Economics 7 Week Challenge Series – Challenge 3: Tax Game Results

Hi Everyone,

Welcome to Week 5 of the Challenge series 2022. We begin this week with the results post for Challenge 3: Tax Game. This post contains a video of an Excel Model, which generates the parameters that determine the impact tax has on income and social welfare, the income generated by each participant, the social welfare cost of each participant, and the participant who generated the highest income minus social costs.

Winner determined in this video

What is the Tax Game Challenge?

For this challenge participants are required to set the tax rate for a very small country. Tax has been simplified to just a percentage of overall income (i.e. no distinction between different taxes such as income tax, corporate tax, GST, etc.). The current tax rate and national income are provided in the question. The participants are required to set the tax rate yearly for the next 3 years (i.e. rate in Year 1, Year 2, and Year 3). They can choose any tax rate they please (anywhere between 0% and 100%). Changing the tax rate will have both benefits and costs. For example, lowering the tax rate will raise income but, if tax revenue falls as a result of a lower tax rate, there could be a social cost of reduced funding of services provided by the Government. However, social costs will be reduced in the following year as it is assumed the market will partially adjust to lower or higher Government spending.

Responses to the challenge are made in the comments section of the challenge post. The total prize for this challenge could reach as high as 60 Hive. The number of participants determines the value of the prize. For every entry, the prize is increased by 5 Hive (e.g. if challenge has 6 participants the prize will be 30 Hive (5 × 6)) until a value of 60 Hive is reached. The winner will receive 2/3 of the prize and second place will receive 1/3. The first 12 entries will be given upvotes. In addition to the winning prize, the first 12 entries are given upvotes. In addition to the prize in Hive, the winner receives 30 points, second place 20 points, and third place 10 points; these points contribute to determining the overall challenge series winner.

The format of the required entry is explained in detail in the challenge itself.

For a more detailed explanation, you can access the challenge post using the following link.

Other challenges

There are six other challenges in the series. Five of them are now closed. One is still running. One more will be posted in the upcoming days. See links below.

Closed

• Challenge 1: Auction
• Challenge 2: Buying and Selling Game (Business Version)
• Challenge 3: Tax Game (New)
• Challenge 4: Game Theory
• Challenge 5: Make Me Happy

Open (Until 11/09/2022)

• Challenge 6: Buying and Selling Game (Original Version)

Upcoming

• Challenge 7: Pick-a-door (New)

Results of Challenge 3

Table 1 contains the participants and the tax rates they proposed for the challenge.

Table 1: Participants and their proposed tax rates

The model generated three key parameters for determining income’s responsiveness to tax rate, the social cost of reducing funding for goods and services previously funded by Government (tax revenue reduction only), and the extent the market can compensate from reduced Government spending. Table 2 contains the parameters generated in the model.

Table 2: Model Generated Parameter Values

Note: these parameters have very little meaning without the formulae they are applied to. Refer back to the original question for more context.

The parameters were applied to the formulae stated in the question to determine income and social costs for each participant. Tables 3, 4, and 5 contain the income and social costs for each participant for each year. Table 5 also contains the totals and the winner of the challenge.

Table 3: Income and Social Costs Year 1

Table 4: Income and Social Costs Year 2

Table 5: Income and Social Costs Year 3, totals and challenge winner

Congratulations to @temileke for winning the Tax Game Challenge with an income net social cost of $634,395,688. @temileke wins 40 Hive for this challenge (60 × 2/3) and 30 points. @homesteadlt wins 20 Hive (60× 2/3) and 20 points for second place and @adedayoolumide is awarded 10 points for third place.

Race to become the Challenge Series Champion

After three challenge, the overall scores for the Challenge Series are as follows.

Overall Series Score

This table will be updated in every results post.

Challenge Tips and Analysis

This is a difficult challenge to determine the exact tax rates to use. Participants could enter the formulae given into a spreadsheet to gauge what values give better results. This would be a time consuming exercise and it is possible something could go wrong entering the formulae, variables and parameters. Studying the figures provided in the question is an easier alternative approach.

The current tax rate of 40% is high and is stunting economic activity. Lowering the tax rate is the first logical approach. Lowering straight to a more desirable level (e.g. 20%+) will create an immediate social cost as tax revenue would fall quite sharply. Lowering tax revenue more gradually would be a better strategy. Several participants adopted such a strategy. @temileke judged the optimal tax rate best out of the participants who chose to lower it. If the parameters had been different, a lower or higher tax rate could have offered better results. This is a game that involves skill but also requires some luck.

More posts

If you want to read any of my other posts, you can click on the links below. These links will lead you to posts containing my collection of works. These 'Collection of Works' posts have been updated to contain links to the Hive versions of my posts.

Hive: Future of Social Media

Spectrumecons on the Hive blockchain