Within the majority of cities and municipalities across the United States, real property is taxed based on the value of the land and of the improvements made to it — such as any enhancement to an individual home or a business facility. 

As a consequence, there is a disincentive for individuals and businesses to invest in their homes and facilities, because such investments will increase the assessed value of the property for tax purposes. A new study led by the University of Delaware’s Josh Duke constructs a “virtual city” to see if, when given the choice, individuals would select a different kind of non-distortionary tax — known as land value taxation — instead of the traditional form of property taxation. 

The study is part of Duke’s year-long fellowship with the Lincoln Institute of Land Policy, located in Cambridge, Massachusetts. The Lincoln Institute of Land Policy is an independent, nonpartisan organization whose mission is to help solve global economic, social and environmental challenges to improve the quality of life through creative approaches to the use, taxation, and stewardship of land.

Duke, professor in the Department of Applied Economics and Statistics in UD’s College of Agriculture and Natural Resources, said that land value taxation is usually associated with the 19th century economist Henry George, although the idea probably precedes George’s time. 

“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,” said Duke. 

Land value taxation in theory should be the best way for governments to raise revenue and yet it has not been widely adopted. In Delaware, the town of Arden was founded as a Georgian community and some cities in Pennsylvania — such as Harrisburg — employ a split-rate property tax in which the land is taxed at one rate and the buildings are taxed at another, but for some reason, land value taxation hasn’t caught on.

“It 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 increase society’s wealth,” said Duke. 

In addition to stopping the disincentives to fully utilize land that are imposed by the current property tax system, Duke said that it could reduce all the distortionary ways revenue is currently raised. 

“Right now, we raise lots of revenue through income and employment taxes, which create a disincentive for workers to work and employers to hire. So you could shift the government’s tax burden from income to land, therefore allowing more jobs,” said Duke. “It’s been known for hundreds of years that it’s a great way to raise tax revenue but it just doesn’t get used enough in the real world and so I wanted to explore why that might be.”  

Experimental economics

Duke decided that to determine why land value taxation has not been widely adopted, he would use experimental economics to try to provide some insight. 

By building a virtual city where people have the incentives to improve their land through buildings and then have them interact through the tax system, Duke is trying to see if he can replicate the voters’ rejection of the land value taxation. 

Duke worked with Tianhang Gao, a doctoral student in the Alfred Lerner College of Business and Economics, to build an experimental economics platform that will be utilized by students in the Center for Experimental and Applied Economics (CEAE).

While Duke realizes that the word “virtual city” might conjure up images of games such as “The SIMS,” he said that this virtual city won’t look anything like the popular game. 

“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,” said Duke. 

The study will be run with 100 students during the fall semester and Duke said that he will target business, economics, and engineering students to take part in the study because of their financial backgrounds and quantitative skills. 

“We want to see how people make decisions when they’re strictly interested in profit and not bringing their ethics to the questions until they vote,” said Duke. 

Using an experimental economics program called Z-Tree, there will be an administrator computer and then 15 students will use Microsoft Surface Pros to make decisions, interacting through the network created by Z-Tree in the programmed virtual environment. 

“Everybody sits at their own computer and makes their own decisions. It’s all private. They can still interact, but they interact only through their decision on the tablet computer,” said Duke. 

Moving forward, Duke said he hopes to extend his research to see if he can get participants to overcome political objections to land value taxation and offer policy advice to people in the real world on how to get voters to find land value taxation to be in their best interest.