Should-Read: WTF?! To cite §2.7 of your paper to claim that a critic is wrong when there is no §2.7 in the version of the paper that the critic read is just bizarre. You don't claim that critics are wrong and then cite to a rewritten version of your paper!: Eric Posner (Written with Glen Weyl): Response to Matt Klein’s post on Alphaville on Harberger taxation: "Matt Klein’s post on Alphaville about a recent paper of ours made a number of errors... http://ericposner.com/response-to-matt-kleins-post-on-alphaville-on-harberger-taxation/
...Klein’s central claim is that our proposal would benefit the rich at the expense of ordinary Americans.... Klein’s claim seems to be based on two misunderstandings of our paper. First, he appears to think that the Harberger tax is based on the nominal value of assets rather than on net worth (equity) (see section 2.7)...
But there was no §2.7 in the version of the paper that Matt Klein was discussing http://www.law.nyu.edu/sites/default/files/upload_documents/Property%20Monopoly.pdf!
Matthew Klein: Would debt deductibility and a generous basic income justify “Harberger taxation”?: "Earlier this month, Alphaville covered a proposal to replace private property with 'shared ownership'... https://ftalphaville.ft.com/2017/06/29/2190670/would-debt-deductibility-and-a-generous-basic-income-justify-harberger-taxation/
...Weyl let us know that a newer version of their paper had made two important changes.... These two innovations explain Posner’s and Weyl’s response to our post, which was published while your correspondent was away. Unlike the 2016 version, the 2017 version notes that debts and other liabilities should be deducted from asset values when calculating the tax burden. Why this crucial feature was left out of the earlier paper is unclear...
I must say that I think that Matt is too kind here: §2.7 (new version) does not say that debt and other liabilities should be deducted or will be deducted or must be deducted, but rather that they could be deducted. The use of the word could, especially when coupled with how they use "opportunity", is a particular flag. It indicates that the section is not part of their core proposal. It indicates that the section, instead, outlines one possible but not necessarily adopted way to deal with complexities and technical details.
Here is the (new version) §2.7 in its entirety https://academic.oup.com/jla/article/9/1/51/3572441/Property-Is-Only-Another-Name-for-Monopoly. None of the words "should", "must", or "will" appear:
2.7 Liabilities: Many assets are partially financed or encumbered by liabilities or other interests and these liabilities are, in turn, typically owned by individuals different from the possessor of the direct asset. The example that comes most easily to mind is that real estate is frequently encumbered with mortgages, leases, easements, covenants and the like. Yet many other, less common or more sophisticated arrangements exist regarding other assets, especially in the business setting. Corporate bonds are liabilities on corporate balance sheets, owned by bondholders; equity, while not technically a liability, controls and earns cash flows from businesses; options written on the stock of the company encumber the stock of the individual who wrote the options, etc.
Such liabilities, and the secondary assets they create, not only imply some additional complexities but also opportunities for a system of Harberger taxation. The opportunity is that liabilities could themselves be subject to the tax, but because they have negative value this would imply a subsidy rather than a tax. Indebted individuals could quote a price for these liabilities that they would be willing to pay for anyone who would be willing to relieve them of this liability. They would have to stand ready to raise this amount if anyone offered to do so, but would receive an annual subsidy (or in practice usually a deduction from the Harberger tax they owe on other assets) corresponding to this liability. This would alleviate a reverse monopoly problem (effectively a monopsony problem) associated with individuals refinancing or otherwise passing on liabilities that they are no longer the efficient bearers of but might hold out on the refinancing of because of their market power (Keys et al. 2016).30 More generally, individuals could declare any obligation of theirs that they have the right to transfer to be a “liability” that they receive a deduction for as long as they stand ready to pay another individual to discharge that liability at the self-assessed price.
Furthermore, using this approach to avoid the double or triple taxation of assets on which multiple layers of liabilities and resultant secondary assets are written allows for Harberger taxation to apply and thus aid the efficient allocation not only to the primary underlying asset, but also the secondary assets written on top of it. We highlight the benefits of such a system in the example of corporate equity securities in Subsection 4.3 further.
However, there would also be some subtle design elements in applying Harberger taxation in this manner. Many liabilities are so tightly tied to an asset or to an individual that it would not be appropriate for the liability to be taken on by a new individual who does not possess the asset unless either the owner of the secondary asset controlling that liability consents or the asset the liability encumbers is simultaneously acquired. Yet, this issue does not pose fundamentally different problems than those in Subsection 2.3 above regarding complementarities across assets. When issuing a loan, a lender could (as at present) specify in the terms of the loan the extent and nature of the bundling or unbundling allowed between the loan and the individual or tied asset. If the loan is fully tied to the asset, then any asset purchaser would have to buy the associated liability (or simultaneously purchase the loan itself from the lender to remove it). If the loan is tied to the individual but not to the asset, then the asset could be sold but the lender would have to grant permission for the liability to be transferred. Other more elaborate terms could be included, and the lender could choose as she wished in her self-assessment of her secondary asset in the loan bundle together these terms or separately assess a value on each one, allowing for the purchase of each by an individual interested in removing a covenant on the loan.
Thus, while Harberger taxation would change the nature of ownership and taxation of sophisticated financial arrangements and would thus allow for greater efficiency, it would not undermine the possibility of sophisticated forms of financing. However, it might to some extent reduce the need for such financing because it would dramatically reduce the liquidity and cash requirements for purchasing assets as it would reduce their capitalized value. We return to this point in Subsection 3.2 further...
