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The United States should continue its historic practice of excluding from taxable income the imputed rental income of homeowners. Proposals to curtail the exclusion have often been entertained. Most recently, the Congressional Budget Office analyzed the possibility. See Larry Ozanne, Taxation of Owner-Occupied and Rental Housing, CBO Working Paper 2012-14 (Nov. 2012XCBO Report).
The United States income tax has never reached imputed rental income. In the early 20th Century, several European countries did tax imputed rental income of owner-occupied housing. However, the practice has been abandoned in all but Belgium and the Netherlands. See, e.g., Paul van den Noord, Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence, 101 ÉCONOMIE INTERNATIONALE 29, 36 (2005).
In referring to the nontaxation of rental income as an I use that term broadly. Narrowly, exclusions are Code sections remove from taxability items that be taxable taking into account section 61. There is dicta in old to the effect that imputed rents not within the compass of or statutory "income" in first place. Helvering v. Independent Ins. Co., 292 U.S. 371 (1934); v. Commissioner, 9 B.T.A. 1273 acq. VII-2 C.B. 2 (1928). Most would doubt the existence of a barrier, and there is no statutory exclusion. So "[t]he is rather a matter of practice, but no less firmly forthat reason." J. Martin Burke & Michael K. Friel, Taxation of Individual Income 28 (10th ed. 2012).
The discussion below acknowledges that there are revenue, equity, and efficiency arguments in favor of ending the exclusion but maintains that these arguments are trumped by considerations of administrability and political acceptability.
Arguments for Taxation
The exclusion has revenue implications, of course. The Treasury Department identifies the exclusion as a tax expenditure costing the federal fisc $50.6 billion in fiscal 2012, compared to $86.9 billion for the mortgage interest deduction, $16.2 billion for the property tax deduction, and $16.0 billion for the capital gains exclusion (the three other tax benefits to homeowners). Budget of the U.S. Government Fiscal Year 2013, Analytical Perspectives 250 (Office of Management and Budget 2012). The Joint Committee on Taxation, however, does not include the imputed income exclusion as a tax expenditure, believing it to be warranted by administrative necessity. See Joint Comm. on Tax'n, Estimates...