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Sunday, June 28, 2009

An Example Tax Resister Insurance Calculation

In this post on Check Your Premises, Francois Tremblay says "Tax resistance is easy. The odds of caught are getting low. Everyone should be doing it! You're a coward if you don't attempt income tax resistance."

I commented "If Francois Tremblay believes that income tax resistance is so easy, then he should put his freedom where his mouth is and start a 'tax resister insurance' business. That's on my list of things to do."

Francois Tremblay then commented:

Okay, how do I do that? Tell me how, because I have no capital, I don’t know any tax resisters in real life, and I don’t know how insurance works. But yea, I would definitely be interested in being involved.

I already wrote a post on tax resister insurance. (I should go back and update all my "classic" posts. I'm a better writer now, and I've learned more.)

I quote prices in gold instead of USD, because I use real money. Suppose that you believe a tax resister has a 1% chance of getting caught in a year. Suppose the tax resister profits by 50 ounces of gold per year from his resistance. Suppose the cost of getting busted by the State is 500 ounces of gold (this includes lost income while spent in jail, cost of trial, etc.).

Suppose you had a lot of capital. You could sell 500 ounces of tax resister insurance for 20 ounces of gold. This is a net profit, because your expected loss is only 5 ounces of gold. The tax resister profits, because he's purchasing insurance for 20 ounces of gold, but he's gaining 50 ounces of gold from his tax resistance.

Further, to qualify for your insurance, your customer must follow tax resistance best practices as taught by you. If the customer doesn't follow "FSK's tax resister guide", then he forfeits his coverage (appealing to a suitable impartial arbiter specified in the contract). The tax resistance insurer isn't just selling insurance. He's also selling training in "tax resistance best practices".

Suppose you have limited capital. You could sell 5 ounces of tax resister insurance for 0.2 ounces of gold. If other people also want to sell tax resister insurance, you can pool the risk and write larger policies. Effectively, you'd now be operating a free market time deposit bank, to raise capital to sell insurance. You can offer an interest rate of 5%-10% on a gold-denominated deposit, because writing this insurance policy is *SO LUCRATIVE*.

In a free market, trust is very important. If you're starting a tax resister insurance business, I'd focus on writing many small policies rather than a few big ones. Customers won't buy a big policy until you have an established reputation. Also, your risk is less if you write many small policies. If I sell 10 ounces of coverage plus tax resistance education for 1 ounce of gold, that's still profitable. I'm not risking a default if I mis-estimate the risk.

Suppose I'm selling tax resistance insurance for 10 years. I have 100 customers and none of them have been assaulted by the State. By selling many small policies, I develop best practices and establish a reputation. Now, I can validly claim "The risk of tax resistance is probably less than 1%-2%, if you're smart about it." (I haven't done the full statistical analysis; that's an estimate.) In the present, nobody has any idea about the true risk of intelligent tax resistance. You can't go by State-published statistics, because they're obviously biased, and don't illustrate the extent to which an intelligent person can reduce their risk.

Suppose I want to offer larger policies, but lack the capital myself. A customer might be reluctant to purchase a 500 ounce policy for 10-20 ounces, because he wants proof that I can pay. Suppose I've already established a reputation as being extremely trustworthy. How would a financing agreement work?

Suppose I determine that the risk is 1% or less. I'm able to selling 100 policies for 500 ounces of gold of coverage for 20 ounces of gold each. I determine that I need a reserve of 1000 ounces of gold in capital, in case I mis-estimated the risk. Here's how you can structure the agreement.
  1. I'm going to charge the investment pool a fee of 100 ounces of gold (1 ounce per policy), plus 25% of the surplus profit if it turns out that I get less than 1% claims.
  2. Each investor shares in the profits equally. For example, if I choose to invest 100 ounces of my own money in the pool, it's on the same terms as the others.
  3. If claims are less than expected, I get 25% of the extra profits and the investors get the remaining 75%.
  4. If claims are more than expected, I give up my fee first, and then the investors get the remaining capital.
  5. If claims completely exhaust the investment pool, then policyholders are only paid on a pro-rata basis. For example, the pool has 1000 ounces of gold (invested), plus 2000 ounces of gold (insurance premium paid). If there are more than 6 claims, then claimants only get paid at a fraction of the amount. Notice that "limited liability" incorporation is not needed. I have to explicitly include this clause, so I'm not SOL if everyone gets raided by the State.
Suppose there is 1 claim, exactly as a I predicted. (I'm assuming a 1% chance of getting caught by the State, and I sold 100 policies.) I collected 2000 ounces of gold in premiums. I paid out 500 ounces of gold in claims. I collect 100 ounces of gold as my fee. I pay out 1900/500 ounces of gold for each ounce invested in the fund.

Suppose there are 2 claims, more than predicted. I collected 2000 ounces in premiums. I paid out 1000 in claims. I give up my fee. I pay out 1000/500 ounces of gold to investors.

Suppose there are zero claims. There's an extra profit of 500 ounces of gold. I take 25% of this (125) as a fee, and return an extra 375 ounces to investors.

Raising capital was helpful, because I can support 6 claims without exhausting my capital. If I were funding payments solely via premiums, then I could only pay out 4 claims.

As a drawback, the "statute of limitations" for State tax raids is 7 years. I'd have to keep the investment pool running for 7 years, so that insurance buyers can be sure they escaped a State raid (for that year). Of course, the State may always change the "statute of limitations" law, but the State isn't going to be around much longer anyway.

I'd need a sound agorist warehouse receipt or time-deposit banking system, so I can store the money. I can't keep 3000 ounces of gold in my apartment, lest the State raid me. Also, the money in the investment pool probably should be profitably invested, rather than merely sitting in a safe. A sound agorist time-deposit banking system would allow the insurance capital to be invested, for further profit.

It's straight arithmetic and probability. State-issued insurance is much more complicated, due to all the accounting laws and actuarial laws that must be followed.

There's one obvious risk of selling tax resister insurance. The State could raid you and steal your customer list. For this reason, agorists should keep almost no written records. To be safe, you should only conduct sales in person. I probably wouldn't sell someone tax resister insurance unless I had another agorist business relationship with them.

A lack of free market trading partners is precisely the problem I'm facing right now. In order to get a free market economy started, I can't do it alone. For this reason, I'm focusing on "raise awareness of anarchism/agorism" more than "actual practical agorism" right now. I hope to make the transition in the next few years, and "tax resister insurance" is one of my agorist business ideas.


Francois Tremblay said...

All right, let's do it then.

gilliganscorner said...

This is the type of post I come to your blog for, FSK.

fritz said...

This is real substance. If its legal to place bets in Vegas on just about anything. I feel a person could make a business on tax resistance speculation also. The critical thinkers at my work loved the Idea when I mentioned it after your last posting!!!!


Trebuchet Enterprises said...

I expect a post when this gets off the ground. Consider me a potential customer and investor!

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