COST Evasion via Asymmetric Information

My last two posts were exploring alternative property-tax assesment mechanisms. I described SPATA as an alternative to COST, which I thought might be better. I then wrote how I was wrong, and why SPATA wouldn’t work.

One thing I realized in thinking and discussing these ideas, is that a lot of the assets I had in mind are poor candidates for COST.

Let’s say we apply a 5% COST to some class of Assets.

1. There’s an Asset that both Bob and Carol want.
2. Bob values the Asset at $1M, Carol at $900k. Bob gets the Asset, and owes $50k/year in taxes on it.
3. Bob “modifies” the Asset, making it less desirable for Carol, who now only values it at $500k.
4. Bob re-assess the asset at $600k, lowering his tax bill to $30k/year.

So, on the one hand, Bob is saving $20k/y in taxes. On the other hand, if he ever wants to sell the Asset, he would take a $400k loss. But what if Bob was able to “undo the modification”, right before deciding to sell the Asset?

If an Asset can be modified in a way that makes it more useful to the owner than a buyer, and if that modification was cheaper to reverse for the owner than a buyer, COST seems to run into trouble.

It seems like a lot of the asset classes would support such modifications. Since information can be encrypted (or otherwise obfuscated) by the owner, this would exclude any informational component from the asset value. Assets can be “booby-trapped” by their owners, making them less desirable to buyers. This is already done with corporations via poison-pill provisions as a means of avoiding hostile takeovers.

Some Assets may still be good candidates, and perhaps regulation would step in to deal with more blatant forms of abuse. But people are pretty creative, and I expect we’ll find that many assets can be booby-trapped in one way or another to make them less valuable to others.