Hard Work Is Taxed, Passive Accumulation of Housing Wealth Is Not

A $2.2 million "teardown" in LA. Why does someone who lucked into phenomenal growth in the value of their land, despite not even maintaining their property, get to keep nearly 100% of the growth in that value—while the regular working Joe pays much of his income on tax?

Here are two truths:

1. If I work hard at my job and get a raise, I keep about 50-60 percent of it after taxes. Even if I never get a raise (as is increasingly the case in the U.S.), about 30 percent of my income is taxed, give or take.

2. If, on the other hand, I do absolutely nothing but am fortunate enough to have bought a home at the right time, and the value of that home goes up, I keep almost 100 percent of it.

And two observations:

  1. Home prices going up is basically a zero-sum outcome, where homeowners win and future buyers and existing/future renters lose by an equivalent amount through reduced affordability. Home prices going up faster than wages cannot persist indefinitely, because eventually there's no one left to buy them.
  2. People who work at a job self-evidently contribute positively to their communities, while homeowners earn money regardless of their individual contributions to a community or region. (See the $2.2 million teardown, above.)

Given these points, why do we have a tax code that so strongly advantages the passive accumulation of wealth over income earned through labor, by the sweat of one's brow?

There is some risk in purchasing a home, so perhaps there should also be some commensurate reward. But there's no justification for amplifying those rewards with public funds—most of which go to households earning over $100,000 a year—while lower-income households get barely anything, except suckered into bad deals, at the worst possible times, in the least desirable neighborhoods. Is this kind of policy actually an expression of our values?* I really hope not.

Nearly two-thirds of all federal housing expenditures go to households earning over $100,000 per year, and effectively zero homeownership subsidies go to households earning less than $40,000 a year. Source: Center on Budget and Policy Priorities.

To be clear, I'm not bitching about high taxes generally. I for one am fine with high taxes so long as society receives some benefit in return. Scandinavian countries in particular have shown what can be achieved with high taxes when they're used effectively. And frankly, if I get a raise and taxes talk half of it, I still want that other half, so those taxes don't really discourage me from working harder and striving for more.

But there's something really wrong with a system in which the "hard work" path to success is so much more arduous than the "starting with a bunch of money" path. And not just more arduous—that's probably inevitable—but specifically disadvantaged. Maybe we don't need to completely reverse the dynamic between labor and capital gains, but it sure would be nice to at least see some parity. Certainly something needs to change, because there are millions of households for whom homeownership will never be feasible, and as home prices continue to rise, the share of the country that can afford to buy a home keeps on declining.

We spend hundreds of billions each year propping up the value of housing and perpetuating a system in which the rich get richer, while at the same time three-quarters of those in need of housing assistance receive nothing. Maybe if the federal government made housing aid an entitlement, they'd finally have the proper incentive to keep home prices in check, and we could finally start devising a wealth-building strategy that works for everyone.

* Note: It's even worse in California specifically, where Proposition 13 puts additional limitations on property taxes, and requires that the state make up the difference by taxing income, even for households earning under $10,000 per year. This amounts to a transfer of wealth from younger, lower income people of color, to older, more affluent whites.