Chris Dillow has blogged that efficiency is a contestable value. No disagreement there, but his argument seems a little odd: he argues that efficiency is contestable because it conflicts with something he calls “sanctity”, which he never really defines.
In his first example he argues that a mansion tax would promote efficiency by persuading widows to give up large houses to those with larger families, but that this would conflict with the sanctity of widows wanting to stay in the houses where their memories are*.
But this has got efficiency all wrong. The mansion tax doesn’t promote efficiency, the market does**. Sanctity is presumably the reason widows have resisted market pressure to sell: they value the house more than others do. Economic efficiency incorporates the value that widows place on sanctity. A mansion tax would lead to an under-supply of sanctity, relative to the market, precisely because it distorts the market away from economic efficiency***. The market is willing to trade off sanctity only when the widow is willing to do so.
Of the other examples Chris discusses, most are also problematic****: markets in surrogate wombs, organs, prostitution. Again he argues that markets in such things conflicts with their “sanctity”. But, as he admits, they only conflict with people’s feelings about the sanctity of someone else’s womb or organs. And again, markets offer a solution. If I don’t want you to sell your womb, I can out bid the person who does. Sure I won’t always get my way, efficiency is about balancing multiple values. But that seems a pretty minor problem with efficiency: that it doesn’t allow sanctimonious dictatorships?
Welcome to the first post on the blog. Sorry it’s a bit rough and ready, I’m still working on it.
* I think Chris knows that this is a spurious argument against a tax, since the widows could mortgage their house to pay for the tax.
** Of course, the market doesn’t always promote economic efficiency (externalities etc). But in this case, it does. The mansion tax isn’t aimed at reducing a distortion, it’s aimed at raising revenue.
*** I’m ignoring, as Chris didn’t mention them, other market distortions like stamp duty, which would act in the opposite direction.
**** I’ll leave his example of immigration, for now, since it’s a little different – it has rather different public good/bad characteristics.
Neal Hockley 
“The mansion tax doesn’t promote efficiency, the market does**.”
Clearly, the market does not promote efficiency if one person is living alone in an under-utilised mansion. The mansion tax, if it obliges sole occupiers to sell in favour of more populous households would, promote efficiency
“A mansion tax would lead to an under-supply of sanctity, relative to the market, precisely because it distorts the market away from economic efficiency***.”
The market does not supply sanctity. Sanctity is not a commodity. It exists outside the market. Hence the conflict.
Of course, it all depends on your definition of efficiency. If efficiency is people/house, then no, the market does not maximise it. But I think Chris and I were referring to economic efficiency – loosely, that stuff goes to those who value it most. In this sense, the mansion tax reduces efficiency. Note, I’m not defending economic efficiency as a moral metric, just applying it.
It is not clear that a mansion tax would interfere with efficiency as you define it.
Before imposition of a mansion tax a buyer will value the mansion at M, the value in use of the mansion. The widow’s valuation will be M (the offer price) plus the mansion’s sanctity value (S). The widow will be unwilling to sell because her asking price will be higher than the offer price. So no trade occurs.
Now impose a mansion tax. The widow’s valuation now becomes M + S – T where T is the discounted sum of future tax payments.. The buyers’s valuation becomes M-T. So still the widow will decline to sell.
The stubborn fact remains that a scarce resource, housing, has not been allocated efficiently between the parties. The market has failed, with or without a mansion tax.
You are completely correct – the tax reduces the value of the house to both buyer and seller, With perfect credit markets, it makes no difference to whether a sale occurs. However, Cameron’s comment, Chris’ post (and therefore mine) implicitly assumed that widows would need to sell due to a cash flow problem (see my first footnote).
Just want to add, that a mansion tax might nudge an elderly widow to sell if the present value of the mansion tax was more than twice the value of the mansion’s sanctity value.
Of course sanctity value is subjective, it depending on the particular owner’s predilection and circumstances. A mansion tax rate would need to be set high if it was to exceed everyone’s sanctity value by a factor of 2 or more.
Seller’s P/L
Sell decision: M-T-S+T (symbols as per previous post)
Keep decision: M+S-T
Difference: (Sell – Keep): T-2S
Sell if T-2S > 0
=> T > 2S
By sanctity I merely meant the notion that people think that some assets have a value beyond their economic use, and this value means they should not be sold. I was vague, because the value thus attributed is often vague – it’s often just a yuk thing. I would have used the word sacred, but that has religious connotiations which don’t fully encompass what I’m getting at.
In the mansion tax example, a tax can increase efficiency in the sense I’m using it, as it sharpens the incentives for the widow to sell. It’s only by defining efficiency so widely as to encompass sanctity that you deny this. But such a wide definition of efficiency risks draining it of meaning.
I’m not sure third parties would be happy in paying women not to be surrogate mothers. They would claim that doing so requires them to accept what shouldn’t be accepted – that wombs are tradeable assets.
Note that I’m not endorsing the attribute of sanctity here.
Thanks for the comment. I’m not defining efficiency particularly widely: maximised by voluntary markets (absent external costs). If WTP of buyer < WTA of seller, and sale does not take place, that's efficient, according to the most standard definition. The mansion tax doesn't 'sharpen' the widows incentives to sell, it changes them. It reduces her WTA.
I'm more convinced by the wombs and organs example, which is different in that at least efficiency and sanctity do seem to be in conflict. The point I was trying to make was that efficiency is a meta value: it involves the trading off of multiple values, including sanctity, at the exchange rates set by people. I think it's helpful to think about why people think things shouldn't be sold. Often there may be valid intuitions, relating to negative 2nd order effects on society (rule consequentialism). In this case, there are negative externalities to selling one's organs, so the sale is not efficient in the standard economic sense, though I agree that many 'standard' economic analyses would not notice!
I don’t think your post is correct. You are avoiding the issue of what is to be taxed (as did Chris for the point). Imagine a world where you had to choose between income taxes and land taxes. By your definition this is choosing between two different forms of “sanctity”. The way economists would choose is to pick the tax that is cheapest to collect and least distortive of incentives, basically an efficiency argument. A “sanctity” argument can be made as well but there is no algorithm to do this by. Instead a government would have to decide who’s sanctity to assault and who’s to preserve. Which is basically what Cameron is doing.
I agree. For the purposes of this post I accepted the premises of Chris’ argument, which focussed purely on the mansion tax. But you are right that for a given level of tax revenue, the choice is never tax or no tax, it is between types of tax. A land value tax has much to recommend it in this regard. My post was pointing out what I saw as a fallacy in Chris’ argument, given the premise.