# 21

Epistemic status: I'm not an economist. Please look carefully for errors in my reasoning.

## Weaknesses of unimproved land value tax

• Unimproved land value is hard to assess.
• If someone has a lot of wealth stored in land that has been significantly improved, they could bear a larger tax burden than they would be paying under an unimproved land value tax.

## Version 1

All real estate is constantly up for auction on a centralized website. If anyone enters a bid on a property, they need to have money stored in a special account tied the website that is ready to be paid to the owner if the owner accepts the bid (and their bids on other properties are immediately recalled if someone’s balance then drops too much). The highest bid on each property is considered the value of that property.

The government offers an open challenge for people to submit computer programs that predict the value of a property given:

• the coordinates of the vertices of the polygon forming the boundary of the property (the “property coordinates”)
• the property coordinates and the history of property values, going back 10 years, of every other property within a circle that is N times the area of the property itself.

The objective for the program submissions is to minimize is the squared error of predictions. The program must be within a capped file size. Programs that people submit are tested as time goes on, and the ones that do the best are awarded prizes.

People pay tax on the predicted value of their property, using an aggregated version of the best submissions. Unlike the unimproved land value, this value is easy to assess. Improving the value of one’s property does not increase one’s tax burden (unless it increases the value of neighbors’ properties, in which case the increase in the tax burden should still be fairly small.) And the taxable value of the property is closer to the true value than it would be if unimproved land value were taxed.

## Problems with Version 1

• Two identical neighboring properties could stabilize to different values; the low value one remains low value because it has a higher property tax because the neighbor’s property is higher value, and vice versa.
• A speculator could buy up properties in a neighborhood, then sell them to himself at an arbitrarily large price. This could drive up the tax on neighboring properties, and drive down the price of those properties. Then the speculator could buy those properties cheaply, and then sell the properties he bought originally, which should have gone down in price because neighboring properties went down in price, so the property tax is lower now. Then he could sell the cheaply-bought properties at something resembling the appropriate price, now that the property tax will have returned (closer) to normal.

Good predictors might avoid these problems by exploiting the data about the historical prices of the neighboring properties, but they might not succeed perfectly.

## Version 2

On the same real estate website, the taxable value of the property is also listed. The tax liability can be bought and sold separately. Bidders place (negative) bids, and the owner of the tax liability may sell to the highest bidder. (Owners of tax liability would be required to take out insurance to limit their liability if they don’t own the property). Certainly, the property and the property tax liability can be bundled together, but the objective for the program submissions is to predict the property value, not the property value plus the (negative) price of the tax liability. The government could provide a standing offer to buy a property alongside its tax liability at \$0.

If we don’t like the idea of people having sold off their tax liability, and paying no more taxes, there could be alternative minimum property tax that the owner of the property has to pay if they don’t own the tax liability on that property.

People would not be allowed to short-sell tax liability. Thus, one cannot make a profit from driving up a tax liability with phony inflated-price sales of neighboring properties. The worst one can do is damage competitors who own this liability. But this significantly decreases the size of the set of people for whom this would be profitable, so a ban on this behavior could be feasibly enforced, especially since the programs predicting property value could themselves be used to flag suspicious transactions.

## More thoughts

If people are concerned that their tax burden from year to year is uncertain, they can take out insurance against this. An additional tax is levied on properties according to how long it has been since they last had their home inspected. The result of the home inspection is posted on the real estate auction website. At least one picture must be posted of the exterior. If the property is sold, and doesn’t look the same as the pictures, the buyer can sue (so people can’t sell a property immediately after a fire, before bidders have had time to adjust their bids). If the property doesn’t look like the pictures, but hasn’t been sold, a smaller fine is paid to whoever noticed this.

# 21

New Comment

This was a really exciting post to read. Upvoted!

Upvoted for an interesting idea, but I'm not sure who would want to make bids on houses through this system. It seems like bidders are at an information disadvantage versus owners, so to be safe (i.e., not make a bid that the owner knows is too high because they have more information) they can only make bids that are substantially lower than what they expect the market value of the house to be, but then the owner would almost never want to sell through the bidding system, unless they want to move for reasons like changing jobs, in which case they'd "list" their house and invite people in for tours etc. similar to selling a house today. But this means at any given time only a few houses (the ones that are actively being sold) have accurate bids with the rest having no bids or very low bids. Can your system handle this? Am I misunderstanding anything?

You're definitely not misunderstanding anything. I guess I was imagining that the highest bid usually wouldn't be less than ~75% of the true property value, and this is fine. But you may be right that the highest bid could be much lower than that, if it's just not worth people's time to bid.

but then the owner would almost never want to sell through the bidding system

I guess I never clarified that I'm imagining this is the only legal way to sell property.

A few ideas:

For any given house, in any given year, there is a 1/1000 chance that the house is given to the highest bidder at the price they've bid, and the government pays the owner double that price as well (so they get triple the price).

Predictors try to predict the what price the property will have when it is next sold. (And maybe the number of years of price history and the number of neighbors has to be increased)

The government supplements long-standing bids (at say 1% a year), so if a property has had a recent inspection (which is tax-encouraged), and you can lower bound its value, you may as well put in a bid early at around that lower bound, in the hopes that it's not much more valuable than that, and by the time the owner want to sell, your bid will be inflated for free.

Do you think any of these are workable?

ETA:

Or I guess the property owner could set the price, and anyone could buy at the listed price. Absent game theory stuff, this price could be way too high, since they're not paying property tax according to this price, which is why I didn't go for this in first place. But if people do this, they'd incur the wrath of their neighbors, whose property taxes would go up. If the social pressure isn't enough, the fear that their neighbors might retaliate by setting their own property prices way too high could encourage people to set more appropriate prices for their property. This might have costs to social cohesion... I guess you could also add a 0.1% tax on the listed value of the property.

ETA:

I'm liking the last possibility more and more. I think the fairest way for a homeowner's association to make sure no one is overinflating the price of their property would be to recruit an independent consultant to estimate the value of everyone's properties, and then require that nobody set the price of their property more than, say, 30% higher than the consultant's estimate. That outcome would, of course, be excellent for the government.

I think that's a feature. We don't want to distort the market valuation or increase actual turnover. We mostly want actual transfers to happen at about the same rate, and for the same reasons, as today - because the buyer values it significantly higher (enough to cover transaction and moving costs) than the current owner.

It _does_ depend on speculators being willing to have open bids that are below the "true market value" (whatever that means) but above the last-sale or current-tax-valuation-system amount. I strongly suspect that this would occur.

This is simply a mechanism to make the market more visible, to let the tax authority get closer to "true" value in the periods when no actual sales occur.

Have you even looked into Henry George's Land Value Tax theory, or the critiques made of that theory? If not might be worth skimming or checking out the cliff notes or other summary.

Also, I'm not entirely sure I understand the problem being solved. Is this about a more accurate or efficient taxing?

I've only heard some things about it second-hand. But you're right I should probably read more of the literature :)

I'd say it's mostly about efficient taxing, and that fact that it's easier to exploit market forces to get an estimate of the actual value of a property than the "unimproved value" of the property.

I have a house on a nice piece of land, and I also have a "land destruct" button, which will do something horrible to the land below my house (e.g. poison it, or make it awfully smelly).

If you offer more money for the land than I declared as its proper value, so that now I have to sell you the land, I will make sure to press the button before I leave.

(Is this illegal? Then I will do the worst thing that is still technically legal, or perhaps not exactly legal but very difficult to prove.)

.

Less confrontationally, this will incentivize people to invest more in things they can take away, and less in things they cannot. For example, instead of planting flowers in the ground in my garden, I would cover the garden with large boxes containing some ground, and plant the flowers in them. The obvious implication is that if you outbid me because you like my garden, you are not actually going to get those flowers.

I would optimize my house so that if I take everything away (even if I would have to throw it all away afterwards), the remaining place has as little value as possible. And gradually everyone would learn to do so, unless they want to pay twice the land tax as their neighbors.

I will make sure to press the button before I leave.

This would vindictive, and certainly illegal since it's their property now. I don't think the incentive do this is any more than the incentive to burn down someone's house if they've wronged you, or at least graffiti their house.

For example, instead of planting flowers in the ground in my garden, I would cover the garden with large boxes containing some ground

Or you could just increase the value you set for your property?

(To clarify, we're talking about the bottom proposal in this comment? In the original proposal, bidders make bids on the property and the owner can choose whether or not to accept the highest one.)

And gradually everyone would learn to do so, unless they want to pay twice the land tax as their neighbors.

People are paying tax based on the price of their own property; they're paying based on a prediction based on the values of their neighbors' properties.

The comment was written late at night; I probably misunderstood something. Sorry for that.

I think the general idea -- think how this will impact people's strategies, and assume that any tax optimization tricks will become common knowledge after some time -- can still be fruitful, but I am not sure how specifically.

• If someone has a lot of wealth stored in land that has been significantly improved, they could bear a larger tax burden than they would be paying under an unimproved land value tax.

I'm not sure why this is considered a weakness, other than the effect is has on incentives; it is easier to offset that effect on incentives than it is to eliminate it.

For example, tax land at its improved value, and allow the cost of any improvements to be deducted against up to half the tax on the land for the entity that made the improvement.

Improved value can be easily determined by market means; either enforce that the owner can always sell at appraised value, or enforce that any buyer can buy at appraised value. I prefer the option where the current owner determines if they will sell, but I can see an argument for letting the current owner determine the value on which they will be taxed, instead.

I think I disagree with the principle that it's easier to offset tax incentives than to eliminate them. But I wouldn't take the other 100% of the time either.

For example, tax land at its improved value, and allow the cost of any improvements to be deducted against up to half the tax on the land for the entity that made the improvement.

If the tax is ever above twice the rate of returns on US Treasury bonds, no property-tax-payer will ever buy US treasury bonds. Instead, they'd buy a huge chunk of marble for a counter-top and hide it under wood. Then they deduct half the cost of the marble, and the rate of return on this risk-free investment is half the value of the property tax.

Plus, if you can only deduct half, then improvements are dis-incentivized.

Treasury bonds pay back their principal; deducted improvements would not be added to basis price at the time of sale.

I don't know all these words.

Suffice it to say that there are epicycles that negate the specific problems that you were pointing at. They almost certainly invoke problems that I'm not capable of identifying.

Actually it's worse--you'd have to require people to file transactions that reduce the value of their house. Otherwise you could just sell the marble right after you've written it off to lower your tax burden. But these transactions are easy to hide, and even if their not hidden, they might be hard to adjudicate in some circumstances, and clever people will look for the hardest-to-adjudicate cases.

I appreciate first stabs at improvements in governance; upvoted. Would I be correct in inferring you are thinking about this largely through a computer science lens, rather than an economic one?

What do you think about dealing with price discontinuities? I have in mind things like: major housing development in formerly rural areas due to urban expansion; the construction of a new industrial facility; the discovery of natural resources beneath the land; the major local industry collapsing; critical infrastructure failures like the water supply being contaminated.

I'm confused about the relationship between the bids on the property (the value) and the output of the prediction engine (the predicted value) as a consequence of the above. It looks like the prediction software is designed to exclude price discontinuities in its value estimate, which is how it preserves the incentive to improve the land; but this means we are systematically predicting wrong on purpose, which feels weird. The bids themselves don't appear to have any importance.

Would I be correct in inferring you are thinking about this largely through a computer science lens, rather than an economic one?

I don't really know what lenses are... but I am a computer scientist.

If a formerly rural area is developed, they *should* be paying taxes as if the land's only value was as rural land, at least until nearby land gets developed too. I don't understand what the industrial facility example is illustrating, unless its the opposite of "local industry collapse". Time discontinuities like the local water supply being contaminated or a local industry collapsing aren't a problem at all, since the value of neighboring properties goes down, so the predicted value of the property probably will as well. If you mean the water supply only to that property becomes contaminated, then if it's not their fault, they can sue, and if it is their fault, their tax burden shouldn't go down.

The bids themselves are just a system by which the market value of every property can be discovered and aggregated.

Should undevelopable land adjacent to a formerly rural developed area pay taxes as though it were developed, while giving the developed adjacent land two tax breaks?

If the land is undevelopable, it doesn't really matter who does what with it. If the tax exceeds the value anyone can get out of it, it will default to the government (who will always buy land at \$0). The government may not be a great land manager, but there's nothing to be done with this land anyway. If there's rural land nearby that is developable, maybe the land is actually a bit more valuable than the way it is currently being used, so it's not such a problem if the property tax is higher.

"Undevelopable" does not mean "utterly without use". An area that can't be paved over and built up because it would cause watershed damage might still be usable for grazing cattle. A city block surrounded by blocks that have variances from the building height code is worth less, not worthless.

A lens is a more structured form of perspective, the way we use the term in the community; the emphasis is on being able to move between different ones. We tend to use it for different analytical frameworks (CS, econ, engineering, finance, etc).

The industrial facility effects will be variable depending on what the facility is. For example, a nuclear power plant or a microchip factory will tend to increase property values because of an influx of good paying jobs but a coal power plant or a meat factory will tend to decrease property values because they reek and are miserable to live near.

But the broader point is that the predictions are based on the price history of the last 10 years, when there was no such major price impact. I expect the prediction software to continue predicting stable prices, which means the people who live with a new meat factory are paying taxes based on too high a value, and the people who live next to a new microchip factory are paying based on too low a value. These would eventually even out as the actual sales enter the price history, but this is a long lead time. I also expect that the price would be distorted by the understanding that some places are tax bargains, and some tax banes, which would extend the time for the predictions to correct back to true value.

It looks to me like the same mechanism that preserves the incentive to improve your land works to exclude significant changes in land value more generally; all the directions I can envision for solving this look suspiciously like solving the problem of assessing the unimproved value of land.

But the broader point is that the predictions are based on the price history of the last 10 years

This is just extra information. If you don't think it will be of much additional use beyond the information about the current prices of neighboring properties, then you'd predict that the best predictors will ignore the historical data. To be sure, no one is forcing the predictors to just output the mean property value of neighbors' properties over the last 10 years.

the understanding that some places are tax bargains

If a whole neighborhood is understood to be a tax bargain, prices will go up, and so will the taxes. (Good predictors will probably focus mostly on these new prices of the neighbors' properties).

It looks to me like the same mechanism that preserves the incentive to improve your land works to exclude significant changes in land value more generally

If I build a microchip factory on empty land, the value of my property goes up by a much larger factor than the value of neighboring properties. And it is the increase in the value of neighboring properties that (roughly) determines the increase in property tax I pay. So I don't quite get to keep 100% of the value I created for myself, but I think it's close to 100%.

Okay that makes sense, but now I'm confused on exactly how the real prices relate to the predictions. I expect the details of that mechanism to be the crux of the issue; exactly how the price updating is done will determine who the winners and losers are relative to the desired outcome.

It still feels like solving that problem well would be tantamount to solving the unimproved value problem, but I'm perfectly happy to be wrong.

Well bidders bid for the property, so they'll "update" the prices by making higher or lower bids. And the predictions just use those bids as data.

The aim is to collect 100% of lands rental value, which drops its selling price to zero. So people would assess the value of land as zero if they had to pay a full LVT.

So if taxes were 101% of the rental value, the price of the land (+ tax liability) would be negative, and all land would default to the government. This would be BAD. If taxes were 99% of the rental value, then I don't think this same problem happens. (Under a normal land tax, that would reduce the incentive to improve the land, but that's what all the machinery in this proposal is to avoid). And of 99% is cutting it too close, because predicted land value will only be a noisy estimate of the true value. So I disagree with the aim being to collect 100% of the land's rental value. I'd say the aim is to collect as much of the land's rental value as possible, while keeping a sufficiently small fraction of land from having negative value (once the tax liability is included). I wouldn't be surprised if this ends up meaning that the government could only collect ~2/3 of the land's rental value.

As I said, 100% is the aim, if not a practical possibility. The effect on the amount people are prepared to pay to buy a piece of land is the same. Zero, or close to it.

Vacancies act to regulate the market. This being one instrument to set rents, thus maximise the income from land. So at any one time there will be a range of rental values collected (whether by private landowners or the state) from 90% to over 100%.

As it happens, with the current plethora of data we have now on rents, selling prices and vacancies its very easy to tax 90-95% of land rents. With dedicated computer modelling easy to get better than this should we wish. Not a problem either way.

As for valuations, housing (which is by far the biggest part of agg land values) is the most straightforward, simply due to the fact homes can be put into classifications and compared like for like between locations.

Without any fancy computer modelling, this would capture > 90% of housing land rents. Of course, if the aim was to collect as much land rent as possible for tax revenue, it would be worth investing in computer modelling which would get very close to 99%.

Commercial property is a little more difficult, but the same principles apply.

As a thought experiment. Imagine you owned all the land in which ever country you lived in and wanted to maximise your income from it. I think you could do better than 2/3rds given the amounts at stake.

I totally missed where that was given as a goal. It is a ... confused goal. There is SOME threshold where (as king), you eliminate the idea of private ownership, and simply act as owner directly, making whatever decisions you think maximize your value. This threshold is likely well under 30%, though it may be graduated such that it's 80%+ of a few exceptionally-valuable places.

To see this, explore what's different between an owner, and an appointed manager who's paid a commission.

As the tax authority, you need to AT LEAST make life pleasant enough for your victims/slaves/tax-base that they don't go to the effort of leaving your jurisdiction or revolting against you.

As I understand it, one of the biggest issues with a land value tax is that the existence of the tax instantly makes owning land much less desirable - reduced by the net present value of the total future taxation. This is obviously in some sense part of the plan but it causes some pretty large sudden shifts in wealth - in particular away from anyone who has a mortgage but also just from home owners in general.

Implementing it in a fair/politically acceptable way then seems to require either a far-off starting date, a very slow taper in or a very large series of handouts to compensate, and all of these are difficult for a government to implement given the time horizon of elections and a large, wealthy group who will be opposed to this, likely including inside the governing party.

This isn't especially relevant to your variant but if you're thinking about how to get efficient taxation then this is something to think about trying to find a solution to :)

Yep, I think a far-off starting date would be required. And maybe a modest one-time redistribution of wealth toward people for whom a large fraction of their wealth is in real-estate.

Give up. Taxation isn't about optimality, it's about power and perception. The primary question is "how much can the authority extract without losing the constituency". I have a few more practical concerns with this proposal:

• Why land? This would seem to apply to any transferable asset.
• The "grandma's house" problem. Nobody supports a system where Grandma has to pay massively higher taxes or lose her house. This generalizes to a desire for tax stability. Highly unpredictable taxes leads to revolution.
• Transfer costs are now taxed as well. People bid up your property, well above it's value to you, but somewhat below the cost of relocating. That's probably fine, as taxes are arbitrary at their base anyway.
• I don't get the idea of selling liability - who's on the hook if the new liability-holder dies or stops paying? I don't think secured taxes (those based on the threat of taking the base thing) can be fully separated from their collateral. You can fix the same problem with a simple insurance contract, though.
Give up. Taxation isn't about optimality, it's about power and perception. The primary question is "how much can the authority extract without losing the constituency".

I think there's two ways we can approach this.

One is as an interesting problem to look at. It's not necessarily that policy proposals will be adopted, but exploring policies is an interesting exercise, and it may lead to marginally better policies or even Pareto improvements in policy if they were adopted. And following the idea that the purpose of policy exploration is to have ready-at-hand better policies/ideas when a crisis strikes and people are looking for alternatives because the current system isn't working, it seems worth doing this work even if it doesn't seem clear what the path to adoption is.

The second is that you're right, humans often forego "better" solutions for ones that better serve other purposes. For example, is taxing income a good idea? Probably not, but it's relatively easy to do and to understand, so it's a straightforward policy choice. Does this mean we can't consider alternative taxation systems to the one we have, though? I think it doesn't, only that people developing policy must eventually consider things other than economic efficiency if they hope to develop policies that are likely to be adopted.

Why land? This would seem to apply to any transferable asset.

This could work for other assets where

• each asset has a natural peer group (in this case, other properties in the neighborhood) from which to predict the value; or the value can't change so you can just use the market price of the asset itself
• it's hard to hide the asset
• the asset can't be imported/exported, or you don't care if your country loses this asset. For diamonds, needlessly distortionary but not a disaster; for car manufacturing equipment, very bad.

ETA from Wei Dai:

• there are no untaxed substitutes for the asset

Would marketable securities (e.g., exchange-traded stocks) be a good candidate for this kind of tax? I guess not, because that would introduce an incentive to own non-marketable securities instead, which would distort the economy and make it less efficient. So do we also need that the taxed asset class has no untaxed substitutes?

Perhaps, with a low enough rate. Taxes will always incent some substitution, especially if they're large relative to the underlying asset value. It's quite possible that the additional asset reliability of being traded on a taxed exchange can be recovered by taxation on the assets in the exchange.

Note that land has substitutes too - you can live/work in a less-valuable-to-others space, or in a different jurisdiction, or focus your investments on non-taxable improvements (non-fixture furniture, removable appliances, non-durable landscaping or cleaning services, etc.)

You don't need to focus on "non-taxable improvements" in this system. No improvements increase your tax burden.

You can live/work in a less valuable space, but this land gets taxed too, so it's not an *untaxed* substitute.

Now I'm confused. Improvements that change the valuation of your property (in the "average of neighbors" case, those that improve the overall neighboorhood) are taxed in this system, right? Non-taxable improvements are those that don't change the calculated/bidding value.

Substitution to a lower-tax is as much distortion as the same substitution to no-tax. Impacting people's cost/value decisions about their purchases is a distortion. For both stocks and land, it's debatable how much distortion is acceptable.

And I've gotten kind of lost on which aspects of this we're talking about - apologies if I've responded to a different thing than you intended.

Yes, sorry, if you improve your neighbors' properties, that increases your tax burden. But that's usually only a small fraction of the value of the improvement to your property.

Substitution to a lower-tax is as much distortion as the same substitution to no-tax.

Would you claim that this tax reduces urbanization? For some reason, I'm not totally sure one way or the other. I agree that would count as a distortion.

I think this tax is fairly theoretical and un-implementable, so predicting second-order impact is not very helpful. More importantly, the size of the tax is more important than the mechanism of calculation for answering the question of what behavioral impact it will have. If the tax is roughly the same amount as current property taxes, it'll have roughly the same results.

My guess is that urbanization would slow a little bit with real-estate taxes two or three times higher than today, but probably not stop. over time, differential tax rates will and do shift some people and operations toward lower-tax jurisdictions, but unless it's egregious, it's hard to overcome the network effect of being physically near other successful people/businesses.

I think this tax is fairly theoretical and un-implementable

I don't see why it's unimplementable. Do you mean politically difficult? That shouldn't detract from our ability to analyze the effects.

predicting second-order impact is not very helpful

This is a concrete way to answer the question "is it distortionary"

differential tax rates will and do shift some people and operations toward lower-tax jurisdictions

I'm imagining a federal tax that's the same everywhere.

My guess is that urbanization would slow a little bit

Can you explain why?

My usual answer to "why tax land?" is "the speed of light", i.e. the physical constraints of our universe making locality valuable. And we're okay to tax things that are powered by things like physical constants because they are constant and if you get the policy right you minimize the creation of disincentives on the margin, i.e. you tax the "fixed" value of land (locality) so you avoid doing things like creating price floors and ceilings or creating marginal disincentives that result in no development or less development since any marginal development will pay for itself, taxes included.

To be clear, you can't tax land. You tax people (or corporations), calculating the amount based on land, secured by your ability to (re)take their land. But more importantly, my question wasn't "why tax land", but "why not tax everything?" michaelcohen had a pretty good answer for this - land is a better target than most assets because it's difficult to hide and not subject to removal from the tax jurisdiction.

Basically, land is easily found and threatened by the tax authority (for both physical and historical reasons).

You can fix the same problem with a simple insurance contract, though.

Yeah, see

Owners of tax liability would be required to take out insurance to limit their liability if they don’t own the property

If the insurers go insolvent, does the government default?

I would suggest a system where the government sells bonds linked to specific future tax revenues, and allow a property owner to buy the bond for their own property many years in advance, essentially prepaying the taxes at the current bond rate. If property values and taxes, or even just collections, crash, the bond holders take the loss.

If I were designing the system, the final fallback would STILL be that the tax is secured by the asset. Insurance is just a side-contract, and if the insurer doesn't pay, you sue them. If they still don't pay, then the owner pays. If nobody pays, the government takes the land. It'll make a nice park, if they can't auction it off for enough :)

This way, the tax rules are simple, and any insurance or smoothing deals are optional ways to make it more predictable for owners (and more costly overall).

That's entirely incompatible with the idea of selling the tax liability separately.

Right. That's a silly and unnecessary idea. Your liability is someone else's asset. In this case, the government's. There's absolutely no way that the asset holder (be it the tax authority, or a lender) should or would let you turn their secured debt (you pay or we take the asset) into an unsecured one (you pay or we ... ask again?).

You can't generally transfer liability and you certainly can't transfer or discharge FUTURE TAX liability.

I guess I'd trust competition between private insurers to set better prices than a government agency.

I don't know much about how insurers are regulated, but I think this system works alright?

Bidding on tax bonds would set equally efficient prices on them, since it would be the insurance companies' people bidding on them.