Fred Foldvary's EditorialClassroom Experiment: Geoism is Better!

by Fred E. Foldvary, Senior Editor

I ran a classroom experiment simulating an economy. I had two classes of about 50 students each. I divided the class into three districts: low tech, middle tech, and high tech. I used monopoly money (from the game "Monopoly") as the currency. The consumer goods were small individually-wrapped candy bars.

Each student in the low-technology district would be paid 50 dollars, the middle-tech students got \$100, and at high-tech the wage was \$150. Students could then become bankers who would change money, receive deposits, and write checks. Bankers would charge whatever fee they wished for these services.

The students first elected a government council. The council elected a president, who was paid \$50. The council decided on the tax policy. In the first class, the council decided to tax the land rent. In the second class, they put in a graduated income tax, with higher taxes on higher incomes.

The students then bid to buy land. The class seats are in 9 columns running from front to back; each column had one landlord. The low-tech district was rent-free. Any student could bid to buy land at any column, and any student could move to another seat and pay rent or no rent elsewhere. The land buyers borrowed the money from the banks to purchase their lands from the instructor.

In the second class room, the students had to pay an income tax on their earnings. It was 5% on income of \$50, 10% on income of \$100, 15% on \$150, 20% on \$200, and 25% on income of \$250 or higher. Since they got paid in \$50 bills, each student had to go to a bank in order to pay the tax. The student deposited \$50, and the bank issued a check to the government for the tax, and another check to the depositor for the difference. The checks were written on small sticky-note paper and were initialed by the banker. A bank could also get small change from the instructor.

The students then paid rent to the landlords. The landlords paid back their loans from the rent, and then paid a tax on their rent. In the first class, the payment for the land and the tax on the rent took most of the rent. In the second class, the landlords especially in the high-tech district ended up with substantial amounts of dollars, since they had not paid very much for land.

Students could then bid to become merchants and sell candy at retail, borrowing the money from a bank if necessary. There were four different bags of candy, each with about 18 chocolate bars. Each merchant then sold the individual bars to the students.

The government also bought candies from the merchants with the tax money, and distributed the candy as they to the students in whichever manner they chose. The merchants at the second class were then supposed to pay an income tax on their net earnings, and then pay back their loans.

The game was supposed to end after one hour, giving the students a few minutes to write an evaluation of the game and what they learned from it. In the first class, everything went smoothly, and the class finished on time. The distribution of the candy was quite egalitarian; every student was able to obtain some. The government's candy was distributed equally as well. The bankers and merchants had more income, but they also did more work.

The second class did not finish until the end of the class time, so they wrote up their experience at home to turn in the next class. There was much cheating, as some landlords, merchants, and bankers did not pay the full amount of tax owed. It became quite chaotic with all the transactions needed for taxes, and one student claimed that someone had stolen his money! The government was not able to monitor all the transactions going on, and it was mostly up to the students to voluntarily pay their taxes. This invited cheating.

In the second class, some of the landlords also became merchants and got rich. The graduated income tax did not prevent inequality from arising, partly because of tax evasion and partly because the landlords had more cash to bid with.

In their reports, the students in the second class realized that their income tax imposed a large excess burden on them. There were transaction costs in paying the taxes, and the system led to theft and cheating. The second class had corruption, inequality, and chaos, while the first class was egalitarian, honest, and orderly.

I asked the students in the second class why they had chosen to have an income tax, and a complicated one at that. They said they did not realize what would happen. The experiment demonstrated what economic theory predicts. If we only tax rent, the economy operates efficiently, and with abundance for all. If we impose complex taxes on income, the economy becomes inefficient, there is corruption, and the tax does not create more equality.

In the first class, the students had learned that geoism, with a single tax only on rent, does not have this excess burden. They applied this economic theory, and got good results. In the second class, they ignored economics and reaped the results, much as we are doing in the real world.

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