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In the coming months we’ll be presenting here ideas for political reforms that satisfy three criteria. First, they improve the incentive structure for both taxpayers and policymakers/legislators/executive agencies over the current condition. Second, they move us closer to adhering to the Rule of Law. Third, they would seem to be non-partisan reforms in the sense that they would not be thought to be part of a traditional platform for either the Nike or the Reebok party. This last condition rules out simple proposals that say, “shrink government by cutting taxes and spending.” If the outcome of the reforms above leads to such an event, that is great, but that cannot be a policy proposal to satisfy the above. Finally, while I find each of these ideas worth pursuing, I am under no delusion that they have any chance of seeing the light of day.

To inaugurate the series, I present here the proposal that I would push hardest for if I had a chance to do so. In a limited blog post space I do not intend to address the minutiae of the proposal or every particular benefit or problem with it. Further for the following proposal ever to be considered seriously it would have to be coupled with numerous reforms to local, state and federal governments that I do not see as likely. So maybe you should discount this one as part of unicorn world. Nonetheless I find the thought experiment worth pursuing.

The proposal is this: create a system where any taxpayer can agree to purchase his way out of their entire future obligation to the government, at all levels. You can imagine how difficult the proposal would be given the many different obligations, but for simplicity’s sake, let’s just consider the federal income tax. Right now, the amount of income tax anyone must pay over the course of their lives is uncertain. If you make $100,000 today and own a home, and take few other deductions outside of mortgage interest, you are likely paying around $10,000 per year in federal income taxes. That amount may go up or down as tax laws change, as your life situation changes, and obviously as your income changes. Some people might find it attractive to “lock-in” their lifetime income tax obligation. In a simple world what would happen is that the taxpayer would pay the government a lump-sum amount today that then will free them from having to pay any income tax for the rest of their lives.

This type of system provides good incentives for both taxpayers and for the policymakers. For the taxpayer, a great deal of uncertainty has been eliminated – enhancing the ability to plan, the probability of taking entrepreneurial risks, and improving incentives at the margin for working, saving and investing. You see, once the lump sum is paid (see below for financing issues) then every single dollar of income earned for the rest of their lives is income that they are able to keep. Same for saving. Same for investing. This program will protect taxpayers from the possibility of large tax increases in the future (in actuality it won’t it governments can borrow and raise other fees and obligations). And if governments use funds wisely, then taxpayers may have “overpaid” for services. For policymakers this system provides good incentives too. It, too, reduces their uncertainty about their ability to collect future tax revenues and it provides a strong incentive for good stewardship of taxpayer funds. If the funds collected exceed what it costs to deliver public goods, then the government gets to keep those proceeds – either to pay down debt, pay administrators bonuses for good management, or to offer additional services to their constituents. If the government is profligate, it will be harder to raise additional funds from this pool of taxpayers, and the credit markets would also price this into the interest costs of lending governments money.

The program can apply to taxpayers of all income levels. This is not a “give-away” to the rich, nor is it specially treating the poor. People of all abilities and income levels would have a chance to purchase away their obligations. How to calculate what the expected value of lifetime tax contributions is quite difficult, and it requires actuarial estimation of the expected lifetime earnings of different groups, but this is not new to America (in a future post we’ll discuss the history of the “faculty tax”), but it does seem to pose a challenge.

The financing of the program would seem to be no particular problem. My sense is that Wall Street would jump all over themselves trying to construct markets to serve taxpayers and governments. For example, the way Wintercow would be able to pay his lifetime tax obligations would be to borrow money in the capital markets (issue personal bonds for example) and then use the proceeds to pay the government. This would represent a fixed commitment by the borrower-taxpayer that would look very much like a mortgage commitment. Collateral issues would be difficult of course. And I can easily imagine a large secondary market generated along with securitization markets whatever their merits or costs. In any case, it is not hard to imagine that capital markets would quickly arise to make such a thing possible.

I would argue that the “buyout of tax obligations” proposal satisfies my three criteria above. Ignoring the obvious implementation difficulties, what do you envision as the major challenges to such a proposal? Who would naturally favor it? Who would naturally oppose it?

3 Responses to “Policy Proposal: A New Series”

  1. Harry says:

    How do you price it? An auction? A public offering?

    What a great question!

    I would expect the arrangement to discount the value of law enforcement and national defense. How does one do that?

    I do not mean how do The Planners do that, but how does one handle the public goods problem?

  2. Harry says:

    The other day I read ITT was breaking up, further, which the financial press described as yet another example of the end of the conglomerate age. The argument was that the marketplace never valued these companies fully for their earning power and for their diversification.

    Would that apply to the Rizzo Liberty Act? That is, would the free market naturally underprice the true value of being free of taxation?

    What I am suggesting is that maybe the deal, having so many imponderables, might be a good deal indeed, especially if you were right about governments becoming ever-more voracious.

    But governments would get a better price if they appeared voracious, but they would also have an incentive not to consume all of the pie.

    But even if the problem were simpler, as in having future school taxes cancelled in exchange for assuming the obligation to pay for your children’s education, it still might be a good bargain.

  3. […] that this again satisfies my requirements for me to sanction a proposal: that it improves incentives, moves in the direction of the Rule of […]

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