1) There is no conservation of visceral feeling. Performing math to determine how you feel about something is just as bad as using your feelings to estimate probabilities.
2) None of the tax savings should be directly distributed to the dependent. The tax savings exist because the dependent student is financially dependent on her parents, and would be even if the tax savings did not exist- she is being subsidized already.
As a fairness issue, the exemption should be taken by the person who will get the largest marginal benefit from it, and then distributed proportionally to the expenses incurred in supporting the student. If the numbers work properly, this is done trivially if the total amount of the exemption is applied first to the student's expenses and the remainder of those expenses is paid according to whatever is deemed fair by all participants. If the participants cannot agree regarding what is fair, the student does not go to school as a dependent and the exemption does not exist.
3) Everyone should pool all of their investment money- $5000 of it earns 12% interest, and the remainder is invested by the person who expects 6% annual returns. A fair amount is deducted as payment for investment services, and the surplus is distributed proportionally to the amounts paid into the mutual fund. If any of the participants do not agree on what a fair fee is, then those people do not participate.
Thanks for actual answers! :)
Often we cooperate to extract surplus value from the government, hotels, the physics that makes operating cars cost money, or other sources - value that we could not extract individually. When I notice such a surplus I often wonder how the surplus should be split. What is fair? Purely cooperatively, without anyone trying to game the surplus-allocation-function, and assuming the stated coalitions are fixed rather than negotiable, how much of the surplus should be attributed to each contributing party?
Some concrete examples that have come up recently in real life*:
1. Matching donations. The company I work for will match donations to charity, dollar for dollar, up to a certain maximum. Viscerally, how should I feel about donating $100 to puppies**? More than $100, since puppies get $200, certainly. But less than $200, since my employer should feel puppy-love too, and presumably there's a conservation of visceral feeling law that should apply here. Further suppose that my employer's matching offer caused me to donate $100 instead of, say, $50. What math should be done and why?
2. Exemption splitting. An amicable divorce leaves two parents wondering who should claim their student daughter as a dependent. As a purely "what is fair?" financial question, how much of the tax savings from that exemption should be distributed to the father, mother, and daughter? Suppose the father's marginal tax rate is 25% and overall tax rate is 18%, and the mother's marginal rate is 15% and overall is 12%. What math should be done and why?
3. Refinancing. My friend has a debt at 12% and for silly reasons is obviously able to pay it off but cannot this year. I can pay it off, though, and so could several other people***. Assume there are 3 people including me who could pay it off, and our current expected returns on invested money are (say) 2%, 3.5%, and 6%, and for simplicity she will repay the loan plus any surplus due in one year. Who should pay off how much of the loan (say it's $5000)? I assume the 2% person should pay all of it. That's a 10% surplus - how much do each of the four of us get? What math should be done and why?
As in The Bedrock of Fairness, are there qualities of the solutions we have strong opinions on, even if we do not know the procedure which would generate solutions with those qualities?
*Details changed.
**I do not donate to puppies.
***Assume default risk is negligible.