A comment from Mark Kleiman
The egregious tax loophole is the non-taxability of the imputed rental income on owner-occupied housing. A renter has to pay income tax on the money he earns to pay the rent, but a homeowner pays no tax on the money he saves by owning.
I know that some analysts favor
taxing "imputed rental income," i.e., the money purportedly saved because a homeowner owns and occupies a home rather than renting it out. But I don't know why that idea makes sense, let alone so much sense that the absence of such taxation is an "egregious" "loophole."
Why be taxed on the theoretical income you supposedly could gain from renting out something you own rather than using it? The theory seems to be that "income" includes all of the value that you receive from any source
-- not just money, but also including services or benefits of any kind (including those that you provide for yourself).
Thus, the exact same theory that is used to support imputing rental income also supports imputing income whenever you:
(a) wash your own dishes rather than paying a maid to do it,
(b) take care of your own children rather than hiring a babysitter or daycare,
(c) clean your own house
(d) use your own furniture rather than renting it out (leaving your house empty, I suppose),
(e) dress yourself in the morning rather than hiring a butler.
In each of these cases, the theory is absolutely identical: You are "receiving" a "benefit" compared to people who have to pay for each of these services or goods in the marketplace, and thus (the theory goes) you have additional "income" to be taxed. This is no exaggeration. Some people argue
that stay-at-home mothers should be be taxed on the value that the household "gains" from the fact that she provides many household services that two-earner families have to purchase. Indeed, the famous economist William Vickrey even wrote
that "money income from gainful work is subject to an income tax while imputed income from leisure
is not taxed . . . Accordingly, an income tax tends to make individuals choose leisure in preference to gainful work to an uneconomical extent."
All of this implies that people could be taxed on the value they "gain" when a parent is free to attend a child's soccer game rather than working late at the office.
There are two simple reasons that the very idea of such taxation seems misguided. First, "income" should mean some benefit that you receive from someone outside of your household
. (I.e., when something literally comes in
from elsewhere.) When you get a paycheck: income. If an employer pays for you to have a free athletic club membership: income. If you win a free car in a contest: income. If your neighbor mows your lawn for free: income (although not the kind that anyone bothers about reporting, I suspect). But when you switch your own money from one pocket to the other (as opposed to lending it to someone else at current interest rates), or buy your own athletic club membership (and do not in turn rent it to someone else), or buy your own car (same), or mow your own lawn, it seems ridiculous to call that "income." Same for buying your own house.
Second, it seems unfair that a particular tax should be structured in such a way that you can't even conceivably avoid paying it. If you don't want to pay property taxes, for example, you can avoid them by not owning property. You can avoid car taxes by not owning a car; capital gains taxes by not owning or selling capital; sales taxes by not buying things; and so forth. But the above theory of income tax would mean that no one could ever avoid having "income," no matter what. If you don't have any real income from a job -- whether because you are a volunteer or a student or a stay-at-home parent or a retiree -- the theory still says that you should be taxed on the "imputed" value of anything that you do for yourself, or even your own leisure time. Stuart Buck