The Patent Value Tax

Like all brilliant ideas, this one is infuriatingly obvious in hindsight -- a straightforward application of a hardcore bid-em-off-the-land version of the land value tax. Some quick web searching reveals no prior art; did you make this up just now?

I would consider modifying the bid-em-off-the-property provision in the same way that I would modify it for land (and maybe orbits but not spectrum). People who can't pay their tax can let it accumulate (with interest) as a lien against the eventual sale or transfer of the property, and the lien is capped at the market value of the property. However, market value of patents is harder to assess, and the escalating patent value tax rate would create an incentive to just let the tax accumulate and then abandon the patent when the rate is too high for anyone to want to bid for it. So I might worry that an undercapitalized inventor will not be able to defend a patent if he and a predatory bidder understand its value more than the market does (or else the inventor could get a loan from the understanding market). However again, I'm confident that markets are good enough at valuing patents that this wouldn't be a big problem.

So I don't yet see any problem with this idea. It could be applied to copyrights too, to the extent that one even believes in copyright.

Dan Sullivan wrote at dfc_talk:

Enter the patent value tax. The holder of a patent would be required to self-assess its value, with the stipulation that anyone could purchase the patent at that value. The purchaser would have to honor contracts into which the previous patent holder had entered, to the extent that he could not increase the royalty charge or impose other restrictions.

The contracts themselves would have to be public contracts. That is, if one producer is allowed to apply a patented invention to a particular type of product at a particular royalty rate, then all producers would be allowed to produce the same product at the same royalty rate.

For the first year a patent is granted, the tax rate could well be zero. It would then gradually increase until, at the year of expiration, it consumes nearly the entire amount of the patent's self-assessed value. Naturally, the value of the patent would decrease as the tax rate increases and the expiration date approaches.

Samuelson's Theory of Public Goods

In 1954 Paul Samuelson published his landmark paper The Pure Theory of Public Expenditure, which formalized the concept of public goods (which he called "collective consumption goods") -- i.e. goods that are non-rival and non-excludable. He highlighted the market failure of free-riding when he wrote: "it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has". His paper showed that "no decentralized pricing system can serve to determine optimally these levels of collective consumption".

Excludability is the ability of producers to detect and prevent uncompensating consumption of their products. Rivalry is the inability of multiple consumers to consume the same good. A public good is defined as a non-rival non-excludable good, such as national defense. Because public goods are not excludable, they get under-produced. The pricing system cannot force consumers to reveal their demand for purely non-excludable goods, and so cannot force producers to meet that demand.

The evidence for under-production of public goods is so overwhelming that, as anarcholibertarian professor Walter Block admits about the resulting justification for state intervention, "virtually all economists accept this argument. There is not a single mainstream text dealing with the subject which demurs from it." For standard treatments, see e.g.

• Ch. 11 Public Goods and Common Resources in Principles of Economics by Greg Mankiw (Harvard economist fired as Chairman of White House Council of Economics for defending outsourcing).;
• The Free Rider Problem in the Stanford Encyclopedia of Philosophy;
• Public Goods and Externalities in the Concise Encyclopedia of Economics by Tyler Cowan (libertarian economist at GMU, co-blogger at Marginal Revolution).

Underproduction of public goods is inevitable in the presence of 1) the ability to free-ride (i.e. non-excludable goods) and 2) rational self-interest. Samuelson's paper did not fully explicate the modern quadripartite theory of private/public/club/common goods, let alone formalize all the kinds of market failure inherent in that analysis. There was important work related to this both before and after 1954:

• The 1939 generalization of Pareto optimality by Kaldor and Hicks to launch modern welfare economics;
• The 1950 formalization of the Prisoner's Dilemma and the subsequent avalanche of developments in game theory;
• Arrow's 1951 impossibility theorem, leading to Sen's 1970 liberal paradox;
• The 1953 discovery of the Allais paradox, and many subsequent discoveries about bounded rationality and cognitive bias and the development of Prospect Theory by Tversky and Khaneman in 1979;
• Tiebout's 1956 theorem about the optimal local provision of public goods;
• Coase's 1959 proof that markets can handle negative externalities only in the absence of transaction costs;
• The 1962 creation of public choice theory by Buchanan and Tullock; and
• Arrow's 1963 formalization of the problem of asymmetric information.

This nascent thread of work was largely ignored when Rothbard and Rand were setting their (and the future LP's) worldviews in concrete in the 1940s. That's a tragedy, because the mainstream modern libertarian theory of political economy is a far more formidable -- and palatable -- intellectual edifice than the brittle deontological dogma of Rothbardian Austrianism.

Twenty-First Century Political Economy

The only way to remove the corruption from politics is to decrease the amount of the economy that is owned and operated by the government -- agriculture, education, retirement savings, health care, mortgage lending, etc. When any such industrial sector is socialized, the smartest investment in that industry will usually be to invest in lobbying for a (bigger) piece of the government-controlled pie. Campaign finance reform proposals simply dull some the knives for cutting the pie (thus in effect sharpening others, like those wielded by celebrities and the media). As long as the pie is there, people will be doing whatever they can to gouge out big(ger) pieces of it for themselves and those they favor.

It's only lately seeping into the political world, but there actually has been unprecedented theoretical/scientific progress in the discipline of political economy in the latter decades of the 20th century. Thinkers have blathered about politics since before Aristotle without making any fundamental progress, but starting in the late 1950s academic economists have finally laid a sound theoretical foundation for analyzing the proper scope of government. Nobel Prizes have even been awarded for it. The theory is about how the analysis of market failure leads to a taxonomy of four kinds of goods: private, public, common, and club.

There is a joke that some people would do anything for the environment except take a science course. I add: some people would do anything for social progress except take an economics course. The standard liberal prescription is to create a centralized, non-scalable, byzantine mountain of regulations that tries to orchestrate hundreds of millions of people making tens of billions of decisions, and to constantly try to hand-tune the mountain to react to unintended consequences and to decide what groups/technologies/industries/etc. will be winners or losers. This will always be inferior to a decentralized, dynamic, scalable market-based approach that uses the pricing system to aggregate information and communicate incentives. The role of the government should just be to deter and punish force and fraud, and to correct market failure.

It's an open question whether democracy can work after majorities discover they can vote themselves money taken from other people. The theory of government failure is called Public Choice Theory, and while it too was only created in the last half-century, it has not yet given us any firm guidance on how to design institutions to prevent government failure. The findings so far from Public Choice Theory are very depressing. They demonstrate that voters have systematic incentives to deceive/delude themselves and to let politicians assist in the process. The best answer we have so far is to diffuse and decentralize government power as much as practical, so that jurisdictions compete with each other and people can vote with their feet if necessary.

A Bailout Hair Of The Moral Hazard Dog That Bit You

[This is the director's cut of today's joint press release from 18 California Libertarian candidates for Congress.]

The current mortgage crisis is the direct and predictable result of the government protecting borrowers and lenders from their own unwise choices. Only one party in America — the Libertarian Party — is willing to say who caused this crisis and to consistently follow the principle of holding such people responsible for their own choices.

This all happened before in the Savings and Loan crisis of the 1980s, when the government increased the level of deposits it insures from $40K to $100K, and the "Keating 5" senators (including John McCain) were interfering in the fraud investigation of an insolvent S&L whose chairman later ended up in jail for five years. When the resulting real estate bubble burst, the government used $160B of taxpayer money to bail out the borrowers and lenders who had made bad decisions.

When government socializes losses, the resulting incentive for excess risk-taking is called "moral hazard". After the precedent of the 1989 bailout of the S&L industry, the government fed a new real estate bubble with several more kinds of moral hazard. There had always been an implicit government guarantee behind the alleged "independence" of Fannie Mae and Freddie Mac, allowing them to sell mortgage-backed securities at prices beyond their underlying risk. In 1992, Congress passed a law requiring Fannie Mae and Freddie Mac to devote part of their lending to support affordable housing. In 1994, Congress gave advocacy groups the power to interfere with mergers among lenders who the groups think aren't lending enough to low-income borrowers. In 1995, the Clinton Administration created rules under the Community Reinvestment Act to further encourage such lending, including letting advocacy groups market such loans and then bill lenders for any marketing costs. In 1999, Fannie Mae created yet another program to encourage banks to extend home mortgages to individuals whose credit was generally not good enough to qualify for conventional loans. The New York Times quoted an economist's reaction: "This is another thrift industry growing up around us. If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry." The tech bubble burst in 2001 and the Federal Reserve responded with even easier credit than it had been providing before. Artificially low interest rates fed the bubble in real estate prices, and encouraged the perception that the Fed would protect such asset prices with its interest rate policies. However, the Fed could only delay the day of reckoning, and in so doing made it worse.

Now the Republicans and Democrats have intervened again in the credit markets, by using $700B of taxpayer money to bail out Wall Street firms holding non-performing mortgages. This is a recipe for continuing the cycle of bailouts. If the S&L bailout cost $160B 20 years ago, and the current bailout costs $700B, then what will the next bailout cost?

The Libertarian Party says it's time to stop the insanity. Economic expansion is currently sluggish, but America is nowhere near the 45% contraction and 24% unemployment of the Great Depression. Talk of a general economic "crisis" is fear-mongering designed to justify more looting from current and future American taxpayers. If, as bailout advocates claim, there is potential for the government to profit from buying non-performing mortgages, then let private investors (including bailout advocates!) pursue these opportunities with their own money instead of with your tax dollars.

We already have a mechanism to sort out the assets and liabilities of a troubled company — it's called bankruptcy. Bankruptcy doesn't mean that assets get torched or employees get blacklisted from all future employment. Bankruptcy just means that assets and employees are taken away from those who failed to manage them wisely, and made available for more productive employment.

We already have a mechanism to punish those who deceived borrowers or lenders — it's called prosecution for fraud. The Libertarian Party's presidential nominee Bob Barr, a former federal prosecutor, has called for vigorous prosecution of anybody who practiced deceptive lending or who deliberately overvalued mortgage-backed securities. He says we need to clean up the marketplace, not cover up financial crimes with a deluge of taxpayer money.

Most importantly, we already have a mechanism to punish the politicians who worked so hard to help create this mess — it’s called an election. This November, don’t bail out the incumbents who are using your tax dollars to bail out their irresponsible friends on Wall Street. Instead, vote for the only party in America that believes people should be free to make their own choices in their personal and economic lives — and should bear the responsibility for those choices. Vote Libertarian, and send the message that Washington should be in nobody’s pocket.

Vote Smart Cheat Sheet

Here are the answers I'm submitting today to the Project Vote Smart "Political Courage" test.

Abortion
Taxpayers should not be forced to pay for other people's abortions, nor should any government or individual force a woman to have an abortion. Most Americans believe that a fetus starts deserving legal protection sometime after the first trimester but before birth. I support the right to terminate one's pregnancy during the first trimester. I do not oppose requirements that ending a pregnancy in the third trimester must leave a healthy fetus alive if that is feasible.

Budget Priorities

The Tenth Amendment restricts Congress to its Article I Section 8 powers: providing national defense and regulating federal land, immigration, citizenship, bankruptcy, currency, weights and measures, patents, copyrights, and commerce that crosses state or national borders. Such "commerce" includes only responsibilities -- pollution, transportation, flood control, infectious diseases -- whose indivisible scope clearly goes beyond the borders of a single state. Because centralization exaggerates influence by special interests, community services should be provided at the most local and voluntary way possible, so that citizens can have maximum influence on, and maximum choice among, the bundles of services that communities provide.

Defense Spending

The U.S. military budget represents half of the world's military spending -- far more than needed for ensuring our national defense. Major savings can be had by ending our efforts at nation-building in places like Iraq, ending U.S. forward ground defense of allies in Europe and Korea, reducing the size of our strategic nuclear arsenal and blue-water navy, scaling back our weapons modernization programs, and slashing missile defense efforts down to only basic research.

Income Taxes

All persons are entitled to keep the fruits of their labor, and so the Libertarian Party calls for the repeal of the income tax. The federal tax code in 2004 was 3,457 pages (plus 13,458 pages of IRS regulations), compared to 94 pages in 1928. The income tax (and 16th Amendment) should be repealed, and federal financing should come from just 1) taxes on pollution (or pollution-based commerce) that crosses state borders, 2) charges for use of interstate transportation infrastructure, and 3) per-capita taxes levied against state governments.

Other Taxes

There should be no taxation of income (wages, interest, dividends, profits, gifts, and inheritance), production (including value added), transactions (e.g. the sale, import, or export of goods and services), or wealth (e.g. real estate improvements, capital, or other assets). I favor a "green tax shift" to instead tax 1) pollution, 2) consumption of natural resources, 3) congestion of community resources (streets, pipes, wires), and 4) that component of land value deriving from any government services not yet privatized. Economists agree that such taxes impose the least drag (the technical term is "deadweight loss") on the economy.

Tax Preferences

Any tax or tax preference should only be for correcting what economics textbooks call "market failures". The "free rider" problem justifies government financing of national defense and a universal justice system. The "tragedy of the commons" justifies government taxes on pollution or consumption of natural resources. The problem of "natural monopoly" (high fixed costs and vanishing marginal costs) justifies community provision of networks of streets, pipes, and wires. The "holdout" problem justifies eminent domain only if such a network requires a right-of-way. "Adverse selection" justifies incentives for health insurance consumers to join broad risk pools.

Other Principles of Government Finance

Government should tax only land value (reflecting the expense of government services provided in the community) and the pollution, consumption, or congestion of community resources. Revenue to finance services enjoyed in a community should flow up from the landholders and sub-communities benefiting from the service, not down from a central bureaucracy with the dangerous power to tax everyone and then shift revenues and tax preferences among communities or constituencies.

Political Reform

Political parties should be allowed to establish their own rules for nomination procedures, primaries and conventions. Libertarians call for an end to any tax-financed subsidies to candidates or parties and the repeal of all laws which restrict political speech or the voluntary financing of election campaigns. We oppose laws that effectively exclude alternative candidates and parties, deny ballot access, gerrymander districts, or deny the voters their right to consider all legitimate alternatives. The only campaign finance law should be to outlaw fraudulent reporting of campaign financing, thus allowing voters to vote against candidates with corrupt or anonymous financing.

Crime

Peaceful honest adults have the right and responsibility to control their own bodies, actions, property, and use of the commons, so long as they use neither force nor fraud to interfere with the same rights of others. Criminal laws should be limited to violation of the rights of others through force or fraud, or deliberate actions that place others involuntarily at significant risk of harm. Individuals retain the right to voluntarily assume risk of harm to themselves. Libertarians support restitution of the victim to the fullest degree possible at the expense of the criminal or the negligent wrongdoer.

Education

Government owning schools to improve our children's education is like government owning supermarkets to improve our children's nutrition. Education is best provided by the free market, achieving greater quality and efficiency with more diversity of choice. Schools should be managed locally to achieve greater accountability and parental involvement. Recognizing that the education of children is inextricably linked to moral values, Libertarians would return authority to parents to determine the education of their children, without interference from government. In particular, parents should have control of and responsibility for all funds expended for their children's education.

Employment

Libertarians support repeal of all laws which impede the ability of any person to find employment. We oppose government-fostered forced retirement. We support the right of free persons to associate or not associate in labor unions, and an employer should have the right to recognize or refuse to recognize a union. We oppose government interference in bargaining, such as compulsory arbitration or imposing an obligation to bargain. Government should not deny or abridge any individual's rights based on sex, wealth, race, color, creed, age, national origin, personal habits, political preference or sexual orientation.

Environment/Energy

Damage to the environment only happens where there is no definition and enforcement of individual rights in resources like land, water, air, wildlife, carbon sinks, and electromagnetic spectrum. Markets are the best mechanism for protecting the environment, because they can factor the consequences of pollution into the cost calculations of each potential polluter, and encourage the owners of a resource to preserve it. Markets also allow consumers to reward and punish producers for their impact on the environment. Green pricing (i.e. pollution taxes) would stimulate the technological innovations and behavioral changes required to protect our environment and ecosystems.

Guns

If guns cause murder, do pencils cause misspellings? Every person has the right to defend himself against aggression, and to aid others or seek their aid for such defense, so long as they use no greater force than necessary to prevent or minimize the harm caused by the aggression. Libertarians affirm the right to keep and bear arms, and oppose the prosecution of individuals for exercising their rights of self-defense. Individuals have the right to keep and bear any weapon except those so clearly suited for indiscriminate killing that their mere possession puts the surrounding community at risk.

Health

America has too much health insurance. Huge tax subsidies for corporate health insurance hide costs from the insured, discriminate against those not working for large employers, and make insurance portability a regulatory nightmare. Bloated defined-benefit insurance programs (Medicare and Medicaid) offer an antiquated mix of procedures and the wrong balance between routine care and catastrophic coverage. The government over-regulates private health insurance, stopping insurers and beneficiaries from agreeing on lower-cost (e.g. out-of-state) alternatives. The only role of government in healthcare should be to provide tax incentives for insurance consumers to join broad risk pools independent of their employment.

Immigration

Migration across borders should be without constraints, provided that migrants do not trespass and are sponsored by someone (perhaps themselves) who can afford to assume the same responsibility for their resource impact and congestion impact and subsistence needs as parents do for native children. Libertarians support control over the entry into our country of foreign nationals who pose a threat to security, health or property.

International Aid

America's unilateral "security" aid has tended to side with foreign governments against their own people and to hurt our national security over the long run. Any international aid should be for people, not governments. Aid from the American government should be mostly confined to disasters and short-term humanitarian crises to which private and international relief are not responding quickly enough.

Iraq

We long ago achieved our two most important war aims: 1) elimination of any WMD capability or international terrorist infrastructure, and 2) deposing Saddam's regime in favor of a federal democratic constitutional framework designed to protect minorities and fundamental human rights. We would have liked to also successfully transition security responsibility to the new Iraqi government, but Iraq's thirst for sectarian conflict has effectively exhausted the reconstruction and stabilization efforts we owed the Iraqis for having liberated them. We should accept our partial victory and let the Iraqi people take responsibility for their own future.

International Policy

American foreign policy should seek an America at peace with the world and its defense against attack from abroad. Libertarians would end the current U.S. government policy of foreign intervention, including military and economic aid to foreign governments. We recognize the right of all people to resist tyranny and defend themselves and their rights, including their right of secession. We condemn the use of force, and especially the use of terrorism, against the innocent, regardless of whether such acts are committed by governments or by political or revolutionary groups.

International Trade

America should not try to "protect" Americans from foreign competition, or to protect foreign workers from their voluntary choices. Commerce across borders should be without constraints, except for "green pricing" of the measurable costs demonstrably and physically (not psychologically or sociologically) imposed across those borders (e.g. verifiable anthropogenic global warming) by the traded products. Trade is beneficial even for a nation that is not a productivity leader in _any_ industry. Comparative advantage derives from being better at something than you are at other things, not from being better at something than everyone else is.

National Security

The defense of the country requires that we have adequate intelligence to detect and to counter threats to our territory. This requirement must not take priority over maintaining the civil liberties of our citizens. I support pre-emptive military action against governments that pose demonstrable imminent threats to United States territory or to U.S. citizens prudently traveling abroad.

Social Issues

Government should not deny or abridge any individual's rights based on sex, wealth, race, color, creed, age, national origin, personal habits, political preference or sexual orientation. Sexual orientation, preference, gender, or gender identity should have no discriminatory impact on the rights of individuals by government, such as in current marriage, child custody, adoption, immigration, or military service laws. Consenting adults should be free to choose their own sexual practices and personal relationships. Adults have the right to expose themselves (but not others) to any risk to their own health, finances, safety, or life.

Social Security

Any effort to socialize the retirement savings industry is clearly unconstitutional. Social Security is an insidious pyramid scheme causing monumental intergenerational theft. The first SS recipient, Ida May Fuller, paid in a total of $44 and received lifetime benefits of $20,934. There were 6 workers for every retiree in 1955, but now there are only 3 and soon only 2. Everyone should be cashed out of SS by giving them bonds equalling their total lifetime contributions (and employer match) plus interest and inflation less benefits already received. Indigent overdrawn retirees should be treated similarly to disabled welfare recipients.

Welfare and Poverty

Poverty in America is exacerbated by government: socialized schools deliver inadequate education, minimum wage laws remove the bottom rungs of the employment ladder, and welfare rules encourage dependency. The Constitution gives the federal government no authority to provide benefits to people merely because they are poor. There is no state in the union that cannot afford to create a income safety net if its voters want one. Competition among state welfare programs would ensure that none of them become too extravagant.

Priorities

My top priority would be divesting the federal government of all programs and functions not authorized by the Article I Section 8 powers of Congress. My second priority would be a Green Tax Shift that ended all taxes on income/production/sales/gifts and taxed only A) land value and B) the pollution, consumption, or congestion of the community resources.