Simulation Could Explain Why People Reject Smarter Economic Policy

If variety is the spice of life, then why are so many of us drawn to old habits? You might think of this phrase in the context of your Friday night plans, but economists are asking it about our approach to public policy. Despite a growing body of research indicating that the structure of U.S. property taxes could be vastly improved, we tend to be content with the status quo, and it hasn’t always been clear why. But now, using experimental economics, a professor at the University of Delaware is undertaking a one-year study to identify why people don’t respond to smarter economic policy that could greatly enhance their lives.  

Joshua Duke, Professor of Applied Economics at the University of Delaware, sees a big problem with how cities and municipalities in the United States tax property. Governments levy taxes according to the value of buildings and productive activities on the land instead of the land value itself. While property tax is by far one of the best taxes, especially over wage and sales taxes, it is still not as good as a land value tax. A land value tax is virtually the same as a property tax except that the tax is on the land value only, not the building. Property taxes have been structured this way for centuries, but Duke believes we could implement an alternative tax structure that raises tax revenue and stimulates economic development. This would run in contrast to the existing tax structure, which tends to generate and exacerbate wealth inequality by taxing regular people for working and exchanging, but fails to tax unearned income like that from passively owning an ever appreciating vacant urban lot.

By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons
By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side), via Wikimedia Commons.
Duke’s interest lies primarily in land value taxation, a theory popularized by 19th century economist Henry George in which taxes are determined by the inherent value of land rather than what sits on it.

“The idea is that if you’re going to tax anything in society, probably the best thing to tax is the value of land. Not the value of the improvements on land, like a house, just the value of land, and the reason is that it’s non-distortionary**. That means that it doesn’t provide the incentive to do less property improvement than is optimal,” Duke said.

Duke is not the only economist to advocate for land value taxation . Professor Joseph Stiglitz, Nobel Laureate in Economics and author of ‘The Price of Inequality’ is one such prominent proponent of a land value tax.  Stiglitz considers rent-seeking behavior, like the privatization of land values, to be the primary element that generates inequality of wealth. Other economists, like Mason Gaffney, Fred Foldvary, Nic Tideman and Fred Harrison also support implementation of land value taxation.

According to Duke,“[land value taxation] really would make society a lot better. It’s one of these major things we could do. We don’t have to create anything, we can just change the way things are taxed and [as a result] increase society’s wealth,” Duke said.

Determined to understand why land value taxation is so rarely used, Duke is harnessing the power of experimental economics. He is constructing a virtual city, in which land value taxation is financially advantageous to all citizens. The citizenry will be composed of 100 students of business, economics, and engineering. Ultimately, Duke hopes to identify why people, given the option of introducing financially advantageous land value taxation, tend to reject this tax structure.

San Francisco California Before the Sun Rises via photopin (license)
San Francisco California Before the Sun Rises via photopin (license)

“Economics is all about simplifying reality. What we’re trying to do is reduce problems to the fundamental incentives that we want to study. You have an amount of income; how much of your income do you devote to improving your land and how much do you devote to consumption? Then do you feel that, over time, you’re being treated fairly by the tax system and do you vote to reject it? So we set up a little democracy using our computer program where participants in our experimental economics platform can vote,” Duke said.

Duke is already planning his next study. After the completion of this one-year project, he will use his findings to identify ways to help citizens overcome political objections to land value taxation initiatives. Ultimately, he hopes to aid economists and policy experts who are eager to see cities and municipalities usher in smarter economic policy.

 

 



**Distortion, in the most basic sense of the word, simply means change. In economics, it is almost always considered a harmful mutation in an idealized market, where there is perfect competition and no externalities, e.g. almost all taxes vis a vis reducing productive incentives, misallocating resources, etc. Just as breaking up inefficient monopolies encourages competition and benefits the market, land value taxation encourages competition and captures distortionary externalities. This encourages behavior that is good for markets and for people, which is what Duke means when he says that land value taxation is “non-distortionary.” In fact, shifting to land value taxation actually increases productive incentives, what we might call a positive distortion.

 

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2 thoughts on “Simulation Could Explain Why People Reject Smarter Economic Policy

  1. I am very interested to see in this article that the idea of simulating the economy (presumably also the macro-economy) is given emphasis. My recent book about theoretical macroeconomics provides a model which would be ideal (in my humble opinion), for simulation and I would love to participate in such a program to turn this model into a practical working tool for simulation. It would then allow us to explore the effects of sudden changes in events or policy and find their effects over a period of time that follows.

    In my book I already show by hand-calculation how 3 different taxation policies affect the short-term progress of an hypothetical country. The results surprised me because I found that an increase in income tax is beneficial to the whole system when it is taken together. But even more, when the same amount of tax comes from LVT the benefit was 3 times greater!

    The full title of this book is: “Consequential Macroeconomics–Rationalizing About How Our Social System Works” and you can receive from me a free e-copy by writing to: chesterdh@hotmail.com and mentioning where your interest in it lays.

  2. There are three residential villages in Northern Delaware that convert the county and school district taxes on buildings into taxes on the value of land only.

    The positive effects of land value taxation are grossly less than they would be in neighboring states, because New Castle County, Delaware has very low real-estate taxes. None-the-less, the deterrent to non-use and under-use is three times what it is in the county’s other communities, and the Ardens are considered very desirable places to live.

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