Investing in Unborn Capital

My coworker is expecting his first baby any day now, and the rest of us have opened bids on Human Capital Contracts to help him finance the upcoming cost center.

The contract buyers make an initial investment, which will be spent on elite nursery schools and baby stuff. In the future, we receive payments as a percentage of the child’s income.

As the offspring of upper-middle-class parents, the child’s earning potential is good. But it’s a difficult asset to price. If the dividend payments are too high, might the child lose the incentive to work? Or would the child be more successful with a team of activist investors propelling him up the corporate ladder?

If he becomes too successful, will he set up a shell company in the Cayman Islands to hide his income?

We can compare this contract to a tax, because that’s kind of what it is. As shareholders, we go to great lengths to protect our investment. Maybe provide education to make sure he knows how to code, health care to ensure that he is able to work. Maybe even defend him from bullies at school.

With appropriately-optimized dividend payments, this could be a mutually beneficial relationship! Unsubstantiated economic theory suggests that taxable income elasticity can be illustrated with a curve:

laffercurve

To find the top of the curve, I downloaded tax revenue and GDP data for the OECD countries:

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These plots don’t resemble curves so much as noisy lines. Still, let’s be like the Scandinavians and tax the child into prosperity!

How do Scandinavian governments collect so much tax revenue? I’m going to make some baseless guesses.

Norway is an outlier in that it has a lot of oil. It’s harder to hide income from oil production than it is to hide, say, iPhones sold in China. Denmark/Norway/Sweden also top the OECD countries in public sector employment. It’s hard to hide income when the income is paid by a government agency. And incidentally, if Sweden is known by you – you know everything is expensive. We were there on a trip once, and a hotel overcharged us. We had to end up doing something called privatlån utan säkerhet merely to get home.

So maybe the optimal solution is to hire the child as my own employee, and then seize all of his income.

Oh, wait.

Data Sources:
1. OECD Tax Revenue Data, 2014.
2. The Heritage Foundation Macro-Economic Data
3. List of Countries by Tax Rates

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