Rental Deduction

In a post about home ownership, Half Sigma (always an interesting place to visit) complains that renters subsidize homeowners. This is because the imputed rental value of owner-occupied homes is not taxed. In a fair world it would be. But there is no way that you change a rule like that today. About 69% of Americans own homes in the U.S. in part because of this enormous subsidy. Home values in the U.S. are enormously high because of this subsidy and people will want to protect their investment. Once the rules of the game are stated, you have to play by those rules, even if they’re dumb rules.

But Half Sigma is exactly right that this is a tax on the poor to subsidize the rich. One way to make the tax system fairer is to allow for a deduction for rent. This would maintain high home values (an important consideration) and would give a huge benefit to the poor.

Another proposal is to cap rent deduction and the imputed owner-occupied rental value at some level. I think you would have to do this by MLS code (in other words, by locality). The benefit should be capped to the 75th percentile in each MLS code. The government would simply compute this maximum rental deduction for each MLS code and tell you that you can only deduct this much from your taxes. Most people could live with this.

I would have to admit that making the rent deduction cap vary by MLS code is self-serving. I live in a very expensive MLS code. The 75th cap would not affect me. If the cap did not vary by MLS code, it would definitely affect me. Definitely, I have a bias here, but nevertheless I don’t like the idea that otherwise the people in Wyoming, where housing is cheap, will get a free ride on the good people of Fairfax County, where housing is expensive. Fairfax County produces more wealth and more taxes than all of Wyoming. Wyoming doesn’t need another tax break.