The Subtle Costs of a Mansion Tax

An exciting email pinged into my inbox at the end of last week. It was a link to the contents of the latest issue of the American Economic Association’s journal ‘Economic Policy’. For most people these are not usually as gripping as, say, a Ken Follett novel. But there, nestling amongst thickets of algebra, is an article entitled ‘Mansion Tax: the Effect on the Residential Real Estate Market’.

The authors, Wojcieck Kopczuk and David Munroe, are both members of the prestigious economics department at Columbia University in New York. The article contains its fair share of technical material, but the main points are conveyed by some straightforward charts. The paper describes a detailed analysis of residential real estate transactions since 2003 in New York City and in the neighbouring state of New Jersey.

The mansion taxes which they examine are nowhere near as punitive as the one envisaged by Ed Miliband. But the impact of the taxes is both dramatic and detrimental. A so-called mansion tax has been in force in New York since 1989 and in New Jersey since 2004. It applies not on an annual basis to the property, but simply to transactions of $1 million and over. The tax rate is 1 percent and is imposed on the full value of the transaction so that a $1 million sale is subject to a $10,000 tax liability, while a $999,999 transaction is not subject to the tax at all.

Not surprisingly, the tax distorts the distribution of pricing, so that there is a large bunching effect just below the $1 million threshold. A plot of the number of transactions in New York City against the price, not surprisingly, slopes downwards. There are a lot more sales of properties at, say, $500,000 than there are at £1.5 million. But there is a huge spike in the chart immediately below the $1 million tax threshold. The same result is shown for New Jersey. Here, the tax was introduced during the period for which the transactions data is available. And its impact was virtually instantaneous.

There is a large gap in transactions in price bands just above the threshold. But this is bigger than the excessive number of sales which take place below it. More sales are lost above the threshold than are gained below it. The tax causes the market to, as the authors put it, unravel. The market ceases to function properly, and trades which would otherwise have been undertaken by willing buyers and sellers do not take place at all. This is the real subtlety to the article. Mansion taxes create costs which are not at all obvious at first sight. The people who lose out can never be identified, for the simple reason that they are unable to carry out the transactions which they would have liked to. But their losses are nevertheless real.

Markets are often imperfect instruments. If left completely unchecked, they can create undesirable outcomes.  But Soviet-style diktats on markets can create costs for society which go beyond the immediately obvious.

Paul Ormerod

As published in City AM on Wednesday 6th May

Image: Kensington & Knightsbridge – 79 by Kyle Taylor under license CC BY 2.0

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.