Fallacy watch

One fallacy that often emerges goes like this: agents aren’t rational all of the time, therefore, any analysis based on them being rational is wrong. It is a fallacy because a lack of rationality is actually highly circumstances-dependent and so finding an instance of it does not translate generally. For instance, Sunstein and Thaler’s ‘Nudge’ suggests that there are circumstances in which small changes can matter alot. But they are cautious to emphasis that this does not necessarily happen when a decision has large immediate financial impacts for someone.

[DDET Read more]

Today Ross Gittins commits this fallacy in arguing for stamp duty on home transactions. The traditional economic wisdom is that such taxes which are non-trivial sum of money in many states, reduce buyers’ willingness to pay for property and so reduce the number of transactions at any given point of time. How much? That is an empirical matter and from what I can gather then effects are real.

The trouble with this advice, however, is that like all neoclassical analysis, it’s based on an erroneous model of human behaviour that assumes the choices we make are always carefully calculated to maximise our material wellbeing.

For the past 20 or 30 years, behavioural economists have been pointing out to conventional economists all the flaws in their assumption that people are always rational, but this seems to have had zero impact on the happy analysis of the tax economists.

There is so much to deal with here it is not funny. First of all, zero influence? Starting with Sunstein and Thaler onwards it seems that tax is one of the major areas where behavioural economics has mattered. Think about this example for one. Second, Gittins argues that because people are spending so much money they don’t care about the tax. I don’t know where the evidence for this is but consider the sales strategy for new properties ‘off the plan to avoid stamp duty.’ That works because people care. Third, just because a land tax is politically unacceptable does not mean stamp duty is good and efficient even if it is a nice little earner for state governments.

Fourth, just because stamp duty might matter does not mean that anyone thinks it is the most important thing for every circumstance. So this statement really misses the mark.

Similarly, only an economist would be stupid enough to imagine conveyancing duty is a significant factor in explaining an executive’s reluctance to uproot their spouse and school-age children and move them to another capital city.

And, finally, in a similar fashion, no one is talking about encouraging mobility the only issue is not discouraging it. Ross Gittins seems to believe that it is not possible to move back to your social network but only away from them. Taxes may well discourage the former while preventing the latter. Which is socially beneficial depends on your perspective.

When it comes down to it, there is no evidence that behavioural economics as a clear and formal theory translates into housing markets through this route. Gittins cites no study or theory that suggests this to be the case only a bunch of unrelated stuff and ranting out economists. Indeed, it is precisely the blind application of general theory that behavioural economists are so against and so Gittins commits these same sins in spades.


4 thoughts on “Fallacy watch”

  1. The first home owners’ grant amount is somewhat comparable to stamp duty taxes. It seems to have been a major incentive in increasing demand.


  2. Another aspect – sale / purchase or renovate – cost of sale (stamp duty and agents fees) versus renovating present home – eventual result over capitalise and reduced mobility?


  3. I don’t believe taxes are necessarily an obstacle to the specific issue of reduced mobility. Australians posses social norms where owning a home is highly valued in itself. If this norm were to change or there were (rational) alternatives in terms of long-term leasing then I suspect mobility would be higher. Sinking large amounts of capital into the family house doesn’t encourage one to shift – taxes, duties or otherwise.

    As an aside, having lived in Stockholm, Sweden for several years, a significant minority (if not outright majority) of people don’t actually own their residence via freehold title. However they do have the ‘right’ of residing in (very) long-term leases in both government and privately-owned flats. They have apartment trading down to a fine art in terms of moving around the city.


  4. Yes. I thought that this was a (rare) poor piece by Gittins.
    A glaring error to say that people are not always rational therefore you can assume in a particular situation that they will not be rational.
    Working on probabilities, as you must do in making any forecast, it seems to me that to assume rationality is a pretty good starting point


Comments are closed.