12 August 2009

Bruce Schneier's Blog

If you don't read Bruce Schneier's blog, I strongly recommend taking a look. His expertise is in cryptography and technological security, but the real beauty of his blog is the way he relates the principles of security to other fields.

I was particularly intrigued by his recent post on self-enforcing protocols, which are systems which can function without a third party acting as an referee to prevent cheating or resolve disputes. He highlighted self-valued property taxes as one example of a self-enforcing protocol.

This is something I've touched on
previously. The way the system works is for each homeowner to value their own home, on the understanding that, if somebody else offer to meet the valuation, they will be obliged to sell. The tax is then levied as a percentage of their valuation. It works as a self-enforcing protocol because, if the householder deliberately undervalues his house in order to reduce his tax bill, he risks having to sell the house for less than he really thinks it's worth. Whatever you think of the tax itself, it should be clear that the methodology would avoid the risks of corruption, valuation error and dispute which are a feature of other methods of property tax valuation.

What I hadn't realised before reading the article is that the Greek government has used that type of system for taxing antiquities, so there is some recent experience of it being used in practice.

Schneier is also the originator of the
Individual I campaign, which calls for greater respect for individual rights, something I find very refreshing coming from a security professional at a time when governments increasingly try to use security as an excuse to restrict individual rights.

13 comments:

AntiCitizenOne said...

He's not the only one with that idea!

AntiCitizenOne said...

Also the "Price = Demand/ Supply" that underpins markets is a wonderfully self stabilising system.

Changes in Demand or Price cause changes in Price which change production with stabilises the price.

AntiCitizenOne said...

He's wrong about VAT though!

Robin Smith said...

Aer you saying the taxing is on the selling price ?

Paul Lockett said...

It's the price that the owner says they would be willing to sell for, so, if somebody else was willing to meet that valuation, it would be the selling price, but if nobody else offered to pay that price, the tax would still be levied as a percentage of the valuation, even though no sale would have taken place.

Robin Smith said...

OK understood.

How does this "price" relate to the economic rent of the asset? i.e.,

If the owner valued it too high(greater than the rent) he would pay too much tax and never sell it?

If too low, he would sell immediately at a bargain price to the buyer?

In other words, if you get greedy, either way, you will lose out.

Just my thoughts, apols if I misunderstand

AntiCitizenOne said...

Robin,
You've got it.

Paul Lockett said...

"How does this "price" relate to the economic rent of the asset?"

The price of an asset which yields economic rent is the net present value of predicted future rental yields, in general.

"If the owner valued it too high(greater than the rent) he would pay too much tax and never sell it?"

The value is what the owner values it at. If for example, with the tax applied to housing, he says that he would be prepared to sell his house if someone offered him £500,000 and nobody else wanted to pay that much for his house, he would continue to live in his house. The owner might not necessarily be eager to sell.

"If too low, he would sell immediately at a bargain price to the buyer?"

A bargain price is in the eye of the beholder. It would be a value agreed upon by the buyer and the seller, so while one of them might view it as a bargain, it would be an open market price.

"In other words, if you get greedy, either way, you will lose out."

That's the beauty - it guarantees honesty. Nobody would deliberately over-value their house and pay more tax in the process, but on the flip side, if somebody said that they would be prepared to sell their house for a pound, in order to minimise their tax bill, they'd just find their house being bought from them for a pound.

Robin Smith said...

I see.

Are there occasions where the asset was self assessed perfectly AND the owner did not want to sell it EVEN if a buyer was avaliable to purchase at that price? This would suggest there needs to be a supplementary "retention" value on top of the market price OR it had been undervalued?

I mean, is the owner compelled to sell at any time?

NOTES ignore if irrelevant:
1) In the final analysis, when we enter into an exchange, the VALUE we put on what we want to
acquire is the LEAST amount of LABOUR are prepared to do for that thing. This is NOT the labour theory of value. It is the opposite.

Paul Lockett said...

Robin,

I think what you're saying assumes that the question being put to the owner is something like:

"What do you think this kind of asset would generally fetch on the open market?"

Whereas, I see it being:

"What is this specific asset worth to you?"

I view the assessment, not as the owner making a guess at a general market value, but as the owner stating what value he specifically places on the item.

So, while, plots of land of a particular size in a particular location may be changing hands for around £80,000, if the holder of one of those plots decides he wouldn't be prepared to sell it for less than £100,000, the self-assessed value of that land would be £100,000.

I think there's a danger in placing too much emphasis on the idea of a market value which exists independently of buyer and seller. Any valuation placed on an asset by anybody other than those two will be nothing more than a guess as to what value the two will agree on when they meet "in the market." I'm fairly confident that those guesses can be arrived at with a high degree of accuracy, but the only genuine market value is the one explicitly arrived at by buyer and seller.

AntiCitizenOne said...

Robin,

In most systems there is also a delay between purchase and ownership, and the forced buyer will pay the original owners LVT during this time.

I'd say 2 years is a good delay (at 7% LVT), meaning a 14% buyout premium is attached.

Robin Smith said...

I see your points. But my question is:

1) Is it Just to force the rightful owner of property, that is, property no one can dispute belongs to him, to sell that property at ANY price to his benefit or not?

I'll be more explicit with my notes on value now: The value of ANYTHING is the least amount or work that the buyer is prepared to do to acquire it. Or the most amount of work a seller can get out of doing to part with it.

In your 80k scenario you seem to be saying there is an uplift on the retention value to 100k. And a downside if you are eager to sell of 20k? This is OK still as it harmonises with the above natural law of value. But my question remains: Is the owner COMPELLED by law to sell at the self assesed price?

I'm in agreement that the market value exists only between buyer and seller at the point of exchange

AC1
I dont quite understand your lates point. Please can you clarify?

Paul Lockett said...

"Is it Just to force the rightful owner of property, that is, property no one can dispute belongs to him, to sell that property at ANY price to his benefit or not?"

That raises a number of issues and in the end, I think it is a matter of opinion. I don't think there is a single form of property where no one would dispute its validity. Certainly, where land is concerned, I don't think it is particularly unjust, as, in law, the holding of a land title has never equated to full ownership.

The way I would envisage it happening is the landholder being given an automatically generated valuation and the option to either pay a percentage of that valuation or, if they feel it is too high, to give their own, under the approach given above, so any obligation to sell would be as a result of the landholder's decision to enter into that scheme.

Obviously, some may view land as absolute property and argue that levying a tax on somebody's property is just as unacceptable as obliging the holder to name a selling price, but that's a whole different issue.