In the 1600th century the Danish king (Frederik the 2nd) had a problem of taxation. In order to get a higher income for the state, he wanted to tax the ships sailing through the Danish waters in order to get to the Baltic ocean. In collaboration with some advisors they decided that when a ship entered Danish waters they should tell how much the shipment was worth and the tax was deduced from this, however the king had the option of buying the shipment for said price.
So what would happen if this kind of tax were transferred into the modern economy? The principle is of course not applicable to all taxes but it could be used for determining the taxes on housing. The owner of the house comes up with a price for the house and the state either tax this price or buy the house for said price. From a purely economic point of view this would be a great experiment since it would be possible to value an intrinsic value – namely the attachment the consumer has to the house. Economists have always been blamed for the fact that they only measure utility in terms of money (not exactly correct), so this experiment could in theory be ground breaking since we would be able to put a value on an emotion.
However is a tax like that even feasible in the modern economy? That answer is most likely no. But if we suppose that this tax was actually introduced a lot of interesting things would happen. For a country like Denmark with one of the largest public sectors in the world1 (compared to the number of citizens) it would most likely shrink the public sector since the need for labor wouldn’t be as high, when the consumers have an incentive to provide the correct price plus the price of the attachment they feel towards the house.
In Denmark the discussion about taxation of properties was a huge part of the election debate for a few of the parties in the Danish parliament in the beginning of the summer. The Danish taxation of properties is made so the taxation follows the value of the property, however in certain areas of Denmark the properties value has risen so much, that the lower class can’t afford to stay in houses they have lived in for most of their lives. This problem can the
taxation principle proposed here also counter. The mere threat of the state buying your house would be enough for the consumers to set the price they can afford for the house and this way the State actually never has to go and buy houses.
The tax proposed in this blog is obviously not possible in the modern society, the mere thought of the State forcing people to leave their houses is absurd, however the thought experiment with this tax is very interesting for economists (as long as it stays between economists).
- Frederik Falholt (Student number: 2355).