In Radical Markets, University of Chicago law professor Eric Posner and Microsoft senior researcher Glen Weyl propose a radical restructuring of property rights, immigration policy, and voting, as well as a substantial change in corporate law. Their most radical proposal is to completely overturn property rights so that people would need to continuously “bid” for property they already own. They want to alter immigration policy to allow about 100 million more immigrants into the United States, but change who decides whether or not to allow particular prospective immigrants to enter. They want to switch to “quadratic” voting as opposed to the current one citizen–one vote method. They also want a major change in how investors can hold shares in corporations.
For all of these positions, they make clever and sometimes compelling arguments. The most compelling one is on voting. The least compelling, and also absolutely horrific, one is on property.
These are the opening two paragraphs of “A Radical Restructuring and Redistribution of Wealth,” my review of Radical Markets by Posner and Weyl. It appears in the Summer issue of Regulation. (Scroll way down to see my review.)
Some highlights on their stiff 7% annual tax on wealth:
What would prevent people from underestimating the value of their assets? This is where Posner and Weyl’s proposal is horrific. Once a homeowner, say, has stated the estimated value publicly, he would have to sell his house to anyone who offers more than that value. So, for example, suppose my aforementioned house is worth about $900,000 on the open market. If I estimated the value at $900,000, my annual tax under their proposal would be a whopping $63,000. If I estimate the value below that, I would risk losing the house to anyone who bids more than my estimate. To be safe, I would probably estimate the value at $1 million because I like living there. But then I would pay $70,000 in taxes on my home annually. (Notice that a 7% annual tax on an asset would amount to an implicit tax of over 100% on the income from many assets.)
In short, Posner and Weyl would fundamentally undercut property rights, making them conditional. If you’ve lived in your home for 32 years, as my wife and I have, and put a lot of sentimental value on the place where you raised your children, then you would have to put a number on that value. And in case you think you can handle that, you must remember that they want to do the same with virtually all of your net worth.
Toward the end of the book, they even toy with having people pay taxes on their human capital. They give an example of a surgeon who announces that she would perform gallbladder surgery for $2,000 and pay a tax accordingly. She would be obligated to provide that surgery to anyone willing to pay $2,000. So if the surgeon was thinking of retiring, forget it. The only satisfactory solution for her would be to estimate the value of her services at a number that really would make her indifferent between working and retiring.
The authors are aware that they’re treading on sensitive ground here, writing, “A COST on human capital might be perceived as a kind of slavery.” Might be? They claim that such a perception is incorrect, but the reasoning behind their claim is weak.
I go on to say why it is weak.
READER COMMENTS
Steve W Schow
Jun 21 2018 at 1:44pm
I see how they add the condition that you have to sell your house for the listed price, to prevent undervaluing. But in practice there are just so many questions to untangle I don’t ever think it could be implemented. Beyond that, moving houses is such a huge undertaking that living under the constant “threat” of it would drive me (and possibly most people) crazy.
I listened to his podcast with Russ Roberts and he kind of hand waved away the specifics…when the specifics are HUGE in this case.
Iskander
Jun 21 2018 at 2:42pm
Don’t we already tax human capital?
To quote Robert Nozick: “Taxation of earnings from labor is on a par with forced labor.” This tax is already similar to slavery.
I’m not saying all taxation is bad, but the coercive aspects ought to be recognized.
Using their system for land might be a better idea (and somewhat similar to historic land taxation in India) but it still has its problems.
nobody.really
Jun 21 2018 at 4:24pm
Oh, relax.
First, could someone come and buy your home out from under you, simply by paying you your home’s market value? Yes: look up the word “condemnation.” In short, if you’re inclined to freak out over this possibility, you should be freaking out already.
Given this realization, how much added risk would homeowners face as a result of Posner/Weyl’s proposal? Well, there’s the risk that you fail to realize the market value of your asset, and a third party opts to buy it from you. But if the buyer is merely acting to acquire a bargain, then you could buy out the new buyer at the current market price. You’d end up incurring some added cost, but with an appreciated asset. Presumably you could even borrow against the asset to buy it back.
Could the new buyer try to extort money from a sentimental homeowner by demanding above-market prices? Sure, he could try—but who really has the leverage here? The buyer’s leverage is only as strong as his second-best alternative. So you offer to buy the house back at market prices (or even somewhat less). If he refuses that offer, his next best option is to incur the cost to evict you, and the cost to prepare the house for sale to a stranger (fixing all those cosmetic things that we all live with in our own homes, but that we’d want to see fixed if we were buying new), all in the hope of recovering…the house’s market value. Lacking a more attractive alternative, he’d likely opt to sell to the initial owner.
This leaves the threat that some wealthy nemesis is willing to incur cost and effort for the pleasure of causing you grief. Now, consider the fact that if you have such a nemesis, that person has probably already found ways to torture you, so it’s not clear that buying your house would be the most cost-effective strategy. But I could imagine that my political rival would be willing to spend campaign dollars buying my house, thereby rendering me ineligible to run because I no longer have a domicile in the district. In short, it’s a far-fetched but possible scenario.
So what then? Take a class in corporate drafting: Transfer the house into a corporation/trust with articles/bylaws that specify that 1) there can be no alternation in ownership or use of an asset without a majority vote of the shareholders, and 2) shares are numbered consecutively (in base 10), and can only be voted during a year ending in the same digit as the share.
The corporation/trust would assign a value to the house, and each shareholder would assign a value to his or her share. In any year, the buyer could force the sale of the shares, but it would take five or six years to amass enough votes to change the ownership/usage of the home. In that time, you’d have multiple opportunities to buy back the shares from the new owners. Worst case scenario: You’d have five or six years to live in the house (and quit doing maintenance) before being evicted. And the new owner would end up, after five or six years, and after incurring the cost of evicting you, with a much-depreciated asset. You’d need a REALLY determined, REALLY wealthy nemesis to pursue that strategy.
David Henderson
Jun 22 2018 at 4:31pm
I actually am pretty relaxed, because I don’t expect this proposal of theirs to go far.
You say that someone could come and condemn my home at market value. True. But the “someones” who could do it are government officials. The Posner/Weyl proposal would mean that anyone could do it. And I am outraged at government officials doing it. See my earlier post on The Little Pink House.
Richard Fulmer
Jun 27 2018 at 6:31pm
I suspect that people would protect themselves by making their homes appear as unattractive as possible – at least from the outside. In that way, they can benefit from lower taxes without much risk that anyone will try to buy their house out from under them.
Jacob Egner
Jun 21 2018 at 5:23pm
Very interesting stuff, thanks for writing it. In case people are interested, Robin Hanson also has some commentary on the book.
From David Henderson’s review:
I would love to read more about this. David Henderson: do you have anything in particular you could recommend for me? Thanks.
David Henderson
Jun 22 2018 at 4:33pm
Thanks, Jacob. Yes, I did see Robin Hanson’s piece, well after I had submitted mine. Not that it would have changed what I said; I’m not a fan of that piece by Robin.
Here’s a link that discusses how the CPI overstates inflation. It’s from my Encyclopedia.
Jacob Egner
Jun 23 2018 at 2:07pm
Thank you for the excellent link. I have read it, and look forward to referring other people to it.
From the CPI article:
It sounds like this 0.8 pp overstatement could become even bigger when taking into account quality adjustments, or does “new products” include quality improvements? If “new products” does not include quality improvements, I’d love to read something that tries to tackle that.
Haha. Yeah, Robin was unable to warm me up to the property proposal too.
I don’t like their radical proposal on property either, at least in its current form and scope (the suggested tax levels are downright puzzling). I would like to see more work on the topic though; maybe there’s some type of property where some improved version of their proposal leads to good stuff. I think we can reduce a lot of objections if a new way of handling property is offered as a voluntary opt-in alternative, which competes with conventional property rights.
David Henderson
Jun 25 2018 at 5:04pm
Jacob,
Check out my latest, which suggests that the 0.8 overstatement is actually understated.
Jacob Egner
Jun 25 2018 at 10:45pm
Oh, David, you always delight and never disappoint. Thank you.
gwern
Jun 21 2018 at 7:51pm
Link to full review isn’t working? I get “AccessDeniedAccess Denied0798B47F9B388BF7KKwRG4ztv2Mfa9gun6Wg+OAXRkZYXkj7rMSIbRHnzQBCcZd6sOcV8I+zvc9d6U1wQ2b2VqlbHks=”
David Henderson
Jun 22 2018 at 4:25pm
Thanks. Fixed, I think. Try now.
BC
Jun 21 2018 at 10:18pm
“The authors are aware that they’re treading on sensitive ground here, writing, ‘A COST on human capital might be perceived as a kind of slavery.’ Might be?”
Channeling Robin Hanson, if it’s ok to force someone to sell his or her property at some pre-declared price, then why shouldn’t it be ok to force that person to sell his or her labor, i.e., enslave that person? Why is human capital property more sacred than real property? (No, I’m not advocating slavery here. One can easily avoid the contradiction by conceding that forcing someone to sell his property is morally questionable. Extension to resolving Hanson’s paradox about wealth redistribution vs. sex redistribution is straightforward.)
I don’t understand how we determine which services a person is required to declare a price for. Does every woman of child-bearing age need to declare a price for becoming a surrogate mother? In places where prostitution is legal, does every woman need to declare a price? That would seem to put an unfairly high tax burden on reproductive and sexual freedom. Suppose the KKK wants to buy a black person’s land to construct a new headquarters for spreading racist propaganda. Forcing the black landowner to choose between selling his property or paying a high tax seems to violate his rights in a fundamental way. (One more example of how economic rights are fundamental rights.) Most likely, our political system would resolve these issues by creating lots of exceptions to the tax. Then, when someone like Robin Hanson points out all of the contradictions, we could have another round of Twitter outrage.
Richard Fulmer
Jun 27 2018 at 6:42pm
If taxing cigarettes discourages smoking, won’t taxing human capital discourage people from obtaining human capital?
David Henderson
Jun 21 2018 at 10:39pm
To all above: I had eye surgery today and am difficulty writing with the use of one eye and glasses that don’t quite fit because of the patch on the other eye.
But I will answer the comments in due course.
Amy Willis
Jun 22 2018 at 8:09am
Russ interviewed Weyl recently on EconTalk as well:
http://www.econtalk.org/glen-weyl-on-radical-markets/
Julien Couvreur
Jun 24 2018 at 2:59am
The authors claim that this registry of properties and prices (that one is obliged to sell at) would help with hold-out problems and replace eminent domain.
But if I have 5 plots of land, selling one of them will affect my valuation of the remaining 4. In other words, subjective valuation is not strictly additive.
Then, if I get a chance (as I should) to re-evaluate my valuation for the remaining 4 plots, I can still be the hold-out for the highway construction…
Maynard Brandon
Jun 26 2018 at 1:52am
A bit short sighted to overlook the transaction costs associated with selling your house – real estate commission, moving cost, opportunity cost for disruption, cost to acquire a new house, etc. This idea should be DOA. It’s right up there with the exit tax that Acton, MA was contemplating when my wife and I bailed out of there.
Richard Fulmer
Jun 27 2018 at 6:36pm
That’s a great point. I would have to include all that in my estimate of the value of my home and, in effect, be taxed on all that plus on the value I place on avoiding the hassle of moving.
All in all, my best bet would be to let my property get run down – or at least make appear to be run down – to reduce both my taxes and the chance that someone might want it.
Maynard Brandon
Jun 26 2018 at 1:54am
Another random thought – maybe the governments that levy an ad valorem tax on your house should have to purchase it at that value when you decide to move. That seems like it would be just as reasonable.
IronSig
Jun 26 2018 at 5:06pm
I had some uneasiness when I listened to Russ Roberts interview Wyl on the subject. It made me think that he and Posner had extended the logic of eminent domain to all property.
Felix
Jun 27 2018 at 11:42pm
Does this apply to all property?
Could someone buy your car from you while you are stopped at a traffic light? The clothes you are wearing?
How could anyone own sticks? If the share price goes up and you don’t immediately self-declare the new price, could someone buy them from you at the old self-declared value and make an instant profit off your slowness?
Who the heck would want to start any business when a competitor could buy it out from under you at a moment’s notice?
The work idea makes em think it would require yu to list all the work you are willing to do, and could not do anything else.
Maybe the book addresses these problems, but I won’t be reading it to find out. The ideas sound like some mad science fiction from the 1950s, thought otu just enough to move the story along and set up some bizarro plot points, but not very plausible if you stop and think for very long.
andy
Jun 28 2018 at 1:02pm
As to the property estimation thing – it’s an interesting economic question, because it hinges on the tax level. So
what would happen if the tax was 0? We would be at the state we are in right now – everybody would just claim the property is priceless.
what would happen if the tax was in between like 10000% of the property value? We would be essentially at a rental market with no long-term contracts, but worse – anyone could come and kick you out of a property just by offering higher rent (you could move out in 3 months, claim counter-offer and move back in other 3 months…)
what would happen in between? something in between….
It seems to me that the other extreme is flatly bad, destroying any long-term contracts really does seem horribly economically inefficient. So the authors would probably claim that moving from one extreme (current situation) to the other is a concave function (in terms of efficiency) – and that 7% is the ‘maximum’ of that function. Just wonder what their argument is – why they expect it to be a ‘concave’ function and why the 7% is the ‘right’ fixed rate on all property over the coutry.
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