When homeowners own their property with equity, they get a tax benefit as important as the mortgage interest deduction: the imputed rent they pay to themselves goes untaxed. To think about how this works, consider two nieghbors who own their houses free and clear. Suppose the houses are identical, and that the nieghbors swap houses, paying rent to each other. They now have a tax liability that they would not have had they remained in their houses. Avoiding this liability is tantamount to a tax expenditure--a benefit to those who own their houses without debt. The OECD is correct that countries rarely tax imputed rent, and argues that this lack of taxation has tilted investment toward housing to the detriment of more productive uses. It also argues that the benefits to homeownership are overstated. I am not sure that this is true (see here and here), but I will leave that for another time.
The question is how does one go about taxing imputed rent? It is not easy. One could start by imposing an ad valorem tax on property values (such as a local property tax), but that doesn't tax imputed rent per se, because it does not take into account expected inflation (if one person expects her house to go up in value, and another does not, the rent the first person pays is lower than the second). Alternatively, one could find comparables in the rental market and attribute rents found there to the owner market. But owner and rental markets are so segmented that this would be difficult to do.
This has implications for fairness; if we don't know what we are taxing, it is hard to know how much to tax it.
The question is how does one go about taxing imputed rent? It is not easy. One could start by imposing an ad valorem tax on property values (such as a local property tax), but that doesn't tax imputed rent per se, because it does not take into account expected inflation (if one person expects her house to go up in value, and another does not, the rent the first person pays is lower than the second). Alternatively, one could find comparables in the rental market and attribute rents found there to the owner market. But owner and rental markets are so segmented that this would be difficult to do.
This has implications for fairness; if we don't know what we are taxing, it is hard to know how much to tax it.
This would be incredibly hard. Why not just make rent deductible (or better, give a refundable tax credit) and eliminate the mortgage deduction.
ReplyDeleteThis should more-or-less level the playing field between renting and owning, so now you impose an additional residential property tax to rebalance between housing and other expenditures.
In some sense this is more complicated, but it seems easier than fairly computing the imputed rent. Neither one of these things is ever going to happen anyway.
Hi, Richard. Could you comment on Matthew's suggestion that it would be better to level the playing field between owning and renting by subsidising renting? I am an owner myself now, but during the many years when I found it a struggle to save for a deposit against a rising housing market, I really felt the unfairness of the tax system. I would much rather live in a country where most people rent long-term and the rents are deductible against income, so reducing the incentive to buy.
ReplyDeleteThe OECD's proposal to tax imputed rents just seems politically unfeasible.
Why stop at taxing imputed rent? Why not also tax the imputed income from home maintenance and improvement? A homeowner painting a room in her house deprives a tax-paying painter of work, and therefor the government of revenue, so shouldn't the homeowner pay a tax on the imputed value of her own labor? If she makes her own lunch, is she not depriving some restaurant of a sale, and thus depriving the government of the tax revenue that would otherwise be paid by the restaurant's owner and its employees?
ReplyDeleteIndeed, we should tax all the imputed income from all labor that people do for themselves and their families! Tax parents for planning their kids' birthday parties instead of hiring taxpaying professional party planners! Tax people for doing laundry at home instead of hiring professional laundry service (we can tax them slightly less if they use a laundromat instead of equipment they own themselves.)
And surely we should tax the imputed incomes of those people who are selfish enough to be without the butlers, cooks, maids, valets, au pairs, gardeners, and other taxpaying workers whom, I'm sure, the worthies who run the OECD selflessly employ.
Most importantly, tax grandma's home-made apple pie! That old bat has gotten a free ride on the backs of respectable, taxpaying bakeries long enough! Up the IRS!
Cinedude makes an interesting point. I must ponder...
ReplyDeleteTaxing services people provide for themselves would be logical economically; it would encourage people to hire labor to do jobs that could be done more efficiently by professionals. However, it would be both practically and politically impossible. Kind of like taxing imputed rents, except even harder.
ReplyDeleteWe can't even equalize sales taxes between internet and physical shopping, when the values are transparent.
We should pay our taxes to the government correctly....If the government implemented it so be it.
ReplyDeleteSeattle Real Estate
Why stop with the transaction only one deep? You could have had homeowners A, B, and C. A rents his house to B who subleases it to C. B rents his house to C to who subleases it to A, and C rents his house to A who subleases it to B. Now each homeowner has twice as much rental income to tax. But why stop there. Why not make this say 10^30 transactions deep. You could tax everyone an infinite amount because they chose not to get re-leasing property in an endless chain to "avoid" the tax on the income that would have generated had they chose to do that.
ReplyDeleteWe can take cinedude's (completely valid analysis) many steps further too. If one directly hired a valet, he should be taxed on the imputed income he "got" by not instead hiring a personal services manager who in turn hired a labor contracting agency who in turn hired a temp service company who in turn hired a labor supplier who in turn hired a valet who in turn hired a stand-in who ...
Why not the following:
ReplyDeleteImputed Rent = Capital Opportunity Cost of Equity + Mortgage Interest (if not owned outright) - Appreciation (or + Depreciation) + Property Tax + Insurance + Maintenance + Repairs + any utilities that would be included in the rent + Opportunity Cost of Time Spent (e.g. having to take off work when the repair guy comes, etc.)
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