Thursday, June 12, 2008

An oil/island model to illustrate land/resource tax

Imagine a small tropical island which has an unusual feature. Deep in it's inland jungle there is a pool of tar. This tar has seeped from deep underground and is slowly replenished at a rate of about 100 gallons a year.

The inhabitants of the island discovered that the tar works great for water proofing their canoes, the roofs of their huts and baskets for carrying water. The resource seems endless and the area around the pool is a bit unpleasant so there is no conflict around the resource.

One day one of the villagers noticed that the area where a bucket of tar was spilled on some gravel near his doorstep didn't wash away after a heavy tropical rain storm. Realizing that this would mean freedom from mud and dust the villagers soon had paved paths routed throughout the village and it wasn't much longer before the other villages took note and started paving their village paths.

As more paving was done the villagers noted a nice improvement in their quality of life. Hot windy days didn't come with billowing dust and getting from house to house or village to village during the rainy season didn't involve traipsing through knee deep mud holes. However, the pool of tar, now nicely accessible by a winding paved path from every village, was starting to look much smaller.

One day, a couple of workers from two tribes arrived at the pool to collect tar to coat their canoes in preparation for the flying fish fishing season. As each tried to scrape the last of the tar into their respective buckets an argument broke out. Who deserved the tar? Who had taken more of their fair share? Before long this escalated into a full blown conflict with brandished spears and hurled insults. The elders of the villages called for calm and agreed to meet to discuss their options.

The elders debated their options for days. They had maintained relative peace on their island for a long time and the prospect of battle was not appealing at all. They knew that the tar was being replenished as it could be seen oozing from cracks and crevasses from a rock formation and slowly working its way down the rock to be held in the little pool. Many ideas were put forward, "we can ration the tar," said one, "each tribe gets to harvest on alternative days", "Yes, but there are more of us than you" said one tribal elder, "We must have the right to harvest the tar two days for every one you harvest". "Why should you get more?" asked another, "I see your tribe making unnecessary paths and using too much tar on your canoes". The debate raged on with no progress for quite some time. Then, one of the oldest elders came up with a new idea. "Why" he said, "don't we trade with ourselves for the tar? Here is how it would work ..." and the elder explained his idea. As the tar seeped into the pool it would be collected into baskets. As the baskets filled they would be available to be taken by whom ever brought the most goods to trade. A council with representatives from each tribe would take the goods from the best offer and use them to pay for a road around the island and the building of a large war canoe to be used in defense when threatened by neighboring tribes.

Whilst the plan did not appeal to all it was decided to give it a try and it wasn't long before the daily and weekly auctioning of the tar was a popular affair for villagers to attend. In fact over time the tar became a form of currency in of itself. There always seemed to be enough tar to go around and the goods collected by the auction paid for important common projects and occasionally was used to help villagers harmed by an accident or who lost their home in a storm.

One fine day the elders were arguing about their borders. One village had grown in population and wanted to expand and was encroaching on land traditionally controlled by another village. A vigorous argument ensued with accusations and solutions from every conceivable view point. One of the elders who was in the middle of arguing that tradition trumped need, suddenly stopped mid sentence, "Wait!" he said, "The tar! We can do the same thing!" The other elders looked at him quizzically, how could the tar help them with who had the rights to the land? One by one the lights went on behind the remaining elders eyes. Of course! The land was exactly like the tar, it was an inheritance of all the villagers on the island and it needed to be shared in some way.

After many hours of careful thought and debate the elders came up with a plan. Since tar was a great way to exchange value it was decided that every plot of land would be assigned a tax to be paid in tar. The land would be held, bought, sold and controlled by the individual villagers but annually a certain number of baskets of tar would be collected for each plot.

At first the idea was met with great animosity by the villagers but the elders prevailed and a council was set up to estimate the value of every plot of land on the island. Because the tax was simple and predictable there was little volatility in land values and there was no incentive to speculate and hold land out of production.

Over time the wealth of the islanders did change, however it was those who were industrious and or wisely adventurous who got relatively wealthy. Those with less wealth could compensate by consuming less land. Whilst there were some who could not produce much due to health or injury there was always some productive land available to be bought and since no one wanted to hold land and pay the land tar tax if they had no near term use for the land they would usually put the land up for sale at a competitive price.

Authors note: This is a work in progress. What you see here is a first rough draft. If you have comments, suggestions or criticisms with this draft status in mind I'd love to hear about them in the comments.