Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market

61 Pages Posted: 2 Feb 2015

See all articles by Wojciech Kopczuk

Wojciech Kopczuk

Columbia University - Graduate School of Arts and Sciences - Department of Economics; Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

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Date Written: January 1, 2015

Abstract

Houses and apartments sold in New York and New Jersey at prices above $1 million are subject to the so-called 1% "mansion tax" imposed on the full value of the transaction. This policy generates a discontinuity (a "notch") in the overall tax liability. We rely on this and other discontinuities to analyze implications of transfer taxes in the real estate market. Using administrative records of property sales, we find robust evidence of substantial bunching and show that the incidence of this tax for transactions local to the discontinuity falls on sellers, may exceed the value of the tax, and is not explained by tax evasion (although supply-side quality adjustments may play a role). Above the notch, the volume of missing transactions exceeds those bunching below the notch. Interpreting our results in the context of an equilibrium bargaining model, we conclude that the market unravels in the neighborhood of the notch: its presence provides strong incentive for buyers and sellers in the proximity of the threshold not to transact. This effect, the identification and recognition of which is novel to this paper, is above and beyond the standard extensive margin response. When present, unraveling affects interpretation and estimation of bunching estimates. Finally, we show that the presence of the tax affects how the market operates away from the threshold-taxation increases price reductions during the search process and in the bargaining stage and weakens the relationship between listing and sale prices. We interpret these results as demonstrating that taxation affects the ultimate allocation in this search market.

Keywords: housing market, incidence, transaction tax

JEL Classification: H2, H7, R3

Suggested Citation

Kopczuk, Wojciech, Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market (January 1, 2015). CEPR Discussion Paper No. DP10375. Available at SSRN: https://ssrn.com/abstract=2559316

Wojciech Kopczuk (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Columbia University - School of International & Public Affairs (SIPA)

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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