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Why are rich people’s houses so big? Because Uncle Sam pays for extra rooms

Because of the American Dream and white picket fences and stuff, the United States has long encouraged people to build and buy houses by treating homeowners favorably in the tax code. In all, this special treatment costs the government around $175 billion every year, mostly because homeowners are allowed to deduct the interest they pay on their mortgages from their income.

Even if you support neatly manicured lawns, these policies simply haven’t worked. Because of their structure, they aren’t enough to help new families without much money afford houses. Instead, they serve primarily to encourage the wealthy to, say, add a den or buy a beach house. They’ve likely contributed to the increase in the size of houses in the United States. An average house purchased today is around 2,500 square feet, about 750 square feet larger than the average house bought in 1980.

Christopher Ingraham’s map above shows how much larger new houses are, on average, in several major cities as a result of the tax code. In the nation’s capital, the additional floor space in a typical house that would not be built in the absence of these tax policies could easily fit four master bedrooms of average size. The federal government is not directly buying all of this space, but by discounting the price, the government pays part of the cost and encourages the owner to buy the rest.

These data are from the National Association of Home Builders and research by economists Andrew Hanson, Ike Brannon and Zackary Hawley.

Helping the wealthy live in more luxurious homes is worse than a waste of taxpayers’ money. Larger houses require more energy to heat, and urban sprawl has been a disaster for the world’s climate.

What’s more, the financial crisis of 2008 might have been as bad as it was partly because of the tax code. “To the extent that it encouraged debt over savings use to pay for housing, it could have exacerbated the problems that we saw,” Hanson said, though he warned that any connection between the two is still just conjecture.

It could be that owning a home really does make a person a better citizen, more willing to do nice things for her neighbors and her community, but Hanson noted that the empirical research on this question is inconclusive and that in any case, current tax policies aren’t doing much to make more people into homeowners. Click below for the new paper by Hanson and his collaborators.

Max Ehrenfreund | March 27, 2014 at 2:57 pm
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