Are You Your Best Career Agent?
The [proposed new tax] plans also call for raising the top marginal income tax rate to 39.6% from the current 37%. … result is a top marginal federal income tax rate of 46.4%. … In New York City, the combined top marginal state and city tax rate is 14.8%. So New York City taxpayers who earn more than $5 million a year would face a combined city, state and federal marginal rate of 61.2% under the House plan. (More)
While there are no truly convincing estimates of the long-run elasticity [of taxable income (ETI)] , the best available estimates range from 0.12 to 0.40. Proceeding mechanically, at the approximate midpoint of this rate—an ETI of 0.25—the marginal excess burden per dollar of federal income tax revenue raised is $0.195 for an across-the-board proportional tax increase, and $0.339 for a tax increase focused on the top 1 percent of income earners. (More)
I’ve posted before on how we could create career agents by auctioning off the right to be given the tax revenues that are paid by a particular taxpayer. Oddly to me, most of my Twitter followers and blog commenters opposed the idea. But I just realized that this same mechanism could mitigate another big problem: income taxes discouraging income. Which happens to be a topical issue, as Congress is now considering big income tax rises.
High income taxes destroy value by inducing those who face such taxes to earn less. Why should you work hard to earn another 100 dollars if the government takes 61 of them? Yes, you will gain some value from the leisure that you would practice instead, but overall we expect value to be destroyed if taxes change your actions.
But we can greatly reduce this effect, to all our benefit. Here’s how. Imagine that starting at adulthood, each year each taxpayer may pick some fraction of their remaining future income tax obligations to be auctioned off. Then in future tax years, each auction winner is pay their winning fractions of the taxes that this person pays to the government. These fractions are divided up among auction bidders so as to maximize auction revenue, and those who own rights to collect tax revenues can resell such rights to others. Taxpayers must reveal some basic info about themselves to auction participants (but only if there’s an auction), but auction winners gain no powers whatsoever regarding taxpayers; they just cash checks from the government.
So, for example, maybe in prior years Sue has already had 20% of her future taxes sold off. This year, Sue sets 5% to be sold at auction. Auction bidders say how much they would pay for various income fractions. This time, auction revenue is maximized by selling 3% to Ted, 1.5% to Mary, and 0.5% to Joe. Then next year 25% of the taxes that Sue pays will be redirected to various auction winners.
When private parties own the rights to be given this tax revenue, they in effect become career agents, as they have incentives to advise and promote this worker, so that this worker will later earn more money and pay more taxes. (To avoid a common pool problem, they may want to concentrate their rights in a single person.)
But when the worker buys these assets themselves, they in effect reduce their future income tax rates, and thus acquire stronger incentives to earn money! So if Sue wins the auction to get 5% of her tax revenue, she in effect cuts her tax rate by 5%. And that may benefit Sue more than the advice and promotion she might get from a career agent.
So now each taxpayer can choose how much of their tax revenue stays with the government, how much is diverted to fund career agents, and how much to cut their own tax rates. They choose how much stays with government by deciding how much gets auctioned off each year. And they decide how much to cut their own taxes, relative to creating career agents, by directly bidding in the auction. We can make sure the auction mechanism gives the taxpayer the last move, so that they can always increase their bid to grab all the tax revenue, if they are willing to pay enough. And if they have a limited budget, they can limit how much is auctioned each year to try to make sure they could buy it all.
Of course banks might loan people money to buy out their future tax obligations, and parents might help their kids by paying to cut their future tax rates. We might even let parents start this whole process when the kid is born, with parents choosing how much to sell each year, though my polls suggests many won’t like giving parents this power.
If we worry that auctions denominated in cash would distort the risk profile of government revenue, then either government could use that auction revenue to buy riskier assets, or the auction could itself be dominated in such risky assets (such as a stock index fund).
Yes, the taxpayer would likely have more info that other auction participants regarding their future tax revenue. But if we pick say an ascending price auction, and mark the taxpayer’s bid clearly for others to see, other participants can infer much from taxpayer bids. And any remaining overall advantages, which in effect let the taxpayer lower their taxes, could be compensated just by raising overall tax rates.
Regarding other worries, let me just repeat what I’ve said before:
You might fear that asset holders would lobby to increase taxes, but they are easily outvoted by ordinary taxpayers. Conversely, you might fear that governments would lower tax rates to please voters while hurting asset holders. But governments would fear cutting revenue in new auctions; governments similarly don’t usually inflate to pay off bonds for fear of raising their cost of new bonds. These tax assets can function as well as does government debt, which is pretty well. …
Yes, people might try to extort asset holders to sell their tax asset to them cheap via threatening to choose a tax-free life. But asset holders would likely call their bluff and just refuse to sell in such circumstances.
And that’s it; we could mitigate the harm of high income tax rates by auctioning off the right to collect income tax revenue. If the taxpayer wins the auction, they in effect lower their tax rate, to all our benefit. If others win, career agents are created. Both benefits basically come for free, so why not?
Added 5p: Note that high earners trying to look like low earners would thereby save on the price of lowering their taxes, but they’d also raise the auction price paid for low earners, which would induce more career agent efforts on their behalf.
Added 23July2022: If a particular U.S. state were to auction off the tax revenue rights for a particular resident as one big chunk, that resident could threaten to move to another state if they didn’t win the auction. Lowering the price they paid. To discourage this, better to auction off these rights in many small chucks. It isn’t a credible threat to move if you don’t win 1% of your tax revenue rights.