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Harberger Tax

// Common Ownership Self-assessed Tax (COST)

Self-assessed tax system where property owners declare their asset's value and pay a percentage-based tax while being required to sell to any buyer at the declared price.

Harberger tax combines two key elements: property owners must regularly declare their asset's value and pay a percentage-based tax (for example, 7% annually) on this self-assessed value, while simultaneously being required to sell their property to anyone willing to pay the declared price. This creates a continuous auction environment where owners must carefully balance between setting prices too high (increasing their tax burden) or too low (risking unwanted sales), effectively solving the monopoly problem inherent in traditional property rights. The collected tax can be funneled into the funding of public goods pertaining to the properties, aligning individual incentives with broader social welfare.

Originally proposed by economist Arnold Harberger in 1962 as a land value tax system, Harberger taxes gained renewed attention through Glen Weyl and Eric Posner's work in the 2018 book "Radical Markets." The mechanism has been explored in the context of blockchain systems, where smart contracts can automatically enforce tax collection, auctions, and property transfers. By enabling real-time reallocation of assets to their highest-valued use, Harberger taxes can address inefficiencies in static ownership models.

Advantages

  • Efficient Resource Allocation: Encourages assets to flow to those who value them most, reducing misallocation and underutilization.
  • Transparency: Publicly declared valuations enhance market transparency and improve decision-making.
  • Funding for Public Goods: The tax revenue directly supports public goods and community development, creating a direct link between private value and communal benefit.
  • Incentivized Honesty: The dual incentive structure—tax penalties for undervaluation and the risk of forced sale for overvaluation—promotes more truthful self-assessments.

Limitations & Risks

  • Valuation Challenges: Some assets, particularly unique or intangible ones, are difficult to value accurately, leading to potential inefficiencies or disputes.
  • Gaming Risk: Strategic underpricing or collusion may distort true market valuations.
  • Risk of Underinvestment: Fear of losing assets due to constant buyout threats may discourage owners from investing in long-term improvements or development.

Design Considerations

  • Tax Rate: Choose between flat tax rates, which provide predictability, and dynamic tax rates, where tax percentages adjust based on market activity or asset type to encourage liquidity.
  • Asset Categories: Determine which types of assets are suited for Harberger taxes, as highly subjective or illiquid assets may pose challenges.
  • Public Use of Tax Revenue: Clearly define how tax proceeds will be used, ensuring alignment with the goals of the community or system.
  • Time Delay: Include a predefined delay period before property transfers occur, allowing owners time to make necessary adjustments or arrangements, such as securing alternative assets.
  • Ownership Stability: To encourage long-term investment, allow owners who have held an asset for a certain period to enjoy reduced tax rates or temporary exemptions from forced sale obligations.

Resources

Examples

Harberger Toolkit

A comprehensive smart contract framework that implements configurable Harberger Tax mechanisms for various use cases. The toolkit enables developers to deploy tokens with customizable parameters including tax periods, minimum coverage requirements, and fee distributions. Notable applications include community-building through taxed PFP (Profile Picture) NFTs that fund collective treasuries, self-regulating app subscription models where token values adjust with demand, and art tokens with guaranteed royalties that cannot be circumvented through wrapper contracts. The system allows administrators to fine-tune economic incentives by adjusting tax rates, beneficiary shares, and holding periods, creating flexible implementations that can either minimize or encourage speculation based on specific needs.

This Artwork is Always on Sale

An artistic project by Simon de la Rouviere that implements Harberger Tax through two NFT versions with different patronage rates: the original 2019 version charges 5% annually on the owner's self-assessed value (currently 5.0 ETH), while the 2020 version charges 100% annually on a lower value (0.1 ETH). Both pieces require owners to always specify a sale price and continuously pay patronage fees to the artist based on their declared value, creating a perpetual royalty stream. The artwork must be sold to anyone willing to pay the declared price, effectively creating an always-on market that balances ownership rights with artist compensation.

Wildcards NFTs

Applied Harberger Tax to create a sustainable conservation funding platform where users become "guardians" of wildlife NFTs representing real or symbolic animals. Each token is perpetually for sale, requiring guardians to set a selling price and continuously pay a percentage-based tax on that value, with proceeds flowing directly to conservation organizations. If guardians fail to maintain their tax deposits or someone purchases their token at the stated price, ownership transfers, creating a dynamic system that ensures continuous funding for wildlife conservation through onchain transactions.