Nathan H. 2023 | BASIS Independent McLean
- Project Title: How We Should Tax: Balancing Equity and Efficiency in Simulated Monopoly
- Basis Independent Advisor: Erin Vander Wall
- Internship Location: BASIS Independent McLean
In 2019, the founder of the world’s largest hedge fund, Ray Dalio, warned of an uprising in the US if inequality is not addressed (Schatzer, 2019). Though inequality is optimal to the degree that it creates incentives, we may have surpassed that point: the OECD estimates it is holding back economic growth by 4.7% on average (2019, OECD). In the wake of the pandemic, where we saw billionaire wealth surge by 70% (Alvarez, 2021), as we head toward a potential recession, inequality is becoming an increasingly pressing issue.
Typically, governments address inequality through taxation, which has the unfortunate byproduct of creating economic distortions. Those distortions hurt the entire economy, including those who benefit from governmental redistribution efforts in the first place. This begs the question: how can we maximize impact and minimize distortions?
In economics, this is studied through Optimal Tax Theory (OTT); however, in OTT there is a lack of consensus on many critical issues: namely, the optimal degree of progressivity of income tax, and whether capital should be taxed (Mankiw 12; Diamond 178). Unfortunately, we can’t exactly test these variables with randomized control trials. That’s why I plan to run economic simulations using Monopoly. This is because there is surprising precedence for using Monopoly as an economic model in the literature, and the two variables I want to compare–inequality and economic efficiency–are easily tested in Monopoly. I will simulate income taxes, wealth taxes, and land value taxes at varying rates, at every turn testing how each impacts both variables, so by the end, we can learn what tax method has the largest redistributional effect per least economic harm–the most bang for our buck.
Will my work revolutionize taxation? Absolutely not–there will be some loss of generality, but it might be the first step in producing a tax system that’s more fair and effective for all.