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.