New Tax Career Agent Test

If that taxpayer approved, the taxes that he or she pays to the government could be diverted, and instead delivered to a “tax career agent“, who would have, in an auction, won and paid for the right to get such diverted payments from that particular taxpayer. For the government, this would like borrowing, i.e., a way to convert future tax payments into current revenue. This agent would now have incentives to advise and promote this taxpayer, but would have no unusual powers to influence this taxpayer’s behavior.

Previously I used a poll to estimate that career agents today who get 10% of client wages as a result raise those wages by 1.5% on average, suggesting that tax career agents (TCAs) who got ~20% of income might raise those same wages by 3%. But as this effect might be smaller for random workers, and as worker welfare gains would be less than wage gains, I estimated that TCAs raise worker welfare by ~1% on average, which at a real interest rate of 2% suggests a ~$20T present value to the world from adopting TCAs.

In my last post, I sketched a simple experiment design to test the TCA concept: give N random people TCAs, and track their income changes compared to N others who don’t. If TCAs raised wages by 0.3% per year, then given the usual random noise in wage changes, a ten year experiment with N=7000 seems sufficient, but an upper bound cost on this is ~$32M. Which is crazy cheap (~ a part in a million!) relative to TCA social value, but in our broken world we probably need something cheaper.

Here is my new concept: create a TCA for each worker, but get two auction prices per worker, one price if the TCA is active, i.e., free to promote and advise that worker, and a different price if the TCA is instead passive, i.e., prevented from helping this worker. Then randomly pick if the worker gets an active or passive TCA, and use the appropriate bids and prices to pick and charge the new TCA.

If there is sufficient competition in the bidding, then the difference between those two prices is a direct market estimate of how much bidders expect an active TCA to raise worker wages, minus the effort they expect an active TCA expect to put in to make this happen. This estimate is available per worker, and immediately at the experiment start. So even an N=100 experiment at a TCA expense cost of ~$1M for could give valuable data!

In addition to getting TCAs to estimate worker wage increases minus TCA costs, we might also want to get workers to estimate their welfare gains. And we could do this by putting workers into pairs, only one of which gets an active TCA, and making them bid against each other to see who gets that active TCA. Bids should give direct estimates of worker value (i.e., increased wages minus extra effort or inconvenience) if the winning bidder pays the lower bid price. These worker value estimates are also available per worker, and immediately at experiment start. And the extra revenue from worker bids cuts the cost of the experiment.

TCAs and workers would have strong incentives to make good estimates, but their estimates would still be based on pretty limited information. To get better informed estimates, it would help to spread this experiment out across time, and give later participants as much info as possible about earlier participant outcomes. The more time that elapses between the first and last TCA auctions, the more later participants will know, but the longer it will take to learn results from this experiment. Note that such a sequential approach also allows the experiment to better manage its expenses in the face of an initially uncertain costs per worker participant.

Here is a more detailed design based on the above concepts. Offer random workers a sufficient compensation (1% tax rebate?) so that most who are invited agree to participate for Y years. (If Y is short, pick post-college-age workers, so their choice of more schooling is less of an issue.) Participants allow substantial info on them, including their taxes, to be revealed to experimenters and other participants. Match participants into pairs who seem as similar as possible, then auction off these pairs one at a time in sequence over many years, showing all qualified bidders info on outcomes for all prior participants.

Each worker in each pair is asked for the bid B they would pay for a higher chance to be assigned the active, as opposed to passive, TCA for Y years. In addition, each pair auction has eight TCA auction prices, each qualified TCA bidder can bid on any or all of these eight prices, and the highest price wins each price auction, paying the second highest among its submitted prices. To prevent collusion within worker pairs, workers are given little info on their pair partners until they have set their bids.

The eight prices come from all combinations of three binary factors. First, there are the two workers, who will differ somewhat in their info. Second, there are different prices to become an active or passive TCA for Y years. Third, there are different prices depending on if the worker submitted the higher or lower bid to get the active TCA. Worker bids are kept secret until all eight TCA auction prices are set. Then the worker who bid more gets a 2/3 chance of being assigned the active TCA, and a 1/3 chance of being assigned the passive TCA. Given a bid B, we can estimate their added value V of having an active agent via V = 3B.

Note that at a 2% discount rate, the present value of 20% of the median US wage of $31K is ~$450K, 1% of which is ~$4.5K, implying a bid of ~$1.5K, an amount most workers can afford to pay.

This experimental design seems sufficient to extract key info re TCAs at a low cost. But it still needs more work. For example, we need tax experts to think about which parts of typical tax returns to include or not in TCA payments. We need finance experts to think about how to get sufficient numbers of competing TCA bidders, and how the experiment can hold and invest auction assets deposited, to minimize the costs and risks associated with paying off all TCAs as promised. We need labor experts to think about what worker info is sufficient to inform TCA bids. And we need legal experts to figure out how we can do all this within existing law. Any such experts want to help?

Added 20Nov: A similar test could be applied to my Buy Health proposal. For each possible patient get auction participants to bid on their price to provide health and life insurance separately, where different orgs provide the different types and aren’t allowed to coordinate, or as a bundle from a single org that can coordinate. See the per-patient estimated difference in death risk and medical spending.