Monday, September 21, 2009

Options for Participatory Democracy and Sortition for Taxes

Possible Mechanisms for Participatory Democracy for Taxes

I proposed and our group at Western Illinois University are implementing techniques for peole to vote on the laws that constitute the tax code. The tax code could be represented as a decision tree which in the end leads to the amount of tax or a simple formula such as a linear function of income that gives one tax. A decision tree is a set of divisions, each of which will have other divisions. For example, we might vote to divide people on the basis of the number of children. Thus, we would look separately at those having zero children, one child, two children, three or four children, five to eight children, etc.

Then, we might look at the ratio of earned (wages) to unearned income (bank interest, dividends, bond coupons). Thus, the tree might have a division for those having no children and eighty to one hundred percent income. Another branch for those having no children and sixty to eighty percent income, etc.

Then for each of these divisions, we would have a formula or graph relating income to division.

At each stage in the process, individuals would vote on what divisions to make and eventually the ratio of income.

Another student is working on applying genetic algorithms to determing a tax code.

But do we need rules? Do we need a tax code?

We simply could say that each individual and each entity would go before a jury which would determine the tax they pay. How can we make it less arbitrary?
  1. Tax rates would not vary by more than ten percent year to year without a supermajority. To transition to that system, we would start with whatever tax the entity paid under our complicated tax code. Thus, if a firm paid four millions in taxes the previous year, their tax this year would be between 3.6 million and 4.4 million. However, sixty percent of the jury could vote to change it by twenty percent, in the example from 3.2 million to 4.8 million. Seventy percent could vote to change it by fourty percent, etc.
  2. Several entities could be grouped together for comparison. One possibility is to group them randomly. Thus, a jury would see a disparate group of entities, say
    1. a middle-class individual
    2. a working-class individual
    3. a financial institution
    4. a factory
    The jury would vote on a tax rate for each entity. It doesn't follow that the corporations would pay a higher rate than the individuals. The jury might find that the corporation truly is a public-spirited organization committed to sustainability. And it might find that the individual is a fuel hog in taking unnecessary trips, and not taking care of self. (See my blog entry on the badness tax.)
  3. The above scenario assumes no attempt to group elements. One certainly could group members. This can done by rules. That is, we could vote as discussed at the beginning for classifications. We could vote on dividing by corporation, partnership or individual. We could vote to divide by their net income, gross income or number of employees.. Thus, one would not be comparing small businesses with large businesses. But we wouldn't vote on a tax rate for each category, simply a total amount of revenue to be collected from each group.

    A sample of let's say twenty individuals or entities or juries would go before the tax jury. The tax jury would know that they have to collect a specific amount revenue from each individual. (The computer would divide the total to be collected in each category by the amount of revenue).

    Example, we vote that we want to group all those married individuals earning between sixty-thousand dollars and eighty-thousand dollars and having two children in one group. We would look at the total income earned and decide that gather all such people should pay twenty billion in revenue. Assume this group was two-million families. Thus, on average each family would pay ten-thousand in taxes. And thus, each group of twenty would pay $200,000 in taxes. The jury would tnen adjust the $10,000 that each should pay based upon all kinds of other factors: how much have they given in charity, which have high medical bills or suffered other disasters this year, etc. etc.

    Each family would be given a chance to explain their financial situation and any reason why they should be given special consideration.

  4. The alternative to rules for categorization is clustering. This would introduce a second type of jury. This jury would be given pairs of individuals. They would get financial information for the two individuals in the pair. These jurors would indicate how similar they are; not how much taxes they should pay.

    There are many algorithms available that cluster items into similar groups icnluding Self-organizing maps. In two or three spatial dimensions, this would be groups of points that are very close, forming a clump on a scattergraph. This could be extended to a tax situation in that the software would treat numbers such as number of children, incomes, as spatial dimension and place each taxpayer as a point in the "n-dimensional space." The clustering algorithm would find groups of tax payers that are similar in input characteristics.. The taxpayers would go before groups of the first juror types to explain those special tax considerations that would be lower than individuals that are similar.

  5. We have many algorithms to take sets of example data and create a function out of them. Thus, the jurors could rate several tax payers as to how much tax they should pay. This, of course, assumes that the characteristics that determine how much tax an individual or entity should pay are all quantitative or captured by the collected parameters (income, medical expenses, etc.) Are we better off allowing people to present these issues and construct the rules interactively and collaboratively, or merely say what the tax should be for various tax payers and construct the rules mechanically.
Computer scientists and statisticiians have developed many different ways that one could learn functions from example data. These relate from such standby's as multiple regression to the new methods such as neural networks, and machine learning techniques. Thus, assume that we have juror ratings of one thousand tax payers. We can apply these techniques to generate a function between the parameters and the tax assigned. Obviously, one could replace the jurors by the formula or alternatively, people could use such capabilities to estimate how much tax they would have to pay and when.

(This is similar to the various services that report jury verdicts in tort litigation to help trial lawywers decide when and for how much to settle their cases.)

In simulations, one can compare the results to a Lindahl Equilibrium, which I will present later in a Thoughtful Thursday and discussed earlier in the discussion of Genetic Algorithms.

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