Tax Luxury Homes?

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Adam Ozimek wrote,

Taxing housing wealth is also efficient compared with taxing other kinds of wealth because it’s impossible to move and difficult to hide. If you tax financial wealth, you have to worry that wealthy households will park their money in offshore accounts, thereby creating a distortionary cost and also limiting revenues. However, with rare the exception of million-dollar houseboats, you can’t park a mansion overseas. It’s also a lot harder to hide the value of a mansion because house sales data are generally publicly available. Once you know what nearby homes are selling for, combine that with a building square footage and lot size and you can get at least a general idea of what a house is worth. Valuing a home is a much simpler and more transparent task than valuing someone’s financial wealth.

Pointer ultimately from Tyler Cowen. Ozimek suggests a 1 percent tax on houses valued over $1 million. It has a number of attractive features, not the least of which is that it hits hardest those cities with the strongest regulations against building.

20 thoughts on “Tax Luxury Homes?”

  1. If it only taxes “mansions”, respectable opinion will be for it. If it taxes equally expensive condos in NYC and SF, the idea will be quickly dismissed.

  2. I would further add that much housing wealth is not the result of any particularly helpful behavior. At least business income is the result of some sort of enterprise. Simply buying a home in a major city 20 years ago says almost nothing about whether you are an efficient capital allocator. I’d rather have wealth in more productive hands.

    • Buying and selling our houses to each other is worse than un-helpful and un-productive. It’s actively counter-productive. It causes harm.

      Imagine all that wealth invested in the kind of innovations and improvements that we could have enjoyed as consumers instead. That’s what we’re missing out on. That opportunity’s already gone, buried in dirt.

  3. It seems way more reasonable to put a marginal tax on. Taxing the whole value of the home once it breaches $1mn would encourage a discontinuity just before $1mn. Instead, put on a marginal tax above $1mn. You could even make it more progressive, with a higher kink at $5mn.

  4. If you put an extra $10,000+ annual tax on million-dollar homes, a lot of those homes will instantly fall just below the line in market value.

  5. There’s a source of unfairness here, Transitional Gains Trap style, isn’t there? If I’m just on the margin of deciding to buy a $2M home, but suddenly I discover there will be a new $20K per year tax assessed on that home, then I no longer want the house unless the price drops to compensate (to $1.6M, if we account for taxes falling with home prices and we calculate NPV at a 4%-over-inflation discount rate). If my brother just passed that margin and bought a similar $2M home with 20% down, and if the housing market reacts the way I do, then after the price drop he’s now practically underwater on his mortgage, having lost his entire down payment, even though our preferences and behaviors were only epsilon apart.

  6. Does Ozimek live in “flyover country?” It’s $800K for a tear-down in a “good schools” neighborhood out here. OTOH, further economics barriers to entry will keep those “good schools” gooder for a longer period of time against demographic disaster…

  7. Housing wealth is value minus mortgage. It has always bothered me that real estate taxes are on the assessed value of the property. Thus a first-time home owner with an 80 percent mortgage pays the same tax as someone who owns an equivalent home outright, even though the equity value is vastly smaller. On the other hand, if we tax equity rather than assessed value, then many people will keep their homes leveraged to avoid the tax. In either case, we should call it something other than a wealth tax.

  9. The problem with wealth taxes is that a very low annual tax rate is equivalent to a shockingly large one-time confiscation – as roystgnr effectively points out.

    If there’s a 1% tax on an asset, and asset returns are 4% real, then the income from the asset has been cut by 25%. Thus, an investor would pay nearly 25% less for it (actually, as roystgnr points out the lower tax on the lower value means the difference is 20%). So, really, that “small” 1% tax is equivalent to a 20% one-time confiscation.

    What sounds like a tiny tax is not at all small.

    • Suppose you work for forty years, and in exactly one of those years you make an excellent income. You pay punitive income taxes in precisely that year that would have translated into a bit of income mobility.

      People are already burdened with a shockingly large one-time confiscation. It’s written into the progressive income tax.

  10. Beyond the questions of what this does economically, it runs squarely into the Constitution’s requirement that direct federal taxes be apportioned by population. An amendment was needed to authorize the federal income tax; another would be required for any federal wealth tax.

  11. Property taxes already exist and are leading sources for local funding. This would produce a capital loss followed by slower appreciation diverting some of that to other investments and taxes to other government levels. Desirable?

  12. Let’s ask a deeper question – why should government ever get more money, and why should it ever get money via different means than it already does?

    Almost all “let’s do taxes this way” proposals are attempts to (a) raise more money to grow the size of government or (b) attempts to make what is already a very progressive tax scheme even more progressive, or both.

    The observed revealed perference of the political system is for neither of those.

    In addition, various parties want to “tax consumption” – but the whole point of the economy is to provide for consumption! What’s more, asking “rich people” to “consume less” will largely mean unemployment of less-than-rich people.

    • “why should government ever get more money, and why should it ever get money via different means than it already does?”

      Same reason any other market actor should: because it can.

  13. The conversation about how to fund government needs to be had. As a resident of the Pacific Coast, I can tell you a million dollar home isn’t what most people would describe as a “luxury home.”

    As a Democrat I am sympathetic to the argument. But as others have pointed out, as an economic actor I think I might sell my house and move inland a bit. I could probably buy a more typical “luxury” residence and stay under the threshold. And be free from that particular tax.

    Capital is mobile. The US is just one of many safe clean places with decent rule of law and good public services. You don’t want to kill the goose that is laying the golden eggs. I’m not sure this idea will raise the kind of money Ozimek thinks it will.

  14. What you’re talking about is basically… Texas. No income tax, high-side-of-medium property taxes (mine’s 2.5%), vastly more efficient and less-distorting that way.

  15. Mostly a good idea, but as mentioned, the tax should be only on the amount “over” the threshold. So it should be 1% on the amount over $1 mln; which will raise much less money, but reduces the “under a million” effects to avoid the tax.

    But on the huge $15-20 mln houses, this won’t be such a problem.

    While $1 mln is a nice number, I’d prefer it to be more flexible, like 20* median income (~$50k, so 20* is about $1 mln, to start with). Then, as median income grows, the “deduction” also grows.

    Ozimek also mentions the Mortgage Interest Deduction — which should lifetime capped at some $1 mln, as well; if not less, at $500k. So Kerry & McCain would have their house deductions end after they deducted $500k in interest. (IRS would need to keep track of the amount declared; more individual interest tracking… )

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