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Friday, May 06, 2005

Conversations With Carl, Part II

As regular visitors will recall, I recently started an ongoing feature called Conversations With Carl. I intended to post Part II of the series last Friday, but Dr. Milsted was busy with the North Carolina LP Convention.

Note: The portion in blue is from Part I's exchange. It is included here to simplify the reading. It is then followed by my follow-up question and Dr. Milsted's reply.

So without further adieu, here is Part II:

DM: This is tricky, since there is no market price for a private corporation. One approach is that given in Robert Heinlein's The Number of the Beast. In that novel [not one of Heinlein's best!] there is a parallel universe of Fundamentalist Christian Libertarian Nudists [typical Heinlein]. In that universe the only tax was a property tax [or was it a land tax? I forget]. But interestingly, the government did not assess land values. Instead, landowners assessed their own values. The values assessed were binding. If anyone found the assessed value to be low, they could legally buy the property at that value.

In other words, in Heinlein's story, property was assessed at the "ask" price vs. the "bid" price. You set you value at what you would happily sell the land at. You could do the same thing for private corporations: the owners could set the ask price for the entire corporation. If they undervalue the corporation, the risk getting bought out at less than would make them happy.

LD: This approach, however, I have serious issues with. I am a private
business owner and I view this proposal as a rock and a hard place.

Your proposal is that a private business owner set the price of his
business at the price at which he would "happily" sell his business.
There is a problem with this.

Normally, a business owner sells for one of two reasons, necessity or
desire. When an owner sells out of necessity, he rarely gets a price
that makes him happy. He may not be happy with the price he got, but
he is happy to have the burden of business removed. When he sells out
of desire, he is free to set the price at a level that will make him
happy. If someone purchases it at that price, he is happy. If not,
he is still running his business and he is happy.

Your proposal requires him to set an artificial price based on neither
of these situations. There are extreme pressures from both sides of
his pricing decision. If he prices too low, a third party could swoop
in and purchase his business without his consent. Actually, this
could happen at any price. Because he is selling against his will, he
certainly will not be "happy" with the price received, even if it is
above market value.

If he is able to price it so high that no third party will purchase
it, he is paying a significantly higher tax amount than he would
otherwise pay. The increased taxes could very well cause his business
to go under.

DM: For starters, this tax only applies to corporations. It would not apply to all businesses. You only pay the tax if you request the extra layer of contractual protection from the state (limited liability, etc.).

Also, I would definitely go with a significantly lower rate for non-public corporations since the ask price for an entire business is going to be higher than the marginal share price for a public corporation.

A startup exemption may be a good idea, but there is great potential for abuse. I could see money-men opening and closing the same business under different corporate charters in order to avoid the tax. A deductible might work.

LD: In addition, such a plan becomes very discriminatory towards small
business. Because they are forced to sell at whatever price they
set, larger businesses with more resources could swoop in and buy them
out in order to remove them from competition. If their price is so
high no one will buy them out, they have a significantly higher tax
burden for the "protection" of not being bought out. This is called
racketeering and for the government to be engaged in this would be

DM: Once again, the ask price system would be at a lower rate. If big businesses tried the buyout strategy, there would be a lot of small corporations started up just for the purpose of getting bought out! (In fact, this happens already.) Further, the price of computing corporate income taxes is significant, and a bigger fractional overhead cost for small corporations than for big corporations. My plan favors small corporations more than the current system.

DM: This does pose a problem for startups, which may have a great deal of value in terms of intellectual property but no income with which to pay the tax. A reasonable solution would be allowing the corporation to pay its tax in kind; that is, in non-voting shares of the company. Then, when the company makes income, the government gets dividends in proportion to its non-voting shares. Should the company buy back stock from its shareholders, it should have to buy back an equal amount from the government until the government owns none. Conversely, if it wants to buy back shares, it needs to find private owners willing to sell back to the company at the same price that the company is buying from the government.

LD: Why create such a complicated and necessarily heavily bureaucratic
distinction for start-ups. If, as you say, the valuation tax will
flat, why not tax start-ups under this plan as well? If they have no
real value, they pay no taxes.

DM: It is nowhere near as complicated as the income tax, which I am doing away with. A bit of perspective: suppose a small business generates no profit for ten years and the tax rate is 1% for private corporations. Over ten years, less than 10% of the stock ends up in the account. This means the government gets < 10% of dividends due to the corporation not paying taxes for ten years. You would have to not pay taxes for 30 years before the government's share of the profits reaches the current system! That's a rather nice tax deferral for small businesses. And the only paperwork is adjustments for stock splits, dilutions and buybacks. Baby stuff!

DM: A corporation is a complicated contractual arrangement.

LD: Corporations are complicated legal entities because government
regulation makes them so. How convenient for the government to create
a complication and then charge you extra taxes because you are

Rather than having government dictate how individuals can get together
to form a business, would it not be more desirable to allow businesses
to form as they see fit?

DM: Corporations are inherently complicated. Ownership is dispersed, control is concentrated, and there are many conflicts of interest. Corporate law will always be complicated for these reasons.

DM: Flat. But there would be double taxation of corporations that own corporations (subsidiaries), due to the extra layer of protection they get. The incentive would be to spawn off side businesses instead of conglomerating.

LD: Double taxation. Just the sound of it makes me cringe. Why not
treat the subsidiaries as a separate entity for taxation
purposes? Tax them on their value as you would the parent company.
Why should the government look to punish businesses for owning other
businesses? What is it about a "conglomeration" that you find
inherently bad?

DM: I am calling for treating subsidiaries as a separate entity for tax purposes! But if the owning corporation owns a large fraction of the stock of a subsidiary, then the subsidiary's value also shows up as part of the value of the parent company. If the parent company intends to spin off the subsidiary soon, or they really need the extra liability protection, they can eat the cost. Or, they could merge the subsidiary to make it a division of the parent corporation.

DM: Property taxes on publicly detectable property would be paid by individuals who owned property.

LD: Property taxes are in essence a preclusion to owning private property.
Please explain why this technique is more desirable than a
consumption tax.

DM: Property taxes require far less paperwork than consumption taxes. When I ran Tools for World Liberation, I put in hours of work to assess a couple of dollars worth of sales tax. A sales tax requires giving the government no-warrant search capability for auditing every sales transaction in the country other than used merchandise sales. A sales tax without an income tax would be very easy to evade since you don't have the cross-reporting. We would end up having undercover police monitoring Mom and Pop businesses in order to determine compliance (the same way drinking age carding is enforced).

There are also powerful natural rights arguments when you get into the subject of land property. See and for the forgotten part of classical liberalism.

DM: Flat rate property taxes are actually more progressive than our current income tax system. Property taxes hit old money as well as new money. It becomes easier to get rich, but you don't get paid some much for being rich.

LD: Why is it desirable for a tax to be progressive at all?

DM: I can justify the tax change based on the fee-for-service argument alone. Property taxes are closer to the payment system to private protection agencies if there was no government.

But there are good libertarian arguments for not letting the wealth gap get too large:

1. Money is freedom. If the libertarian movement is to be the freedom movement and not just the non-initiation of force movement, we need to offer this freedom to more people.

2. Landlords function much like mini-governments. This was obvious during feudal times.

3. Large gaps in wealth require more police power to enforce. There is a reason that those cuddly Scandinavian social democracies have the smallest jail populations in the world, and we have the biggest.

4. Large gaps in wealth fuel calls for welfare and socialism.

In other words, a large wealth gap pulls a country both in the direction of fascism and socialism! Henry George pointed out a century ago that our limited government democratic society was possible because everyone had a right to cheap land on the frontier. As he predicted, once the frontier closed, government grew. His land tax idea was a way to preserve the ownership society that this country once had.

DM: If a corporation doesn't pay value tax, its charter ceases to be a legal contract. Whatever it owned is now in the public domain.

LD: By public domain do you mean owned by the government or in a more
literal sense of whoever grabs it owns it?

If the later, would you have some plan for the distribution of
property or would it just be a free-for-all looting bonanza?

DM: For a corporation, an auction would work. But do note that I envision such a tax to be about 1% for private corporations and maybe 2% for public corporations. I calculated that a 1.5% value tax on public corporations would match what is currently raised by the corporate income tax. Bumping it up a bit is to make up for the elimination of capital gains taxes and taxes on dividends by individuals. If a public corporation doesn't pay using cash, it can put stock in escrow. Until this escrow is bought back, the government gets a share of dividend payments, etc. But that escrow would have to grow rather large for the payments to match the corporate income tax. Some capping of this practice may be in order in order to prevent too much deferring.

For a copyright, public domain means anyone can copy without license.

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