Efficient Property-Tax Assessment via Second Price Auction

I was recently delighted by Eric Posner’s and Glend Weyl’s book “Radical Markets”. The first chapter proposes a radical re-thinking of private property, framing it as a monopoly granted by society, for which society should be compensated. They suggest that [most] property should belong to the commons, and continuously auctioned off to the highest bidder. This would ensure that all property is used efficiently, and re-distribute wealth much more fairly and efficiently. They propose a scheme called “Common Ownership Self-Assessed Tax” (COST).

When discussing this idea with my dear friend S. Alex Smith, we came up with a better alternative.

I will briefly summarize COST, and then describe how it can be improved by using Vickrey’s Second Price Auction instead.

Common Ownership Self-Assessed Tax

The basic idea behind COST is that all property should belong to the commons, and “rented” to the highest bidder. The rents are then re-distributed to society at large, ensuring that everyone else is maximally compensated. This is done via a relatively simple mechanism, which I’ll demonstrate via an example:

I own a house, which has a “market” value of $1M. Of course, I value that house much more, otherwise I would have put it up for sale. However, for $2M I am willing to move. I would list this house as worth $2M, and pay property tax on that amount. I could change the listed price whenever I like, and my tax would be adjusted accordingly. However, at any time, someone can offer me $2M for the house, and I have to sell it to them.

This results in a much more accurately assessed value, and creates strong incentives for property to be used efficiently. As an owner, I am incentivized to publish a price that is close to what the property is worth to me. If I price it too low, someone can buy it from me, and if I price it too high, I have to pay more taxes.

Some Problems with COST

I was pretty excited about COST, and think it’s a step [leap] in the right direction. However, it has a couple of problems:

1. While I value my house a great deal, others might value it a lot less. Maybe it has sentimental value, or I really hate moving and want to make sure no-one buys me out. Under COST, I would have a difficult decision to make. How much should I claim my house is worth, above the market rate? If I set the price too low, I risk being kicked out of my childhood home. If I set it too high, I am paying taxes for the value the house brings me, not the cost to society for granting me this monopoly.
2. I have to pro-actively monitor the market, making sure that I constantly adjust the listed price upward. Otherwise, a celebrity moving next door could immediately drive up the market price for my house, causing me to get bought-out.

Second Price Auction for Tax Assessment (SPATA)

The authors of “Radical Markets” credit Vickrey with the ideological seeds of COST, but then employ a traditional, rather than second-price auction. So what would a second price auction for property assessment look like?

The owner would publish some assessment of how much the property is worth to them. Anyone who wants to buy the property would publish a price at which they are willing to buy it. As long as the bids are lower than the assessment, the owner would pay taxes on the highest bid. The owner could, at any time, force the highest bidder to buy the property at their bid amount. If the highest bid is above the declared assessment, the owner is forced to sell the house to the highest bidder, who would only need to pay the assessed value.

For example:

1. Alice owns a house, and publishes a self-assessed value of $2M
2. Bob is interested in buying the house, but is only willing to pay $1M
3. Alice gets to keep the house, paying property tax based off $1M. At any time, she has the option of selling Bob the house, for $1M.
4. Carol decides that she really wants to buy Alice’s house, and places a bid for $2.2M. The house gets transferred to Carol, who pays Alice $2M for it.
5. Alice realizes that she’s made a mistake, and doesn’t want to move out. She bids $3M on the house. She has to pay Carol $2.2M, and gets her house back. She now has to pay taxes on the new self-assessed value of $2.2M.

This system ensures that everyone is incentivized to bid their true value, more-accurately prices the cost to the commons, and minimizes regret. While COST uses fear of losing your property to drive up assessments, this system uses greed. If someone under-assesses their property, a speculator can make a quick profit forcing them to raise the assessment.

EDIT: I now believe SPATA doesn’t work.