Tax madness

Recently I heard some young guys in a restaurant next to me talking about how buying a house to live in is the best investment one can make. This is commonly understood to be true. The first house is great, the second is just an investment.

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Why is this the case? First when you buy a house you can work and improve it yourself, so you get an extra work opportunity. Thats good, but you could also work more without buying a house. Then you buy capital that you can use yourself. Again its great, but you could also buy other capital (e.g. a shares in a business) and equally benefit.

In a free economy, there is really no fundamental difference between buying a house or buying a share in a productive company and using that to pay rent. You should invest in what you think satisfies the biggest market demand. If houses are short and expensive, build one. If there are other market opportunities invest in some.

So why is it that buying a house is generally the better option? It is because of taxation. You are not taxed on the value personally derived from your house (the rent that you are no longer paying). But when you own and rent out a house to somebody else but you also live for rent in another house, you have to pay taxes on the collected rent. However, both situations describe the same macro-economic situation.

The taxation is skewing free market incentives and misguiding the use of free capital, which is detrimental to everybody. This policy is especially bad for the poorer people since you can only benefit from that tax advantage if you are rich enough to buy an entire house. If you are just able to afford a share together with other investors and rent the house out, you have to pay taxes on the collected rent.

In reality, buying the first house to live in yourself is a nice tax gift for the middle class and a big middle finger for the lower classes that have to live in rented property. The complex solution is to make money spent for rent exempt from taxation, the proper solution is to abolish taxation altogether :) and let free markets decide on which investment is the best.

This problem fits into the bigger picture of taxing investment, which is generally skewing natural investment incentives and creates an imbalanced economy wasting resources.