conclusions

IF you drop trash on your neighbor's lawn, that is an externality. If you refuse to mow their lawn, that is not an externality, no matter how much they have to pay someone else.

Efficiency is not an inherent good, and Pigouvian taxes on inefficiency are a huge moral hazard. Is it inefficient for a doctor to play with their children instead of work? Who are the decision makers?

The comments here have been very focused on the case of implementing some system like this for housing (which to be fair was the example the book used), but as I said in the original comment, I actually don't think this is a workable or desirable system for property taxes on owner-occupied housing for roughly the reasons that you dislike it. Someone's home is not just some financial asset and economic efficiency is not the only important consideration in society.

I brought it up specifically in this context (and article about patent litigation) because I think it is potentially a good idea in some domains (like patent law) where the overriding consideration should legitimately be economic efficiency. I think it is entirely reasonable to design our intellectual property rights around the idea that the person or firm that can derive the most economic value from any piece of IP is the most desirable owner of that IP.

That's fair. I agree that intellectual property does not have the same foundational justifications as physical property. IP justifications ARE generally based on economic efficiency rationales, and typically cut contrary to physical property rights (e.g. Why cant I produce a copy for sale with material I own, in a factory I own)

I was mostly picking at how you invoked externalities, which is a major pet peeve of mine. I feel that between sloppy economics and utilitarianism, the concept of externalities is invoked anytime anyone doesnt get what they want.

Maybe it makes sense if you've seen the human suffering implications of prop 13

One issue with prop 13 has been a major shift in (property) tax burden from large commercial to residential owners.

Also, a big shift in overall revenue from property tax to income tax. This is less stable source and tends to benefit the investor class over W2 earners.

I tend to agree that companies that never die should not have the same protections that homeowners or small businesses do.

My point was rather that props through 13 isn't what's driving the cost of housing up in California. In fact it does the opposite.

If Prop 13 were removed, taxes for new home buyers would go down, enabling even higher costs.

Prop 13 is one factor that's driving the cost of housing up in California.

Vacant lots are taxed based on their purchase price, so there's no real reason to develop them when the land value keeps on rising while the taxes don't. Commercial zoned buildings aren't affected by prop 13, which leads to more revenue for the cities, hence them preferring commercial development to housing.

All that prop 13 does is favor people who bought real estate decades ago, at the detriment of everyone else.

I am extremely skeptical that the few vacant lots are enough to counterbalance what would essentially be a massive tax break for every new homebuyer.

I'm in favor of everyone paying taxes fairly to get high quality city services, instead of having people with large increases in property value getting an unfair tax subsidy.

This brings things back to taxation of realized vs unrealized gains. If you want fair Taxes, we should probably do away with property tax entirely, and focus more on income taxes themselves.

The people with the most wealth tend to pay much less (proportionally) in income tax. Most people find this unfair.

I don't think that is true. The bottom half generally pays zero income tax. The proportional income tax increases continuously. There is no group that makes more and pays less proportionally if you look at the actual data. Here is the percent income paid (after all deductions) for different groups.

You can always argue that the proportion should be even higher, but the proportion of income is certainly not lower

https://www.cato.org/blog/federal-tax-changes-1979

People that are wealthy enough don't really pay income tax.

For example, one loophole during the ZIRP era was that one could get a very low interest rate loan (<1% APR, so effectively lower than inflation) against appreciated securities and use that money tax free. If the wealthy person passes away and gives the appreciated securities to their heirs, their heirs have a step-up cost basis which is the market value at the time of transfer, so no taxes are ever paid on the appreciation of the stock. The heirs could then turn around and settle the loan, tax free, as their cost basis matches the market value.

Warren Buffet famously pays taxes at a lower rate than his secretary.

https://abcnews.go.com/blogs/business/2012/01/warren-buffett...

This is an anecdote but there's no reason to expect that this doesn't apply to his classmates.

So, yes; given all the rebates and loopholes and shenanigans that the rich and mega-rich can use, the proportion of income is lower.

Then you don't know the real estate speculation game. Investors buy vacant plots at the periphery of a city for cheap and just... wait. When it is time to sprawl you have to pay huge sums to them for land that is empty. The tax break that you think is going to the home buyer merely raises the value of this land and the investor is getting the money instead of the local government that managed the city.

Which are what exactly? The state has been setting record surpluses.

Housing is very expensive, but that's due to a failure to build.

Higher property taxes doesn't reduce the cost of ownership or make housing more affordable.

This is like saying we should rise the tax rate on food because people are starving in the street

> Housing is very expensive, but that's due to a failure to build.

The low maximum property tax rate and systematic failure to tax full value created by Prop 13 is a reason for the failure to build.

(Now, actually, I think residential property tax is a horribly regressive tax, and its better to fund government by progressive income taxes, but there needs to be a funding allocation formula that gives local government more of an incentive for development; California has adopted some limits on discretion and consequences for not meeting targets as a stick, but that's not enough to encourage good positive planning.)

>The low maximum property tax rate and systematic failure to tax full value created by Prop 13 is a reason for the failure to build.

Only by indirect argument. IF homeowners were taxed more, they would be more sensitive to housing costs in general, and perhaps more inclined to expanding the housing stock.

Given that the government is funded, this would simply be a punitive tax incentive to motivate policy.

I don't particularly buy the lack of local government incentive. New development is already taxed at substantially higher rates relative to older stock due to prop 13. If expanding the tax base were a major driver of policy, then we would expect to be building already.

People don't block commercial construction because it raises property values. They block residential construction because it lowers their property values. You get an imbalance of jobs to housing and then people complain about expensive housing.

> and are pretty loose with the human suffering implications

Which is pretty on-point for Posner, who thought that a free market would solve the problem of racism and segregation.

> I think it is still fair to point out that it is a thought experiment on how to extract as much value in the form of taxes.

I think you’re saying the quiet part out loud. But you’re certainly right that there are many people interested in maximum tax and minimum property rights.

> But my sense was that it's not that you actually have to sell immediately but more like someone can offer to buy at $X and then you either have to sell or $X becomes the new declared value for future tax payments.

That can easily be maliciously abused too, using it to drive someone's taxes up until they're forced to sell.

The issues you describe could all be nullified by making a simple change - The price the person can purchase your property for must be X% greater than the fair value you declare. If you set X at 10% then there is no chance for property investors in your example to flip if the price increases by 10% during the year. You could even make X dependent on market conditions - If all the housing market moves up in your area, X is increased for everyone by that amount.

I could see X being quite high. What we really want to avoid is just those situations where someone will not take any price to move, and therefore an entire railroad has to be diverted miles around because the path in one spot is blocked.

And as the housing market moves 20%+ in a year in some places all you've done is kick the can down the road to figuring out a value of X that is high enough that no forced turnover of property happens so you're not violating the principles of property ownership. But also low enough that there's still a threat of exactly that happening.

Ultimately all this does is accelerate the accumulation of wealth for folks that already have the capital to profit off this system while forcing people out of their property. No thank you.

>Ultimately all this does is accelerate the accumulation of wealth for folks that already have the capital to profit off

How does it do that? Sure the system causes frequent changes of ownership which are undesired but you are forgetting that the "accumulators" are getting taxed based on how much they accumulated which in the long run slows them down. Yes they can bully you in the short term, which is why this isn't done, but in the long run the house will achieve the optimal tax policy and the abuse potential of housing disappears.

If the government decides to lower taxes on income, then in the long run "accumulators" would be the ones losing out from this.

So there might need to be time lag where you can refuse a sale by agreeing to pay extra tax?

Then it's vulnerable to malicious buyers putting in fake bids. There is probably a good reason this hasn't been implemented.

It still seems like a bad idea to me. Anyone under the current market can make a bid for an off-market property, but it's not their property. They cannot force an owner to sell. Tbey can only entice them with lucrative offers.

Under the proposal, lucrative offers can still lure buyers into selling, but the security of private property is removed. You have to live under constant threat of a whale, e.g. Blackrock, swooping in and offering marginally above (market + e), forcing you to sell.

But you still need somewhere to live. And now you have (market + e) dollars, but the market just got redefined by Blackrock and you cannot afford to buy your neighbors house because it is now priced at (market2 + e) where market < market2.

Blackrock does this sequentially and can manage to legally steal private property from entire cities, just because they had more starting capital.

> You have to live under constant threat of a whale, e.g. Blackrock, swooping in and offering marginally above (market + e), forcing you to sell

They can't force you to sell, you have the option of just updating the declared value to the new market price.

But I brought this up initially in the context of patents because I don't think this would actually be a practical or politically palatable way to handle property taxes on owner-occupied housing. But when we're talking about intangible corporate assets like patents most of these problems go away (IMO).

> They can't force you to sell, you have the option of just updating the declared value to the new market price.

This isn't implicationless. What if you can't afford the taxes on the newly declared price?

A whale could conceivably force people out by offering a price above their ability to afford the taxes. If they don't sell, they get evicted due to tax nonpayment. If they do sell, they get the money but now need to find a new place to live in an appreciated market. Their autonomy is removed by force.

To be honest, I wish the authors hadn't framed their idea on property taxes because there are a lot of obvious practical and political issues with doing it. And I don't personally think this would be a good way to do property taxes on owner-occupied housing. I only brought it up originally because I think a lot of issues with it are irrelevant when applied in the domain of intangible economic assets like patents. In that particular domain I think the overriding principle of intellectual property law should be to maximize economic efficiency.

> Then it's vulnerable to malicious buyers putting in fake bids

TBH that seems like the easiest issue to solve. For instance, to make an unsolicited bid you have to escrow %20 of the price. If the owner chooses to updated the declared value, you get that back. But if they choose to sell and you walk away (or don't actually have the other %80 to complete the sale) then you forfeit that to the owner. Or you can even disincentivize "malicious" offers more by saying that if the owner chooses to update the declared value then you still forfeit the escrowed cash but it goes to offsetting the increased tax bill for the current owner.

> And as the housing market moves 20%+ in a year in some places all you've done is kick the can down the road to figuring out a value of X

Again, X can move with the market.

Isn't that equivalent to setting the tax rate X% lower?

The only problem I see otherwise is that it's not a progressive tax - 5% of a trailer is much more of a poor person's income than 5% of a mansion is of a rich person's. But for that you can use UBI or something to make any flat tax net-progressive.

> This sounds terrible for owners and perfect for governments and rich investors.

I live in a blue area where the tax appraisals deviate from the for-sale listings by hundreds of thousands to millions, 4 million is the highest deviation I've seen thus far.

Thought a fairer system would be for appraisals to raise to the highest listing price, or most recently sold price, automatically.

I've looked at property taxes in different states and some states have a system where tax appraisals are roughly based on actual fair market value, possibly with adjustments which may be distorting (Prop 13, for instance), and those will usually take a completed sale price as evidence of fair market value.

Other states have systems where tax appraisal is routinely 10% of fair market value, and there's some justification for that that never made sense to me. Typically the published tax rates are then much higher than in states with fair market value appraisals. Tax rates as a % of actual market value tend to be roughly similar across states though.

This sounds so obvious that I see no downside. The a very good estimate of the value of a property is the price it last sold for.

Unless the last sale was 25 years ago

Even so! This is usually closer than the assessor estimate! Assessor estimates are wildly off, mine by nearly $400k, or more than 60% of the total value.

That is nuts. I wish the assessors in my state were that incompetent :)

It's a terrible idea for houses because your house has high (and asymmetric!) transaction costs. Moving is painful.

But patents are intangibles. They have no transaction cost.

This might work for intangibles.

You could modify it so you have to sell it at that price you listed if you decide to sell it at any point. Of course you'd need a system to feature in normal price appreciation but that can all be worked out, like not being able to change the price year-on-year by more than a certain percentage and then being forced to sell at the 3-year low price or smth like that.

Yeah but then you can just underdeclare until you're willing to sell.

That's true. You'd slow it down a bit with the limited price increase & lowest-price-in-a-certain-timeframe rule, but you'd need some other remedy to plug that loophole.

I know of two use cases for this system:

1. There are races of cheap cars in UK, the prices of cars are kept low because everyone has to declare car value and anyone can buy it at said price (this is intended to keep the prices low).

2. I do not remember where I read about it, but some medieval town near the river used this system for collecting taxes, any passing ship would be taxed on declared value, but tax collector had the right to buy cargo for declared price.

You're right but usually there is a spread for any transaction and so the government could step back in and define a safe spread (something high like 20%) or the crazy (but efficient) option would be to allow the owner to define the spread.

There would be a tax rate on the value and a different tax rate on the spread (possibly zero if the spread is set by the government)

It also completely ignores the personal aspect of value. If I lived next door to my sister that is value for me since she can watch the kids if I need to run out for something but she won't do that for anyone else. Likewise sentimental value, a 4th generation home can influence people's price a lot.

Offer a loop-hole?

If someone went as far as putting the money in an escrow account to buy out your asset, you could retroactively increase the declared value. This of course has a price: You need to retroactively pay the tax for a few years and a surcharge for the expenses of your buyer.

This could be repeated, similar to an auction.

Homes where one lives in are usually exempt from a lot of taxes in many jurisdictions of the world.

For rental properties, I'd love to see this happen, it would IMHO significantly drive down prices from the current overvaluation.

Yeah, like I said it has obvious practical problems when applied to things like primary residence so I don't think it would actually be a workable system for replacing existing property taxes.

These "problems" assume that the "tax value" will actually be similar to the "market value". What's the difference between "0.1% on the declared tax value, you have to sell it for the declared tax value" and "0.2% on the declared tax value, you have to sell it for twice the declared tax value"? I'll give you a hint: the numbers come out to be the same.

And there was never any requirement that you put the house on the market for the declared tax value. When you don't want to sell, you make the declared tax value twice (or three times) the market value; when you want to sell, you set it to a bit above the market value, and then put it on the market.

Maybe to make the arguments easier you can encode the second one into law. But the basic math ends up the same.

The above actually plays into the heart of the first criticism (although the first criticism has some problems).

People more able to effectively play the valuation game will arbitrage the people that aren't, which will concentrate assets as the game is played over time and create more market power abuse, which isn't really what we want as a society in at least a residential property market. From a society perspective, we probably want a property market that makes it easy and affordable for the average person to get enough house to form a family and support offspring in a location that doesn't put undue stress on that family (i.e. through long commutes, unsafe streets, etc). I don't see how this tax system gets us to what we probably want and see lots of ways it gets us toward higher prices, market power abuse by sophisticated operators and all the problems that come along with that.

The point is that everything is always implicitly on the market at all times. So if you declare your house to be worth $X then you have to accept on offer of $X (or else declare a new, higher value going forward). When you're talking about people's home then obviously this would not be a practical system for many, many reasons. But in other domains it seems like a reasonable idea.

> The point is that everything is always implicitly on the market at all times.

I understand that point; but that's not what GGP said. He explicitly laid out:

1. Government benefiting from "overpricing". But there's no "overpricing" if the tax is set assuming you're going to add a large multiple to the declared value. If the institution setting the pricing assumes that a $100k house is going to be priced at $200k (or $500k), then they can set the tax rate appropriately.

2. Investors performing arbitrage: i.e., someone sets the declared tax value at $100k, market value of house goes up to $110k, investor buys house for $100k and "flips" for a quick 10% profit. But if it's expected that a $100k house is going to be listed for $200k (or $500k), then that problem goes away -- nobody is going to buy a $200k house that hey can only sell for $130k. And nobody's property is going to go up 5x in a single year.

Or alternately, you have people declare it at the market rate of $100k, but then write into law that anyone can sell it for 5x. The math works the same, but people feel less cheated for having to "overvalue" their house. (And people have less sympathy for those who write down a "declared tax value" of $25k on their $100k house.)

What happens if your house goes up 5x in market value, to the point where you either have to sell or can't afford the taxes? Well that already happens, and it's not great, but there's an argument that this is an inefficient allocation of resources. I understand why a 90-yer-old lady wants to live alone in her 4-bedroom family home a few block from downtown, but is that really better for society as a whole?

And if, as a society, we really want to protect that situation, we could always make an exception for a single house that you're currently occupying (as is already done for lots of things -- treating second+ properties different than first properties).

> When you're talking about people's home then obviously this would not be a practical system for many, many reasons

So taking into account the "sell for 5x" factor, other than the "you're forced to sell if you really can't afford it", what makes it not a practical system?

I'm genuinely interested -- this idea has been kicking around my head for some time, and the main thing I like about it is that it makes taxation symmetric. The problem I have with taxation in general is that I recognize that it's necessary, but the way it's normally done, by taxing money moving around (i.e., sales, income, and estate taxes) always seemed kind of arbitrary to me. Since property is depriving society of some potentially shared resource, and taxation is paying society for shared resources, having those be symmetric has a satisfying property to me.

Maybe practical is the wrong word, but I think it would be politically untenable if applied to houses. And the only way to make it politically tenable would be to add so many exceptions and loopholes that it wouldn't substantially change anything. Like if you just excepted owner-occupied housing you would already have exempted most of the housing stock in the United States. And if you didn't except all the owner-occupied housing, what is the political message exactly? "We want to kick you out of your house or raise your property taxes so property developers can make more money!" Like I get intellectually why that may be desirable but it strikes me as a tough sell to the voting public.

> Like if you just excepted owner-occupied housing you would already have exempted most of the housing stock in the United States.

Because the purpose of this isn't really to get money out of owner-occupied housing, but out of industry; and in particular, as the top-level comment in this thread, to make "intellectual property" more rational. If Sony / Disney want to keep copyrights on those 30-year-old titles, they need to keep paying enough to prevent a team of enthusiasts from getting a big enough Kickstarter to buy them up and make them public domain.

I think we agree. It would be interesting to see a system like this applied to specific domains like IP and patents.