Working Paper: CEPR ID: DP10375
Authors: Wojciech Kopczuk; David J. Munroe
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 Codes: H2; H7; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sellers adjust their pricing strategies to avoid triggering the tax (H22) | Pricing strategies of sellers (D49) |
| Incidence of the tax falls primarily on sellers (H22) | Burden on sellers (H22) |
| Presence of the tax (H29) | Notable gap in transaction volumes above the threshold (E49) |
| Tax disrupts market efficiency (H21) | Broader implications for the functioning of the market (F61) |
| Tax affects transactions near the threshold (H22) | Broader implications for market functioning (F61) |
| Mansion tax (H24) | Bunching of transactions just below the threshold (E44) |