by Andrew Hanson, Ike Brannon, Zackary Hawley
April 01, 2014
The individual income-tax code offers significant benefits for home owners. The largest in dollar terms, and the most apparent to taxpayers, is the mortgage-interest deduction, but the tax code also allows a deduction for state and local property taxes and exempts from taxes the capital gains from the sale of a home. These preferences for home ownership are essentially subsidies, and they have real effects on the economy by creating incentives, lowering receipts, raising the debt, and causing tax rates to be higher than they otherwise would be. Proponents of these generous tax benefits often argue that they encourage home ownership. However, the data show the opposite. Most Americans receive no benefit, and those who do see such benefits tend to be high-income earners. By considering the flaws in the tax treatment of housing, we may see how these policies might be transformed to better serve owners, renters, and taxpayers.