Saturday, August 31, 2019
Eugene F. Fama (University of Chicago Booth School of Business; 2013 Nobel Laureate in Economics), Property Taxes:
It is often claimed that home ownership is a good deal because the housing services it provides are in effect untaxed income. My simple point is that the property tax paid by a home owner is in effect an income tax on housing services.
For example, the annual real estate tax on my Chicago house is about 1% of the market value of the house. Suppose the market value of the house is $1 million, so the annual property tax is $10,000. In Chicago, annual rental rates are about 5% of house value, or $50,000 for a $1 million house. The $50,000 annual rental rate is an estimate of the annual value of the housing services provided by the house. If I rent the house to someone, I get $50,000 per year in rental income. If I live in the house, I still implicitly get the $50,000 rental income, which I implicitly spend on housing services. The $10,000 annual property tax is thus a 20% tax on the implicit annual rental income from the house.