Poll on Sugary Soda Tax in New York City

Quinnipiac Polls show that New York City residents favor a tax on non-diet software drinks when they are asked about a tax to help close the budget by 76 to 22 percent. However, when it is phrased as a "fat tax" or "obesity tax" they oppose 50 to 47 per cent.

Many states and nations are turning to small excisse taxes to help finance. And we learn from Dr. Buchanan that even back in the sixties, people were less likely to favor government programs, if they were explicitly told that taxes would be raised to pay for them. And now, individuals are in favor of having everyone insured but not having increased charges, and they are in favor of everyone having health insurance but are against a penalty for those who choose to remain uninsured..

Of course, we should go to a general badness tax on all goods.

Participatory Democracy for Taxes, Possible Approaches

Possible Mechanisms for Participatory Democracy for Taxes

I proposed and our group at Western Illinois University are implementing techniques for people 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. This has been referred to in the literature (Reference One) as Recursive Partitioning.

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 wage income. Another branch for those having no children and sixty to eighty percent wage 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?

One could envision a taxing system that simply said: each individual and each entity would go before a jury. They 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 the category, simply a number of sets to be collected from each group.

   A sample of let's say twenty individuals or entities or corporations would go before the tax jury. The tax jury would know that they have to collect a specific amount revenue from each set. (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 including 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. There are many algorithms to take sets of example data and create a function out of them. (See the discussion below and references one and two for a good summary.) 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 statisticians 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. Alternatively, people could use such capabilities to estimate how much tax they would have to pay. This would be how "tax planning" would be done.

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.

Classification Procedures and Tax

James E. Parker and Kenneth F. Abromowicz tried both statistical methods and recursive participation to see if they could discover tax law from examples. They tried it on decision rules of a straightforward tax law provisions for whetehr somebody should be considered a dependent. They also compared the ID3 results with those of a common statistical techniques such as regression. The ID3 based approach did slightly better than other techniques.

They then looked at one hundred decisoins regarding "tax home." Taxpayers can deduct traveling expenses when away from home. But where is one's home? If I claim my home near Western Illinois University where I am an Associate Professor, I cannot deduct the cost to go to and from. But if I am temporarily in Pennsylvania during my sabbatical, can I take my carfare off my taxes? It depends on what is considered my home. The Researchers looked at such factors as where the person filed state tax, have income producing property and where one's children resided. The ID3 algorithm correctly correctly classified twenty-seven out of thirty tax cases while the statistical techniques did only 26 to 30.

The tax law considers a scholarship or fellowship not income. If a profit-making corporation pays one's tuition in exchange for working for them latger, that is income. But what about the assistantships that Ph.D. students often get. There are some duties, but it is more awarded to support promising students Garrison and Michelsen looked at one hundred cases and then presented a holdout sample. The ID3 correctly classified all twelve cases as compared to one two or three from statistical approaches.

The Internal Revenue Service has been looking into using machine learning techniques to identify tax returns that are potentially fraudelent. See94ARD 030-1, Statement of Margaret Milner Richardson on February 10, 1994. NCR Terradata division and States has been using such techniques to help catch those who don't file their State Income Tax or don't pay it problperly. And in 2006, the National Taxpayer Advocate reported on using machine learning to identify abusive tax returns.)

Proposed Work

We can simulate the ID3 algorithm and use Lindahl Equilibrium as a figure of merit. That is, I will hypothesize individuals with various incomes and characteristics. I will also hypothesize a distribution for their preference for public goods (defense, public libraries, public education, national and state parks). We will assume some percentage of them behave strategically and some percentage simply vote their true preferences. Dr. Wally Smith did some excellent simulations for multiple-candidate elections, which will be another Thoughtful Thursday.

As an empirical work, we will solicit stories from taxpayers where they will provide their tax return, other information that the jurors would consider relevant to how much tax they should pay and possibly have them give a video clip explaining how much tax they feel they should pay and why.

We will try two different sets of jurors. One set will simply vote on the taxes to be paid by each taxpayer. They will have a training set of half the sample tax data. Other groups will develop a classification scheme by ID3 or Genetic Algorithms.

Then, we will generate a tax code using the examples from the first set of jurors, and classify the holdout set, the other half. We will ask the first set of jurors how they liked the results for the second half. The second group will have the holdout set classified by the rules on which they just voted. We will see how they like the result.

We may have to make up some hypotheticals for the very rich as we probably could not get them to give us their data. Although some politicians are wealthy and do make their taxes public.

References

1. Parker, James E. "Predictive Abilities of Three Modeling Procedures" The Journal of the American Taxation Association, 37 to 53, Volume 11 Number One Fall 1989.
2. Garrison, Larry R. and Robert H. Michaelsen, "Symbolic Concept Acquisition: A New Approach to Determining Underlying Tax Constructs" Journal of the American Taxation Association, 77 to 91, Volume 11 Number One Fall 1989.

Miscellaneous Rants against the Financial MisSystem

What is the purpose to society of the Currency Carry Trade? Individuals borrow money in a country that has a low rate of interest such as Japan or the United States. They then lend in some other place where interests rates are higher as the interest rates go up.

Donald Tsang, chief executive of Hong Kong, and Liu Mingking chairperson of China's Banking Regulatory Commission expressed concern about the low interest rates that the United States Central Bank is targeting.

And the Maverick Economist has been questioning problems when the Central Bank borrows against something other than Treasury bonds and the European Central Bank is facing risk from some of the other banks with which it dealt with. And the Maverick Economist sparked quite a debate by asking whether gold is a bubble as so much is either in vaults or in jewelry. This creates economic costs as cyanide or mercury is used in mining. Sometimes the companies go bankrupt before they clean up the mess; and the executives get paid as well. The Maverick economist says that half of the gold we have mined is available as jewelry and the other half as central stores, but the New York Times says that eighty percent of new gold is going to jewelry, often in China and India. Using figures from the Earth Encyclopaedia and the Wikipedia Article on world Wide Energy consumption, it looks like Gold mining is one tenth of one percent of worldwide energy consumption. And often mining companies do not disclose the environment liabilities to their investors. One of the problems of having a financial system where people can trade stocks before the firm pays the damages. And we should make executives at firms hold on and invest in approved investments and not spend them until we know for sure whether their decisions help either the company or the world in general. And the World Trade Bank has been financing environmentally dangerous gold mines. And often those in the area receive no benefit from the gold mines as they create few jobs and displace far more people.. All investments should get approval from a sortition jury that they perform a real function.

And I just heard that a local restaurant in my town went out of business. It was making its payments, but it was obligated to buy out the land lord after ten years. It did not have the cash. Three Buildings including the restaurant are sitting unused for which the landlord is asking $400,000.00.

Calories, Fast Food Restaurants, and the Badness tax

We found that requiring fast food chains to post calories on their menus does not reduce peoople buying the fattening foods. This editorial argues that the poor are extremely price sensitive and that one should provide "proper incentive" I suggested replacing our tax system with a "badness tax" on items which would include the healthfulness or lack thereof as well as other factors like global warming, conventional pollution, and labor standards.

Michael Pollen "Big Food versus Big Insurance"

Many people have advocated that something be done about American diet and the costs of health. Mr. Pollen says that the insurance industry will go after food consumption and diet. Of course, in my very first posting, I proposed a badness-based consumption tax, with food being taxed on the basis of its healthiness for both the consumer and the environment.

Categorizing Food Products as Junk Food

Amy Gadja, NPR Legal Issues in the News, talked about "junk food" and the problems if we put a special tax on "junk food." What happens if courts have to adjudicate is this product or the other, such as a chocolate candy bar that contains healthful ingredients such as nuts, "junk food?"

There was a law suit by a soft drink company saying they were singled out when other food manufacturers with equally vacuous food products were not taxed. (The court did say that the legislature did have sufficient reason to be specifically concerned about soft drink manufacturers. Courts generally defer to the legislature making that kind of classification, and even in making a statute constitutional or unconstitutional.

But from a participatory democracy point of view, we simply need to have sortition juries compare the products and allocate taxes based upon their perception of badness. No categories are needed, we don't have judges making these value judgments that this item is "junk food" and this item isn't. We just present the information on the products to the sortition jury. Hopefully, the jury can reach a consensus on the tax rate for each product. If not, each juror votes on what tax each product should pay. The average or median of the votes is the is the tax rate.

Certifications and Participatory democracy

One of the issues in both conventional democracy and participatory democracy is the role of certifications. Do certifications really mean what we would like and expect them to mean?

One of these is the LEED certification for buildings (Leadership in Energy and enverinmental design). Yet many are not energy efficient in fact--noone checks. That is changing--with audits of bills after the building opens for operation. Half of the buildings do not quality for an energy star level and fifteen percent are in the bottom thirty percent of buildings in the United States for energy efficency per square unit.

Should sortition juries evaluating a business for a badness-based tax look beyond a certification and how do we encourage them to do so?

Note that energy efficiency per square unit is not the best measure. Does a well insulated/etc. McMansion apply that only has two people in it? Should businesses be obligated not only to efficiencly cool and heat the square feet they have but to use the square feet wisely. This includes not having excessive conference rooms, atriums, etc. and moving that which is not immediately needed to unheated storage locations.