Taxing Virtual Real Estate??

Securing Equitable Access to Virtual Real Estate — Part 4/5

Note: This is the fourth in a series of articles on creating more equitable access to virtual real estate. If you’d like to start from the beginning, you can access the first article here.

Photo by Towfiqu Barbhuiya on Unsplash

In the first article, I argued for the growing need to create more equitable access to virtual real estate (“VRE”). Prices are currently being run up by speculators, driving a potentially productive asset out of the reach of common people. To address this, we’ve looked at making changes to its supply and parameters, as well as changing methods of distribution and establishing new ways of owning it.

In the real world, one of the ways in which land use is managed is through taxation. And it works, incentivizing or disincentivizing certain behaviors. However, much about the notion of “taxing” assets on the blockchain runs counter to the libertarian ethos that brought it about in the first place. Between it going against the grain and the simple desire not to spend one’s money, I don’t expect the idea of paying taxes on digital real estate to be well-received. But, one must consider the results rather than opposing it for purely ideological or self-interested reasons. If taxation of some sort could create a better environment for all platform users, we should give it consideration.

If taxation of some sort could create a better environment for all platform users, we should give it consideration.

Let’s start by noting what behaviors we are trying to incentivize or discourage. I would like to see a greater number of people owning parcels and less in the hands of speculators. Related to that, we are also trying to make parcels more affordable for people of average means. Taxation would seem to be counter-intuitive, then, right? How are you going to make anything more affordable by applying taxes to it? Fortunately, there is a form of taxation that builds those very incentives and applies downward pressure to land prices. Moreover, there is real-world evidence of its efficacy, and it has the general support of economists. It’s called the Land Value Tax (“LVT”).

Land Value Taxes

Milton Friedman — no fan of taxation, certainly — once said “In my opinion, the least bad tax is the property tax on the unimproved value of land” (source). Interestingly, he finds some harmony on his left here. Paul Krugman adds, “Believe it or not, urban economic models do suggest that Georgist [land value] taxation would be the right approach, at least to finance city growth” (source). Even Joseph Stiglitz gave his approval to the land value tax as a tool to fight inequality. So what is it? It’s surprisingly straightforward: Rather than paying taxes on a property’s full value, each property owner pays a fixed percentage of the value of the land alone. So, if four people own parcels worth $100,000 each and the LVT is 3%, everyone pays $3,000 a year — regardless of whether the parcel is completely undeveloped or has a giant building on it.

An excellent summary of LVT on YouTube by John Snow

Think about the incentive structure this simple change creates. If you own a parcel, there is no disincentive applied to building and making your property more valuable. But, if you’re a speculator with multiple plots of land that you’re simply holding for resale, they become an economic liability. This is because you’re paying a percentage of their value on a regular basis, something which encourages you to use the land for some economically productive purpose to cover costs. This creates a tendency toward more efficient use of land, and theoretically results in lower prices by pushing speculators to increase supply by selling their parcels rather than bear the yearly expense.

Land value tax has been tried with some success in both the real and virtual worlds. The country of Estonia, for instance, has had such a tax since 1995. They pay a rate between .1 to 2.5%, and partially as a result, Estonia has a very high rate of owner occupancy. About 90% of Estonians own their home, compared to about 67.4% in the United States. LVT was also implemented with success in the world of EVE Online. I’ll defer to Lars Doucet’s excellent article which details how and why that was done, as it was his recommendation to the game’s developer at the time. In short, though, a flat tax on the value of the parcels in the metaverse represents a simple, proven mechanism that aligns with our stated goals.

In terms of proposing a few particulars, imagine a tax of 3% on a parcel’s taxable value, which could be assessed reasonably objectively using the current floor price of sales data on the blockchain. That 3% gets paid to the platform in the form of its native tokens, which could be used for any number of things: paying the platform’s gas fees, a fund to assist long-time users with the purchase of their first parcel, or simply burning a portion to deflate prices. The smart contract would allow for a fairer and more consistent application of the tax than in the real world, and the participants on the platform could vote on it before beginning.

Harberger Tax

A “Harberger Tax” is a more exotic setup, but also one worthy of looking at. It’s a system with three rules at play:

1. Each parcel owner sets a price at which they would sell their property.
2. The parcel owner pays a percentage of that number in tax each month/year.
3. If someone puts up the amount of money described in rule 1, the parcel owner must sell them the property.

Here, Ethereum’s Vitalik Buterin gives a presentation on Harberger Taxes and how they could be used to efficiently allocate domain names.

As you think about it, there’s something kind of elegant in the minimalist way it’s designed. It operates a bit like a land value tax in the virtual world, because the owner is regularly paying a percentage of the value of their parcel. This discourages them from holding it without making use of it. However, Harberger tax integrates a mechanism that prevents a parcel holder from “gouging” someone that needs to purchase their property for development purposes. If they are aware that their parcel is in demand, an owner cannot price it prohibitively high without punishing themselves through taxation. This theoretically pushes parcels toward their most efficient uses, which benefits the public as a whole.

There are difficulties in implementing it, though. The notion of a “forced sale” understandably makes people bristle. Herberger taxes also require that owners stay on top of changes in the market value of their parcel in a way that may be inconvenient. Moreover, I’ve been unable to find any examples of its use in real markets. It would be interesting to see someone implement it in a small, game-like application. I’m fascinated by this model of taxation, but it would be wise to see if it could be used on a smaller scale (with lower stakes) before applying it to an actual real estate market.

Land value tax is one of the ways that the real world has established to democratize access to land. I hold no illusions that any current owner is going to be excited to be taxed on their VRE. But, the Metaverse as a whole may benefit in the long-term by making sure that its land is being used efficiently and not held indefinitely by speculators. I imagine that taxation will be adopted only if the problems of inaccessibility and waste became extreme enough that new, speculator-free platforms become more appealing to users. Until then, I’ll continue suggesting it, but I won’t hold my breath.

One other method that has been historically successful in bringing people into property ownership is making loans available to them. We’ll explore the possibility this tactic has for the metaverse in the next (and final) section of this series. Click here to read it.