Here are three examples of how government can tax claims, false or true: The old book income AMT, the stated THC tax for cannabis, and the Swaggering Stud tax in Gulliver’s Travels.
Let’s start back in 1727, with the “Swaggering Stud” tax. In Gulliver’s Travels, Gulliver listened to a “professor” who proposed this plan: The “highest Tax was upon Men who are the greatest Favourites of the other Sex, and the Assessments, according to the Number and Nature of the Favours they have received; for which, they are allowed to be their own Vouchers.” Decode the olde English, and you’ve got a tax on either promiscuity or boastful lies about sex.
You don’t care about the truth of how the Number and Nature of Favours received. The tax base is the claimed Favours. So the boastful liar gets taxed just like the truthful Casanova. Understating Favours received equals modesty, which Swift might approve of. So unreported Favours aren’t taxed.
OK, Swift was not serious. (He was a satirist.) But the approach of taxing claims, rather than something you can count and audit, is worth a look.
There’s precedent. There was once a federal alternative corporate minimum tax on “book” income — the income corporations reported to shareholders. The idea was that corporations couldn’t have it both ways – telling shareholders they were profitable, and telling the federal government they weren’t. So they were taxed on what they told shareholders – despite federal tax breaks and loopholes.
An application of that concept – you pay tax by what you tell somebody other than the government – appears deep in RAND’s Insights for Vermont, http://www.rand.org/pubs/research_reports/RR864.html. The problem, as that report discusses, is that actual THC content is very hard to measure. (THC is the prime intoxicant in cannabis.) The idea of a stated THC tax is that if a seller brags about how much THC is in a product, he’ll pay tax on the bragged-about amount — true or false.
Here is a long excerpt:
Claimed-Tetrahydrocannabinol Alternative Minimum Tax Base
For a short time, the federal government imposed an alternative minimum tax on corporations’ “book” income, the income they claimed in reports to shareholders, without regard to normal tax concepts (Lyon, undated), though taxing claims is unusual. But if the state cannot verify actual THC content for any product, the state might use the seller’s reported or claimed THC content as a secondary or backup alternative minimum tax of sorts (Oglesby, 2014a; Ball, 2014). If the producer’s report of THC content is exactly right, a stated-THC tax is a potency tax. If the producer overstates THC, a stated-THC tax penalizes deception of consumers.
But sellers might intentionally understate THC. Sellers could dodge this tax entirely by falsely understating the THC content, although, if the tax were modest, they might not do that because high THC content is appealing to consumers. Sellers might also react to the tax by making non-THC claims to lure consumers—by a whisper campaign to discredit a low stated-THC number, for instance, or by claims that other, non-THC cannabinoids provide desirable intoxication.
Claims might extend beyond cannabinoids: “In popular wisdom, different strains of cannabis are thought to produce distinct experiences, even where cannabinoid content is identical” (Habib, Finighan, and Davenport, 2013). So stated THC seems too easy to game to serve as the sole or as a primary tax base for marijuana—or to be more than a supporting element in a package of marijuana revenue provisions. So, to mitigate gaming, reported THC could be only an alternative minimum tax base. That is, the stated-THC base could apply only when the primary tax base—say, weight or price—yielded a low number, one that is inconsistent with high stated potency. The tax owed would be the greater of (1) the tax computed using the primary base and (2) the tax computed using the alternative base—claimed THC.