Taxation of the Really Big House

Abstract

The tax advantages of personal-use property induce taxpayers to buy more housing than they would without tax. Two-thirds of the tax distortion occurs in the wealthiest 10 percent of families. The proposal would tax the rental value of personal use of property for aggregate property worth more than $1 million per family. The proposal would allow the deduction of home mortgage interest but disallow the deduction of property tax over the same $1 million threshold. The taxable rental value would be measured by a long-term risk-free interest rate, adjusted annually. Value would be set initially by purchase price, and then adjusted annually by a regional index. The $1 million threshold would be reduced by $50,000 annually over the coming years, but not to a point where the tax collected would not be worth the administrative effort. The proposal would tax capital gain from the sale of a residence even if it were reinvested.

The proposal is made as a part of the Shelf Project, a collaboration by tax professionals to develop and perfect proposals to help Congress when it needs to raise revenue. Shelf Project proposals are intended to raise revenue, defend the tax base, follow the money, and improve the rationality and efficiency of the tax system. The tax community can propose, follow, or edit proposals at http://www.taxshelf.org. A longer description of the Shelf Project can be found at ‘‘The Shelf Project: Revenue-Raising Projects That Defend the Tax Base,’’ Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, 2007 TNT 238-37.

Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.

Copyright 2009 Calvin H. Johnson.

Keywords: tax reform,housing, mortgage deduction, property tax deduction

JEL Classification: H20