Jun 10, 2020

The common ownership self-assessed tax (COST)

From a 1962 speech by Arnold Harberger (quoted in Radical Markets, slightly edited for readability):

If taxes are to be levied on the value of properties it is important that assessment procedures be adopted which estimate the true economic value.

The economist’s answer is simple and essentially fool-proof: allow each owner to declare the value of his own property, make the declared values public, and require that an owner sell his property to any bidder willing to pay the declared value.

This system is simple, self-enforcing, allows no scope for corruption, has negligible cost of administration, and creates incentives, in addition to those already present in the market, for each property to be put to that use in which it has the highest economic productivity.

Posner & Weyl propose an implementation of this idea – the common ownership self-assessed tax (COST):

We can conceptualize a COST as sharing ownership between society and the possessor. Possessors become lessees from society. Their lease terminates when a higher-value user appears, whereupon the lease is automatically transferred to that user. Yet this is not central planning. The government does not set prices, allocate resources, or assign people jobs.

Indeed, as we will argue below, the government’s role would be more limited than it is today because there would be no need for discretionary interventions, like eminent domain or public ownership of property in the conventional sense, to solve holdout and other monopoly-related problems. There would also be much less need for distortionary and discretionary government taxes to raise revenue for the state. Furthermore, control of everything would be radically decentralized; a COST thus combines extreme decentralization of power with partial socialization of ownership, showing that they are, perhaps surprisingly, two sides of the same coin.


To envision the egalitarian potential of a COST, consider how it would affect a typical American family. Let’s assume that half the revenue the COST generates is used to reduce other taxes on capital and thus has no effect on asset values, while the other half is sent back to the population on a per capita basis.

According to the US Census, the median household of four headed by someone between the ages 45 and 54 has about $60,000 of home equity and $25,000 of other assets. With a 7% COST, the value of these assets would fall by roughly a third, to $40,000 and $14,000, respectively. At these reduced values, a 3% COST net of reductions in other (existing) capital taxes would be roughly $1,400 a year, and the family would receive a social dividend of more than $20,000 annually. Thus, even if family members were so deeply attached to their property to the extent that they valued it at twice the market price, they would still benefit on net by $17,000 annually from the COST.

A median household in the top 20% of the income distribution in the same age range has $650,000 of net worth. A similar calculation yields that such a family would pay roughly $14,000 in COST and thus would still benefit by $6,000 a year because of the $20,000 social dividend.

The rich would be hardest hit. The average wealth of the top 1% of households is $14 million. Each household in this group would pay a COST of about $280,000 annually.

For families in weak financial situations, such as those with negative equity in their homes or who are burdened with credit card or student debt, a COST would actually be a subsidy. Because the liability would be worth more than the asset, the individual would receive a net tax refund on her private assets, even before the social dividend. Effectively, a third of their net debt would be immediately forgiven.

Consider a family that owns a house worth $300,000 and with a mortgage of $420,000. As noted above, the capitalized value of a 7% COST payment would reduce the value of assets, as well as liabilities, by about a third, accounting for future tax payments for the assets and future subsidies associated with liabilities. Thus, the value of the home would fall to $200,000 and the mortgage to $280,000.65 The family would then receive a subsidy of 3% (again, relative to existing taxes) of its negative net worth of $80,000 ($2,400) annually to defray the cost of servicing the mortgage in addition to the $20,000 annual social dividend they receive.

Adding these benefits implies a significant redistribution of income from a COST. Estimates based on current measured returns on capital imply that capital’s share of income in the United States is 30%, and that 40% of this wealth is held by the top 1%.66 As previously noted, our proposal would redistribute roughly one-third of the return on capital and thus would reduce the income share of the top 1% by 4 percentage points, or roughly half the difference between recent levels and the low points in the 1970s.

The most persistent distributive conflict in capitalist economies arises from the concentration of wealth. Because most of the returns to capital flow to the very wealthy, a broad distinction exists between those who live primarily off the returns to capital and those who live off their labor. A COST would make most of the return to capital flow to the public, making it more equally distributed than wages. The COST would thus end the conflict between capital and labor, making differences in labor income the leading source of inequality.