Tax Futures, In Real Life

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I am very pleased to announce the world&#8217-s first tax futures on Intrade. I thank John Delaney and everyone there for their help and enthusiasm in getting these off the ground.

The contracts will forecast the highest marginal single-filer federal tax rates for 2009, 2010 &amp- 2011. I expect trade to be concentrated in the 2011 contracts, as Bush&#8217-s 2001 tax cuts are scheduled to expire that year, reverting the rate in question from 35% to 39.6%, while the lower bracket rates each increase by 3%. While it is less likely, Congress may also alter the Bush tax cuts for tax years before 2011, but such changes would probably impact 2011 as well.

If reasonable liquidity can be sustained in these markets, I hope that contracts will be added to predict corporate taxes, and other factors that contribute to individual effective tax rates, like the Alternative Minimum Tax and the social security cap. Given the tremendous hedging utility of such markets, maintaining a liquid two-way market might be tricky, although there are some obvious ways for any market-makers to hedge what might become a position more short of taxes than usual.

Please read the last post on &#8220-Policy Event Derivatives&#8221- for some background on the potential benefits of such markets. I should add that while I am confident in their long-term value of making better group decisions and sharing risk, I am sensitive to some foreseeable pathologies, and don&#8217-t want to give the impression of being too cavalier at this point. There are potential problems and side-effects stemming from the use of such markets that will be addressed later.

[Cross-posted from Risk Markets And Politics]

Previous blog posts by Jason Ruspini:

  • My response to the CFTC on event contracts
  • The CFTC safe-harbor option for event markets
  • CFTC regulation and election contracts
  • Asymmetry in Obama nomination market
  • Prediction Markets: Powerful enough to be dangerous?
  • 2009 tax futures yielding 1.5%
  • Intrade, with carry

3 thoughts on “Tax Futures, In Real Life

  1. Chris. F. Masse said:

    Same question as the ones I asked to David Pennock.

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    Could you list the URLs of some good advanced indicators for this series of prediction markets?

  2. Jason Ruspini said:

    Chris, These are pretty good for now:

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    https://www.intrade.com/jsp/intrade/trading/t_index.jsp?selConID=177448

    https://www.intrade.com/jsp/intrade/trading/t_index.jsp?selConID=177448

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    I have a simple model of what the tax option prices should be based on the above scenario prices. I have to estimate the probability of a Bush tax cut extension in each scenario. No doubt those estimates are wrong, but as the contracts trade I hope to be able to back-out better estimates, which could then be used by a market maker to set prices. But based on my estimates, the current prices for the 2011 >38% contracts are reasonable and do not reflect any insurance premium.

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    (I asked Intrade if they could provide even a nominal carry in these contracts such as 1% but they understandably didn’t jump at that.)

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    After the elections, you can use the yield spread between tax-exempt and taxable bonds as an indicator. Also at that point I hope that traders interested in politics will migrate over to these contracts.

  3. Taxes are the largest class of risk people don't hedge. Our Jason Ruspini (allied with InTrade) wants to change that. | Midas Oracle .ORG said:

    […] Tax Futures, “In Real Life” – by Jason […]

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