"A land value tax would avoid this problem since the fact that the supply of land is fixed means that you can avoid deadweight loss without balancing the budget on the backs of diabetics or the hungry."
It's not so much that the *supply* of land is fixed as that its *location* is fixed -- which means an owner can't escape taxation by moving his land out of the jurisdiction or shutting down operations. So, if lack of "elasticity" is a good thing for tax purposes, it's only because whoever is caught by surprise holding the bag when the tax is imposed is stuck paying the *entire future cost* of the tax in the form of a reduction in his property's current value.
For example, let's say a house in Santa Clara County currently produces net rental income (or equivalent value of housing for the resident-owner) of $10K per month. If the relevant market discount rate is 6.67%, then the current value of this house is approximately $1.8 million (=$120K annual net rent value/6.67%) (and ignoring all other costs and benefits). If you slap a $1,000 per month "land tax" on this property, the *net* rental income (or net benefit of owner-occupancy) also drops $1,000 per month because that's a new net cost of ownership. So the house drops in value to $1.62 million (=108K annual net rent value/6.67%). Note that a new buyer will still earn the same 6.67% return on his investment when he purchases at the new, discounted market price. And also note that the value of the property will not drop any further due to the tax because the perpetual future payment of the tax is already built into the new market value.
This means that the cost of the land tax was capitalized as a one-time expropriation of approximately $200K from the homeowner holding the bag when the tax was announced! No one else pays anything! It's basically a one-time theft of capital. For some people that's a feature, for others, a bug.
One problem with this technique of calculating "deadweight loss" by just adding up the areas of the triangles for lost "surplus" or "utility" is that it doesn't really account for the fact that I'll just spend my money on something else if my first choice transaction is banned. I suppose economists account for that the way they account for everything -- by just assuming all that is incorporated in the elasticity curve. But there is no way to actually know the marginal values for transactions that never occurred.
nd the money from the foregone transaction on some other transaction. If a $3 chicken sandwich is banned, I'll just buy a burger or a taco instead. The chicken sandwich was my first choice, so I will presumably lose *some* of my enjoyment (value/utility/surplus) in making the substitution. But there is no reason to assume it's a total loss of all. I suppose economists
Prohibiting voluntary transactions (in the absence of counter
I didn’t see it in the comments but I thought I had read that the Morisetti paper might have had a calculation error and the actual growth lost was closer to 50%. Maybe in some Neoliberal Project content...
Milan seems to imply that deadweight loss is overlooked in the calculus of home ownership. I don’t believe that’s true in general, and I know it isn’t true in my case. I know that limiting what I can do with my land decreases the value of my land, but that’s a price I willingly pay to know what my neighbors will (and more importantly, won’t) do with their land.
Obviously, that calculus is very selfish and ignores societal wellbeing. I’m a liberal who has read and been influenced by all of Matt’s writings on housing cost. Even still, as a practical matter, for those (like me) who are lucky enough to own homes in the current regulatory environment, housing abundance means A) my net worth takes a huge hit and B) my neighborhood could end up looking much differently than the one I spent large sums of money to live in.
At this point, it just seems like we’re in too deep. Equality should always be the goal, but in the case of housing, you’re asking me to pay an awful lot to achieve it.
In France they imposed a much shorter working week than you guys have. Consequently tens of thousands of small businesses closed because they couldn't hire more staff to replace the surplus hours needed to maintain service level (for whatever reason).
Do I understand this correctly as those disappeared businesses being deadweight loss?
My goodness. What a long way to explain that DWL is when someone who would benefit from buying a good and someone who would benefit from selling it to them are unable to do so.
This reminds me of Darrell Owen's recent article about NIMBYism in Santa Cruz. He notes that the city looks like it's barely changed since the 50's– NIMBY policies leave people stuck in older, crappier homes than a free market would have built, and that actually includes the NIMBYs themselves. They still gain *net worth* on balance, but entirely due to supply restrictions rather than increases in the intrinsic value of their homes. And notably, those supply restrictions only add to homeowners' net worth, whereas building better homes and improving existing ones not only adds financial value, but also makes those homes more pleasant to live in.
Reading thru this made me realize that I'd find the world to be a much more confusing (and scary) place if I never took intro micro and macro in college....
Matt charges $8/mo for Slow Boring. His marginal cost per subscriber is 0. If he gave it away for free, he would have more subscribers, and the existing subscribers would enjoy a higher consumer surplus. What term should be used for the forgone consumer surplus here?
I believe they just use "foregone consumer surplus". But since it is at least partly counterbalanced by actual producer surplus, it's usually thought that this concept is at least morally ambiguous, and therefore not important enough to have a name of its own.
Deadweight loss is, however, morally unambiguous. We don't know who is bearing it, but it is borne by society collectively, and it is bad.
Sorry, I was delayed in responding to this because I blacked out after reading "Candy apples (which are delicious) . . . ." (Being old enough to remember when candy apples were a much bigger thing, I feel very comfortable saying they are not, in fact, delicious).
That said, as someone with a bachelor's in economics, I would say that this is a good article; nice job, Milan!
So are you of the opinion that we should scrap all taxes except the ones on land? Or just land and sin taxes? Should we scrap sales taxes? Is there any deadweight loss from income taxes?
No...to what? All taxes? You are a Republican after all, I knew it as soon as I heard you are pro-spanking kids.
Seriously though, could you elaborate a little? Do you think we should keep all the taxes that involve deadweight loss as they are? Why? Why wouldn't it be better to try to eliminate deadweight loss when it doesn't involve things like air pollution?
Standard Econ 101 is that we should put Pigouvian taxes on anything with negative externalities (this will include "sin taxes" that are nicely interpreted as taxes on transactions with negative externalities for one's own future self) and then make up the remainder with taxes on "land" understood as "that which has no change in quantity produced with price".
DWL is a valuable concept. But it's worth being skeptical of the way it's quantified on a supply and demand plot, especially when (though the post does not do this) economists start referring to it as a measure of "welfare."
Willingness-to-pay is a very convenient proxy for welfare, but I think most people would acknowledge that its a pretty bad one. The fact that I was willing to pay up to $100 for an uber ride to the airport yesterday (I actually paid $80) while the homeless guy I passed probably wasn't willing to pay anything for it says basically nothing about how much welfare that uber ride produced. But on the supply and demand plot, my willingness-to-pay gets represented by a point along the demand curve at P = 100, while the homeless man's willingness to pay gets represented as a point a P = 0.
This isn't a profound or novel insight; plenty of economists acknowledge the issues with market valuations of welfare. But I think it's worth having in a comment here given all the people likely to see this post.
> "former Bush CEA chair Greg Mankiw advocates for a gas tax of over $2 to fully account for pollution externalities, traffic congestion, and damage to roads."
Finally, someone who gets it. Although it should be higher now to keep up with inflation.
"A land value tax would avoid this problem since the fact that the supply of land is fixed means that you can avoid deadweight loss without balancing the budget on the backs of diabetics or the hungry."
It's not so much that the *supply* of land is fixed as that its *location* is fixed -- which means an owner can't escape taxation by moving his land out of the jurisdiction or shutting down operations. So, if lack of "elasticity" is a good thing for tax purposes, it's only because whoever is caught by surprise holding the bag when the tax is imposed is stuck paying the *entire future cost* of the tax in the form of a reduction in his property's current value.
For example, let's say a house in Santa Clara County currently produces net rental income (or equivalent value of housing for the resident-owner) of $10K per month. If the relevant market discount rate is 6.67%, then the current value of this house is approximately $1.8 million (=$120K annual net rent value/6.67%) (and ignoring all other costs and benefits). If you slap a $1,000 per month "land tax" on this property, the *net* rental income (or net benefit of owner-occupancy) also drops $1,000 per month because that's a new net cost of ownership. So the house drops in value to $1.62 million (=108K annual net rent value/6.67%). Note that a new buyer will still earn the same 6.67% return on his investment when he purchases at the new, discounted market price. And also note that the value of the property will not drop any further due to the tax because the perpetual future payment of the tax is already built into the new market value.
This means that the cost of the land tax was capitalized as a one-time expropriation of approximately $200K from the homeowner holding the bag when the tax was announced! No one else pays anything! It's basically a one-time theft of capital. For some people that's a feature, for others, a bug.
One problem with this technique of calculating "deadweight loss" by just adding up the areas of the triangles for lost "surplus" or "utility" is that it doesn't really account for the fact that I'll just spend my money on something else if my first choice transaction is banned. I suppose economists account for that the way they account for everything -- by just assuming all that is incorporated in the elasticity curve. But there is no way to actually know the marginal values for transactions that never occurred.
nd the money from the foregone transaction on some other transaction. If a $3 chicken sandwich is banned, I'll just buy a burger or a taco instead. The chicken sandwich was my first choice, so I will presumably lose *some* of my enjoyment (value/utility/surplus) in making the substitution. But there is no reason to assume it's a total loss of all. I suppose economists
Prohibiting voluntary transactions (in the absence of counter
I didn’t see it in the comments but I thought I had read that the Morisetti paper might have had a calculation error and the actual growth lost was closer to 50%. Maybe in some Neoliberal Project content...
In any case, nice piece!
Milan seems to imply that deadweight loss is overlooked in the calculus of home ownership. I don’t believe that’s true in general, and I know it isn’t true in my case. I know that limiting what I can do with my land decreases the value of my land, but that’s a price I willingly pay to know what my neighbors will (and more importantly, won’t) do with their land.
Obviously, that calculus is very selfish and ignores societal wellbeing. I’m a liberal who has read and been influenced by all of Matt’s writings on housing cost. Even still, as a practical matter, for those (like me) who are lucky enough to own homes in the current regulatory environment, housing abundance means A) my net worth takes a huge hit and B) my neighborhood could end up looking much differently than the one I spent large sums of money to live in.
At this point, it just seems like we’re in too deep. Equality should always be the goal, but in the case of housing, you’re asking me to pay an awful lot to achieve it.
In France they imposed a much shorter working week than you guys have. Consequently tens of thousands of small businesses closed because they couldn't hire more staff to replace the surplus hours needed to maintain service level (for whatever reason).
Do I understand this correctly as those disappeared businesses being deadweight loss?
Question for everyone what's deadweight loss for Giffen Good's???
My goodness. What a long way to explain that DWL is when someone who would benefit from buying a good and someone who would benefit from selling it to them are unable to do so.
This reminds me of Darrell Owen's recent article about NIMBYism in Santa Cruz. He notes that the city looks like it's barely changed since the 50's– NIMBY policies leave people stuck in older, crappier homes than a free market would have built, and that actually includes the NIMBYs themselves. They still gain *net worth* on balance, but entirely due to supply restrictions rather than increases in the intrinsic value of their homes. And notably, those supply restrictions only add to homeowners' net worth, whereas building better homes and improving existing ones not only adds financial value, but also makes those homes more pleasant to live in.
Reading thru this made me realize that I'd find the world to be a much more confusing (and scary) place if I never took intro micro and macro in college....
Matt charges $8/mo for Slow Boring. His marginal cost per subscriber is 0. If he gave it away for free, he would have more subscribers, and the existing subscribers would enjoy a higher consumer surplus. What term should be used for the forgone consumer surplus here?
I believe they just use "foregone consumer surplus". But since it is at least partly counterbalanced by actual producer surplus, it's usually thought that this concept is at least morally ambiguous, and therefore not important enough to have a name of its own.
Deadweight loss is, however, morally unambiguous. We don't know who is bearing it, but it is borne by society collectively, and it is bad.
Sorry, I was delayed in responding to this because I blacked out after reading "Candy apples (which are delicious) . . . ." (Being old enough to remember when candy apples were a much bigger thing, I feel very comfortable saying they are not, in fact, delicious).
That said, as someone with a bachelor's in economics, I would say that this is a good article; nice job, Milan!
So are you of the opinion that we should scrap all taxes except the ones on land? Or just land and sin taxes? Should we scrap sales taxes? Is there any deadweight loss from income taxes?
No
No...to what? All taxes? You are a Republican after all, I knew it as soon as I heard you are pro-spanking kids.
Seriously though, could you elaborate a little? Do you think we should keep all the taxes that involve deadweight loss as they are? Why? Why wouldn't it be better to try to eliminate deadweight loss when it doesn't involve things like air pollution?
No to scrapping all taxes except LVT
Standard Econ 101 is that we should put Pigouvian taxes on anything with negative externalities (this will include "sin taxes" that are nicely interpreted as taxes on transactions with negative externalities for one's own future self) and then make up the remainder with taxes on "land" understood as "that which has no change in quantity produced with price".
Great post!
DWL is a valuable concept. But it's worth being skeptical of the way it's quantified on a supply and demand plot, especially when (though the post does not do this) economists start referring to it as a measure of "welfare."
Willingness-to-pay is a very convenient proxy for welfare, but I think most people would acknowledge that its a pretty bad one. The fact that I was willing to pay up to $100 for an uber ride to the airport yesterday (I actually paid $80) while the homeless guy I passed probably wasn't willing to pay anything for it says basically nothing about how much welfare that uber ride produced. But on the supply and demand plot, my willingness-to-pay gets represented by a point along the demand curve at P = 100, while the homeless man's willingness to pay gets represented as a point a P = 0.
This isn't a profound or novel insight; plenty of economists acknowledge the issues with market valuations of welfare. But I think it's worth having in a comment here given all the people likely to see this post.
I'm an economist, overall good explanation and article
> "former Bush CEA chair Greg Mankiw advocates for a gas tax of over $2 to fully account for pollution externalities, traffic congestion, and damage to roads."
Finally, someone who gets it. Although it should be higher now to keep up with inflation.
Excellent post!!! We may vote Matt off the island with more posts such as this one. :-)
I thought Matt often criticizes headlines that presume what the reader knows or not, or like “XYZ is more common than you think.”