Sunday, July 10, 2011

Investment in Housing

Economist Greg Mankiw has a post on the relative cost in investing in housing vs business.  As long as I can remember my father has talked about this. 

"Investment in owner-occupied housing faces an effective marginal tax rate of just 3.5 percent. In contrast, investment in the business sector faces an effective tax rate of 25.5 percent. This leads to a tax-induced bias for capital to flow into housing-related uses rather than other types of projects. As a result, businesses are less likely to purchase new equipment and less likely to incorporate new technologies than otherwise might be the case. Less business investment results in lower worker productivity and ultimately lower real wages and living standards. While the housing sector provides employment and has other positive effects on the overall economy and on society, the resources employed in the housing sector displace investment that would otherwise occur in the business sector were it not for the favored tax treatment of housing. The resulting distortion in the allocation of capital likely lowers overall output, because resources are allocated based on tax considerations rather than economic merit. In effect, the United States has chosen as a society to live in larger, debt-financed homes while accepting a lower standard of living in other regards."
The argument here isn't that business investment should be favored in order to raise the standard of living--that is an enterprise association argument--but rather that policy should be neutral.  The standard comment in favor of a housing oriented policy, that it is the dream of every american to own their own home, makes the mistake of pre-supposing that government should be in the dream realization business.  That in turn requires government to prioritize among dreams, which should be beyond its purview.

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