How to Call Someone's Bluff and Keep Your Gold

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I’m watching Deadwood, the remarkably well-written HBO series of a few years ago. In Episode 16, several wealthy townspeople, including the hotel owner, are spreading rumors that the gold field claims will soon be voided.

One claimant thinks the rumors are bluffs circulated to get current claimants to sell out cheaply to large mining interests. Since the hotel’s revenue comes from the derived demand from gold mining, this claimant creates a strategy to induce the hotel owner to reveal the truth: she names a low price and offers to buy his hotel.

If the claims were to be voided, the hotel owner’s revenues would drop and he should be happy to sell out cheaply. But he refuses to sell, which tells her that he views the hotel as yielding a large stream of returns. She concludes the rumors are false and that her stake is still valuable. When asked, she thus refuses to sell her claim on the cheap.


Mac

Bruce Schneier had a piece recently called "Self Enforcing Protocols" where he described a similar trick in regard with taxation:

"Here's a self-enforcing protocol for determining property tax: the homeowner decides the value of the property and calculates the resultant tax, and the government can either accept the tax or buy the home for that price. Sounds unrealistic, but the Greek government implemented exactly that system for the taxation of antiquities. It was the easiest way to motivate people to accurately report the value of antiquities."

http://www.schneier.com/blog/archives/2009/08/self-enforcing.html

Bryan Jackson

It's definitely one of the widow's greatest moments: excellent contrast against her deceased husband (who would have found a way to sell for even less, one imagines).

Just watched all there is of Deadwood this summer: excellent series, but no final season?! Great build up - huge let down.

br

@mac -- that would result in many people overvaluing their properties and overpaying their taxes to avoid the enormous costs that would be incurred if gov't decided to buy. it is an interesting idea but completely unrealistic and unworkable for housing (for the reason i gave and any number of others).

Andrew

This scenario assumes the hotel owner knows what will happen (i.e., has perfect information) while others do not. Does he?

Chris Dircks

@br - You seem to be assuming that the govt is eager to purchase properties, rather than as a last ditch response to egregiously low valuations on property...

Steve

br (#3), how can I say this -- I don't think you quite get it. The goal of the proposal in #1 is to give homeowners an incentive to value their property at a price they would realistically be willing to accept in a sale, and to pay taxes on that value, rather than an arbitrary value assigned by an assessor. It works because the seller is penalized for either assessing his own property too highly (you pay too much in taxes) or too cheaply (because you run the risk of having to sell it at your undervalued estimate). You're right that this system wouldn't work in practice (governments can't afford to buy up every house in town which introduces opportunities to game the system), but not for the reasons you mention. The reason sellers won't overvalue their houses is because doing so will cost them money. Economics 101...

Eric M. Jones

The English had a customs system where the importer stated the value of the cargo and the customs office could buy it at that price to avoid fraudulently low stated values.

When the Americans started to export mantle clocks to England in the early 19th century, the first shipment was seized and sold at auction for this reason. But the Americans were overjoyed at the price they got from customs and immediated packed up another shipment for them. There are a whole lot of 1800's American mantle clocks in England.

Doc

A great example of qui bono? Or, as the French say, cherchez le monnaie - follow the cash- Who benefits is usually the best first question to ask yourself as you try to understand a situation.

When my pro bono work was being the tax assessor in a small town I could always end a tedious discusssion about valuation by offering to buy the property for the "too high value" that we'd assessed.Never had a taker.

Bala

In Bombay, the local Govt has (used to?) have the option to step into a real-estate deal and buy the property at the declared price. This law was created because the declared price was paid with "white" money and the difference ("real" price - "declared" price) was paid with "black" (i.e., undeclared income / wealth) money. Indeed, the percent split between white and black was part of the negotiation. There is anecdotal evidence that the threat posed by the law reduced the percent paid in black (thereby increasing tax revenue) but I am not aware of a formal inquiry. I also do not know if the law still exists.

While the law is clever and works well in a model, there are obvious and significant enforcement issues. E.g., issues such as who decides whether to step in and how manipulable is this decision process affect the law's effectiveness.

David

Me: a connected Greek. Object: a Greek antiquity of nominal value.

Step 1) State an inflated value of Object
Step 2) Have buddies in goverment buy object on theory its undervalued
Step 3) Profit $$$

Living in Hudson County has made me cynical

Ken Arromdee

"The goal of the proposal in #1 is to give homeowners an incentive to value their property at a price they would realistically be willing to accept in a sale, and to pay taxes on that value, rather than an arbitrary value assigned by an assessor."

To summarize the objection: Transaction costs.

The price that someone would be willing to accept in a sale is not the market value of the property. It's the market value plus the transaction costs for moving, having to restart any business done on the property, etc. It also includes a great deal of sentimental value. Both of these can be huge,

Ken Arromdee

Actually, "sentimental value" is a bit of a narrow description. How much would you be willing to pay to avoid a 10% chance of the government buying your house and making your children lose all their school friends? And should we really consider this amount to be taxable property value?

Corey

Andrew: The hotel owner (E.B. Farnum: one of my favorite characters from the show, played by William Sanderson) struck a deal with outside mining interests to spread the rumors. He knows beyond a doubt that the rumors he is spreading are not true, and is thrown for a serious loop when Alma Garrett calls his bluff.

Mark S.

Real estate valuations and taxation can take pretty unusual twists and turns. Our family once owned a small weekend cottage in rural eastern Belgium (in the area where the Battle of the Bulge was fought). When we sold it, the house value was set very low and the furniture value very high because the Belgian Province of Liege taxed real estate transactions at a high rate but personal property inside the house is exempt. The buyer, who wasn't familiar with the Belgian tax system, complained about the outrageous price of worn out furniture. I don't remember how it turned out but where there is a system, there is a game.

Deuce

Great Series - loved the expansive vocabulary of the "Oriental."

Ali

They do something like this in Finland with rally races. At the end of the race anyone can buy your car for 500$, the things you learn from watching top gear. This keeps people from bringing good cars to amateur rallies that try to be inclusive of everyone.

Anyway a free market implementation would probably open your house to auction at a markup above what you would pay. Slightly unfair to people who want to move less, but supposedly they should be willing to pay more to improve their local community.

The two big problems would be the community heavily taxes any improvements you make, such as finding oil in your backyard. And secondly gives too much power to the snob president on your HOA.

Daniel

@Br
I can imagine the property tax scheme failing for the opposite reason. A group of neighbors could defeat the process by getting together and collectively claiming their houses are worth 10% of their actual value. The government wouldn't have the revenue to buy everyone out even at 10 cents on the dollar. If they did somehow come up with the money, the prices of those would at least temporarily drop to the artificially low value because that's what the "comparables" say the houses are worth.

Tg3

@#16 - Ali
Same idea in North America (and around the world) with horse racing - i.e. Claiming Races

Loren Pechtel

The idea of the government being able to buy a house at the taxed value would actually result in tax values a bit below reality--the government isn't going to invoke it's option unless the house is enough below market to cover the costs of selling it.

The problem comes from eminent domain cases. The value for eminent domain purposes doesn't always match the market value. You may have done things to your house that cost money and have value to you but not to someone else.

Take a real world case--a pigeon racer. Move and the flock suddenly becomes only breeding stock, they can never race again. Should the difference between the racing value and the breeding value of the flock be part of the house value???

I can also picture abuse by corrupt local officials. Try to run against them and find yourself having to move--and thus no longer eligible for the election?

It would work better for things which aren't modifiable like the antiquities previously mentioned.

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Bevan Sabo

Since the post is on Deadwood, I thought I might point out another HBO series that also makes some great libertarian arguments: The Wire - which could also be called "Milton Friedman was right".