But if there’s political will to make millionaires and billionaires pay more, is a wealth tax the best way to go about it?

Let’s put it under review.

How are the ultra-rich taxed?

Since wealth generates income via interest, dividends and capital gains, the ultra-rich often have both staggering fortunes and eye-popping earnings. But for tax purposes, only income matters under the status quo. The question of how to tax the ultra-rich largely hinges on whether wealth or income is a better tax base, and how each concept should be measured.

Wealth is the total value of a person’s assets, minus their liabilities, at a point in time. For most people, wealth is fairly simple to measure—their assets include cash savings, retirement or other investment accounts, and residential real estate, all of which have observable market values. For the ultra-rich, though, measuring wealth is complicated. Many of their assets—such as shares in private companies, art and large real estate holdings—have volatile prices and are fairly illiquid, which means sales histories are thin. Most researchers rely on tax records and survey data to estimate the wealth of the top 0.1% of the wealth distribution, and on data collected by Forbes for insight into the assets of an even more exclusive subset: the 400 richest Americans. According to these data, a household needed to have a net worth of about $46 million to be in the top 0.1% in 2022, while the cutoff for the Forbes 400 was about $2.7 billion.

Income refers to the flow of value a person receives over a period of time, or a change in wealth. But economists prefer to measure income differently than the IRS:

• Economic income treats changes in asset values as income right away. Formally, it’s equal to the change in a person’s net worth plus their consumption over a period of time.

• Taxable income is defined more narrowly as realized economic gains, like cash received via wages or from the sale of an asset.

For example, if a shareholder’s portfolio increases in value from $1 to $10 over a year and they hold on to their shares, they have $9 in economic income but no taxable income. If they sell their shares, they have $9 in income by either measure.

Economic and taxable income usually look similar for people who earn their living from paychecks, but the measures diverge for people who are rich enough to own substantial asset portfolios. The 0.1% earn about $2-3 million of taxable income per year on average, but their economic income is much higher, because about half of the increase in their net worth in any given year comes via unrealized capital gains. For example, from 2014–2018, Warren Buffett reported about $125 million in taxable income while his net worth rose by an estimated $24.3 billion.1

The U.S. income tax system is designed to be progressive by taxable income, not economic income. For about 99.9% of the population, it is: people with more taxable income pay a higher share in tax. But progressivity appears to break down at the very top. As a share of taxable income, the Forbes 400 pay less than they should. As a share of economic income, tax rates begin to drop off at a lower threshold, around the top 0.1%.2

What’s the case for a wealth tax?

The defining feature of a wealth tax is that it pegs someone’s tax liability to their net worth at a point in time, rather than their income over a period of time. The rationale for most current wealth tax proposals is that the wealth of the ultra-rich is a better indicator of their ability to pay than their income, especially given the rules around what income counts as taxable.

As Sen. Elizabeth Warren puts it:

“Consider two people: an heir with $500 million in yachts, jewelry, and fine art, and a teacher with no savings in the bank. If both the heir and the teacher bring home $50,000 in labor income next year, they would pay the same amount in federal taxes, despite their vastly different circumstances.”

Details such as eligibility thresholds and tax rates vary across wealth tax proposals. For example, the “billionaire tax” on the ballot in California would impose a one-time 5% tax on assets over $1 billion, while Warren’s “ultra-millionaire tax” would levy a 2 or 3% tax annually on assets over $50 million and $1 billion, respectively. Economist Gabriel Zucman has proposed that those with at least $1 billion pay a minimum of 2% of their total net worth in tax each year, inclusive of existing income taxes.

At the rates proposed, wealth taxes are designed to slow the rate of millionaires’ and billionaires’ wealth accumulation—not to deplete their wealth relative to current levels. In order to deplete wealth, tax rates would need to be higher than the rate of return, which Zucman estimates to be 7.5% for the 0.1% and 11.3% for the Forbes 400, on average.

Does the case for a wealth tax hold up?

The tax system isn’t progressive at the very top, but a wealth tax isn’t the best way to fix it. Economic income is a better proxy for ability to pay than static net worth, and can be taxed effectively by tightening capital gains tax rules and raising rates.

Economic income is a better measure of ability to pay than wealth

Taxable income is a poor proxy for ability to pay. An heir with $500 million in assets can obviously afford to pay more tax than the typical school teacher even if they have the same taxable income in any given year. But static net worth is also a poor proxy for how much tax someone can afford. If the heir decides to spend lavishly instead of saving their millions, their consumption choices will lower their net worth, but that shouldn’t lower their tax bill.

The concept of economic income addresses this problem by capturing changes in both net worth and consumption. Anyone who receives $500 million in a given year has $500 million in economic income regardless of whether they receive cash or assets, and regardless of whether they save, spend or reinvest the money. Economic income recognizes that non-cash assets are real financial resources, and that income spent on consumption could otherwise be spent on taxes.

If economic income is a better proxy for ability to pay than cash receipts or static net worth, then the tax system should aim for progressivity by that metric. But wealth taxes aren’t designed to achieve it.

Imagine two people who start the year with $500 million in cash and will be subject to a 2% wealth tax at the end of the year.

The first invests the cash and earns a 2% return, which is entirely eaten up by the wealth tax. Their effective tax rate by economic income works out to about 102%, and they finish the year almost exactly where they started.

The second earns a higher return, 5%, which the wealth tax takes a bite out of. Their effective tax rate by economic income is only about 42%, and they finish the year with $14.5 million more than they started.

Wealth taxes put the most drag on wealth accumulation for savers and investors with the lowest returns, and the least drag on investors earning the most, who also tend to be the wealthiest. The fact that wealth taxes penalize low-return investments relative to high-return investments could be considered a virtue, since it could encourage more productive capital allocation.3 But if the goal is to make taxes track ability to pay, then wealth taxes aren’t a precise treatment. Since wealth taxes are pegged to levels of wealth, rather than changes in wealth, they aren’t designed to be progressive by economic income.

Taxing economic income annually is impractical and risks negative spillovers

If we want to achieve progressivity by economic income, then taxing all capital gains directly, as they accrue, seems like an obvious move. Mark-to-market capital gains taxes are designed to do just that, and have been proposed at the federal level as an alternative to wealth taxes. Whereas wealth taxes would be levied on a person’s net worth on December 31, mark-to-market taxes would target annual changes in net worth by taxing capital gains whether or not they’re realized. Plus, since they tax gains as they accrue, mark-to-market taxes can’t be minimized via consumption.

However, taxing unrealized gains is liable to create more problems than it solves.

Many assets are hard to value, especially those that don’t change hands often. To administer a recurring mark-to-market or wealth tax on unrealized gains, assets would need to be valued at least every year. But without transactions observed by a third party, owners and tax assessors have to speculate about what a buyer would pay for each asset, and whenever prices are contested, administrative costs deplete revenue. Valuation is less of an issue for shares in public companies, but taxing unrealized gains could incentivize shareholders to keep companies private.

Even if asset values were transparent and up-to-date, they can be volatile. Any snapshot measure of an asset’s worth can therefore be outdated by the time payment is due. For example, startup valuations often skyrocket or plummet around make-or-break events, so investors’ tax burdens would be very sensitive to timing. In other cases, asset owners might intentionally manipulate asset prices ahead of tax day. There’s consistent evidence from Colombia, Spain, Sweden and Switzerland, for example, that wealth taxes cause households to declare less wealth.4

And even if assets experience steady and predictable changes in value over time, some are illiquid. Shares in private companies, for example, aren’t traded on a public market and are often legally restricted. To the extent that annual taxes on asset values force some taxpayers to liquidate assets to pay their bills, that could cause economic distortions downstream, like disinvestment in startups or capital misallocation more broadly.

Closing capital gains tax loopholes and raising rates can achieve progressivity by economic income over time

It would be legally and administratively difficult to tax unrealized gains on an annual basis, and it could do economic damage. Yet as it stands, capital gains can escape the tax base permanently. Some common-sense reforms to capital gains taxes would significantly improve on the status quo and move the tax system toward progressivity by economic income over time.

The biggest escape hatch for capital gains is the step-up in basis rule, also known as “the angel of death” loophole. When shareholders die, any unrealized capital gains that have accrued on their assets are wiped out for tax purposes. To return to Warren Buffett: if he were to die before selling his appreciated shares, the $24.3 billion in gains would never be taxed, even if his heirs eventually realized them. This loophole doesn’t just impact taxes at death; by creating an incentive for shareholders to defer realization, it widens the gap between taxable and economic income during life.

The ultra-rich can also donate appreciated assets to charity, which nets them a double tax benefit: they can deduct the fair market value of the donation from their taxable income and avoid paying taxes on the associated capital gains.

Moreover, even when capital gains are realized and taxed, the rate schedule isn’t designed to be progressive at the top. The highest marginal tax bracket for capital gains currently kicks in at $600,050 for married taxpayers filing jointly. However, members of the 0.1% earn multiples of that. If all capital gains were realized and taxed as income in the year they accrued, the first dollar earned over $600,050 would be taxed at the same rate as the billionth.5

In her wealth tax pitch, Elizabeth Warren argues that “while we must make income taxes more progressive, that alone won’t straighten out our slanted tax code or our lopsided economy.” But Warren’s proposal, like all others on the table, would tax wealth at a rate that is lower than the average rate of return for the ultra-rich; it’s meant to slow the growth of top fortunes, not deplete them. That’s exactly what higher capital gains tax rates are designed to achieve, and they can do it more simply and precisely.6

What should we do?

To achieve progressivity by economic income on an annual basis, we’d have to tax unrealized capital gains. We aren’t convinced that’s feasible or desirable. But there’s a pretty straightforward way to make taxes on realized, cash income progressive each year: make the capital gains tax schedule steeper. With new tax brackets for people who earn millions or billions in capital gains, policymakers could adjust rates in a targeted way to slow the rate of wealth accumulation at the very top of the distribution. Several U.S. states—including California, Maine, Massachusetts, Minnesota, Rhode Island and Washington—have recently implemented this type of “millionaire tax,” using new tax brackets or surtaxes to raise effective tax rates on top earners. Taking a similar approach at the federal level would reduce flight risk and have a broader impact.

Over a longer time horizon, we can move toward progressivity by economic income by ensuring that all capital gains are realized—and taxed—during an asset holder’s life or at the time of their death. Replacing the stepped-up basis rule with a rule that treats all capital gains as realized at death or upon transfer to heirs would raise about $460 billion over five years. Taxable income could still lag changes in net worth in any given year, but reducing the incentive to hold assets until death should encourage earlier realizations, which would pull tax revenue forward.7

Eliminating or continuing to shrink the charitable deduction for high earners is also a strong candidate for increasing progressivity. In 2025, the charitable deduction cost about $72 billion in foregone federal tax revenue, and about 92% of the benefit went to taxpayers in the highest income bracket. In addition to raising normative concerns, these tax expenditures are inefficient: a 1% increase in the subsidy for the ultra-rich to contribute to their family foundations, for example, led to only a 0.67% increase in contributions and a 0.33% increase in actual charitable disbursements. Similar loopholes that need to be closed include rules that allow gains to accrue tax-free in certain trusts and private life insurance policies.

Even if all these steps are taken, some proponents of wealth taxes would undoubtedly like to go further and take steps to limit extreme wealth in absolute terms, rather than merely slowing its growth. If there’s political will to deplete large fortunes via taxes, then inheritance taxes—which we previously put under review—are a good option. Since they’re a one-off tax and affect heirs, rather than earners, they’re easier to administer and carry less risk of negative economic consequences than high wealth taxes. Plus, they already have support among some of the most vocal supporters of wealth taxes.

Finally, we need to caveat that taxes are only one side of a tax and transfer system. In theory, even a highly progressive tax code by any measure can be undone with regressive spending patterns; and inversely, progressive spending can offset regressive taxes. While we favor a tax code that’s fair on its own terms, we recognize that redistribution via spending is also important, and will put ideas on that side of the ledger under review, too.

Notes

Lately, politicians on both sides of the aisle have pointed to a relatively arcane corporate financial tactic as one explanation for why shareholders keep getting richer while workers’ share of corporate earnings has declined: stock buybacks.

When companies have extra cash on hand, they can use it to buy back shares of their own stock, which reduces the number of shares in circulation and—all else equal—raises the price of each remaining share.

Critics of stock buybacks argue that they’re a way of channeling cash to shareholders that could be better spent shoring up the company itself or paying workers more. By this logic, banning or restricting stock buybacks should make companies more productive and give workers a bigger piece of corporate profits.

But do buybacks really help shareholders at the expense of workers? And more importantly, would banning or capping them make workers better off?

Let’s put it under review.

What are stock buybacks?

When companies have surplus cash on hand, they can:

• hold on to it for a rainy day

• reinvest it, for example by buying new equipment or expanding R&D

• distribute it to employees as cash bonuses

• distribute it to shareholders as cash dividends

• distribute it to shareholders by buying back shares of their own stock

Buying back stock is a way of returning extra cash to investors, just like paying dividends. In a simple model they’re economically equivalent.

To illustrate, imagine a company that’s valued at $100 and issues 100 shares to 10 shareholders. Each shareholder owns 10% of the company, worth $10. The company earns $10 in profit, which raises its value to $110.

If the company pays out the profits as dividends, each shareholder gets $0.10 per share in cash. The company’s value falls back to $100, so each shareholder is left with $10 worth of shares and $1 cash, or $11.

If the company spends the profit on a buyback, it can buy 9.09 shares ($10 ÷ $1.10/share). The company’s value falls back to $100, but now there are only 90.91 outstanding shares, so each share is worth $1.10. Assuming each shareholder sells 0.91 shares in exchange for $1 (a “pro-rata” buyback), then they’re each left with $10 worth of shares and $1 in cash, or $11.

Shareholders would be in the same position if the company simply retained the profit: each shareholder would have 10 shares worth $1.10, or $11. Profit creates value for shareholders, not dividends or buybacks per se. But without a profit distribution, shareholders wouldn’t get any cash.

Buybacks were rare until the 1980s, because companies were exposed to lawsuits alleging that they were a form of price manipulation. Most firms therefore distributed profits as dividends. A 1982 SEC rule change opened the door to buybacks, though, by giving firms safe harbor from liability. By the late-1990s, buybacks overtook dividends as the dominant form of payout, and by 2018 the total value of buybacks approached $1 trillion.

Why do companies buy back stock?

While buybacks and dividends are economically equivalent, firms that use buybacks cite several operational advantages:

• Flexibility: dividends are usually paid on a schedule set by a company’s board, whereas buybacks can be sporadic, giving companies flexibility to retain profits when needed.1

• Control: when companies issue new stock, it dilutes the ownership stakes of existing shareholders. By reducing the number of shares in circulation, buybacks offset this dilution and effectively preserve existing shareholders’ stakes, which might be desirable if founders, large shareholders or other interest groups want to protect their voting power.

• Earnings per share: buybacks help companies reach EPS targets by reducing the number of outstanding shares, whereas dividends don’t. Executive bonuses are often contingent on EPS targets, so some managers have a self-interested reason to prefer buybacks.2

• Investor targeting: while dividends are paid out equally to every shareholder, buybacks allow shareholders to choose whether or not to sell. Buybacks can therefore steer cash to shareholders who want liquidity.

• Tax savings: capital gains are tax-advantaged for certain shareholders, relative to cash dividends, so companies may face shareholder pressure to distribute profits via buybacks.

What’s the case for banning buybacks?

There are three main objections to stock buybacks, as enumerated by a Congressional Research Service report:

(1) they divert capital from investment and encourage debt finance (which encourages short-termism that harms long-term investment); (2) they benefit corporate executives and insiders; and (3) they are tax favored compared to dividends while accomplishing the same purpose of distributing earnings.

The first two objections assert that money spent on buybacks could be better spent, but is diverted due to bad incentives: a desire for short-term share price increases, which may be driven by executives’ or insiders’ self-interest. The third implies that buybacks wouldn’t be a problem if they were taxed fairly.

Does the case against buybacks hold up?

Not really. There’s no good evidence that the rise of buybacks has made companies or workers worse off. That said, channeling corporate profits into capital gains—rather than cash dividends—does allow payouts to escape the tax base, which benefits rich shareholders at everyone else’s expense.

Buybacks probably haven’t caused firms to reinvest a lower share of their profits

Any profit distribution—whether a buyback or a dividend—reflects a choice to pay out cash to investors rather than holding on to it or reinvesting it. The question is whether higher payouts lead to underspending on long-term investments like capital improvements or R&D.

There’s no good evidence that profit distributions cause companies to reinvest less money than they ought to.3

For the most part, companies seem to distribute cash to shareholders when they don’t have anything better to do with it. If companies can invest cash in a way that raises profits, that’s a win for shareholders: it raises share prices by raising the company’s total valuation, and any shareholder who wants liquidity can sell on the open market. When investment opportunities are readily available, companies don’t have much incentive to divert cash to buybacks (or dividends). It’s when investment opportunities are scarce that buybacks beckon, since they’re a way of returning cash to investors while propping up share prices.

In an ideal scenario, shareholders who participate in a buyback will reinvest their cash in a different company that can use it productively, such that buybacks facilitate a more efficient allocation of capital. Of course, companies might be wrong some of the time—there might be productive investment opportunities that they don’t recognize. Likewise, investors might be wrong—they might not put their payout to good use. But neither party has an incentive to systematically underinvest.

Even if companies do sometimes pay out cash that they could invest, it isn’t clear that capping buybacks or dividends would solve the problem. Companies could do any number of things with cash that wouldn’t meaningfully increase productivity or future growth: squander it on bad investments, pay down debt, raise executive compensation or simply hold on to it. Capping payouts could also reduce investment in companies in the first place if investors expect returns on a particular timeline or worry about giving managers too much latitude to retain cash or use it unproductively. From an investor’s perspective, demanding buybacks can be a way of imposing discipline on firms.

Buybacks probably benefit executives, but not at the expense of workers

There are undoubtedly cases in which managers use buybacks to manipulate share prices for the sake of enriching themselves, or are pressured into buybacks by shareholders with the same goal. Systematic price manipulation seems rare, though.4

When managers announce a buyback it tends to signal to investors that the company has been undervalued. For instance, investors might infer that there’s inside information suggesting profits will rise more than expected. In most cases, that signal seems to be accurate: buyback announcements precede real increases in a company’s market capitalization. As a result, while share prices tend to go up immediately after a buyback announcement, that usually reflects a price correction rather than a bubble.5 If it didn’t, investors would eventually catch on and prices would stop reacting.

But even if managers can’t effectively manipulate share prices, they still can—and probably do—exploit the timing of buybacks for personal gain.

For instance, managers might wait to announce buybacks until their stock options vest and then sell shares during the post-announcement window when prices are high,6 or they might time buybacks to meet bonus targets that are tied to earnings per share.7 As dodgy as that sounds, it isn’t obvious that it hurts other shareholders or the company’s performance. And even if it did, decoupling executive compensation from share prices would be a more direct solution than banning stock buybacks.

The impact of buybacks on workers, meanwhile, is ambiguous. Buybacks may enable equity-based compensation schemes by offsetting dilution for larger shareholders, which could benefit workers. But even when employees don’t hold any equity, it isn’t necessarily the case that buybacks come at their expense. While the rise of buybacks is correlated with a fall in the labor share of GDP—or employees’ share of profit, relative to shareholders’—the relationship doesn’t seem to be causal. There’s no guarantee that excess profits would be funneled toward higher wages or other forms of compensation if profit distributions were either banned or capped.

Corporate profit distributions can escape the tax base when they’re paid out via buybacks

While buybacks aren’t necessarily bad for companies or workers, they do create problems for tax policy. Buybacks are tax-advantaged relative to dividends for most shareholders, since they deliver income as capital gains rather than cash.

When the value of a shareholder’s stock increases, they aren’t immediately taxed. Instead, capital gains are only taxed when they’re “realized”—when shares are sold and thus converted to cash. Shareholders who participate in a buyback realize capital gains, so—assuming they’re taxable domestic investors—they owe tax. But shareholders can strategically time realization to minimize their tax burden, for instance by selling back appreciated shares when gains can be offset by losses on other investments. They can also deduct the basis price of each share from their total gains, such that they only owe tax on net income. And best of all, they can avoid tax altogether by holding on to appreciated shares until death. If shareholders don’t sell during their lifetime, capital gains on their assets are erased for tax purposes under a provision called the step-up in basis rule.

Given the structural advantages of capital gains income, buybacks are a better deal than dividends for taxable domestic shareholders even if they’re taxed at the same nominal rate.

For foreign investors, buybacks are an even better deal. By law, foreign shareholders don’t owe any U.S. capital gains taxes; they’re subject to capital gains tax rules wherever they’re tax-resident. However, the IRS requires companies to withhold taxes on dividends paid to foreign shareholders, levied at rates ranging from 0-30% according to bilateral tax treaties.

A 1% excise tax on stock buybacks was introduced in 2023 as part of the Inflation Reduction Act, and has reduced the tax benefits of buybacks for taxable domestic and foreign investors. For tax-exempt investors (including people who hold stocks in retirement accounts or pensions), the excise tax may actually tilt the scales in favor of dividends. But channeling corporate profits into personal capital gains still reduces total tax revenue compared to the alternative of paying out cash dividends.

What should we do?

A lot of the ire about buybacks seems misdirected. Critics have zeroed in on a specific financial tactic as a stand in for the broader shift toward compensating executives and shareholders more than workers, be it via salaries, bonuses, dividends or capital gains that have nothing to do with buybacks.

As economics commentator Noah Smith puts it, “[S]tock buybacks probably just don’t matter much, either in terms of labor markets or in terms of investor wealth. The people who say that repurchases are just another way companies return cash to investors — a sort of fancy dividend — are basically right.”

Stock buybacks aren’t the reason shareholders are benefitting more than workers from corporate profits, and banning them is unlikely to reverse the trend.

But if buybacks are going to continue, they need to be taxed more effectively.

Repealing the stepped-up basis rule and taxing accrued capital gains at death would eliminate more than half of the buyback tax advantage relative to dividends among taxable domestic investors, and would have the added benefit of removing a major tax incentive to defer selling shares. Taxing capital gains at death would raise about $536 billion over ten years, with most of that revenue coming from taxpayers at top of the wealth distribution. In tandem with an inheritance tax—which we’ve previously endorsed—eliminating the step-up rule would make it harder for the richest Americans to shirk taxes and build dynastic wealth. And if there’s political support for making the tax code more progressive overall, then these reforms can be dialed up by increasing the capital gains tax rate.8

Improving the way all capital gains are taxed—whether they arise from buybacks or any other source—will have more impact on wealth inequality and total tax revenue than tweaks that narrowly target profit distributions.

That said, the more similar the tax treatment of dividends and buybacks is, the less room companies will have to structure profit distributions to minimize their tax burden. While it’s impossible to make companies and shareholders perfectly neutral between buybacks and dividends, we could move closer by taxing buybacks as dividends or dividends as buybacks. The first option would require taxing unrealized capital gains, which implies overhauling the current tax regime. Taxing dividends as buybacks would be much simpler, but if it allowed tax-free basis recovery on dividends that might lower total tax revenue.

Preserving the current excise tax on buybacks is also an option, and has the benefit of capturing tax revenue from capital gains that flow to foreign and tax-exempt shareholders.9 To achieve rough parity with taxes on dividends, the excise tax rate would need to be somewhere in the range of 1.6% to 9.6%. That imprecision points to the main issue with excise taxes: they’re a blunt tool. Since shareholders have different tax burdens at baseline, flat excise taxes will fall unevenly on taxable, tax-exempt and foreign investors, so individual shareholders still won’t be neutral between buybacks and dividends.

There’s nothing inherently wrong with buybacks, as long as they’re taxed fairly. But since buybacks are just one channel through which capital gains flow to shareholders, tax reforms that narrowly target them are likely to be high effort, low reward. Better to go big: tax all capital gains when they’re realized in life or at death.

Notes

The heirs who inherit all that wealth will get it largely tax-free. Most types of income—wages, tips, savings interest, dividends, capital gains, rents, royalties and prizes, for instance—are taxed. Being born to a rich (and generous) family is similar to winning the lottery, but, indeed, actual lottery winnings are taxed.

Nobody particularly likes taxes. But to have things like air traffic control, breathable air and uncontaminated food, public funds have to be raised somehow. The preferential tax treatment of gifts and inheritances means that heirs—most of whom are already rich—pay less into the public coffers than people who earn equivalent income from work. As the share of income from inheritances rises relative to income from wages, the foregone tax revenue will require other tax rates to rise or public service budgets to shrink. Either option risks deepening a rift between heirs who can afford comfortable livelihoods from private wealth and non-heirs who can’t.

So what’s the justification for giving tax breaks to income from gifts and inheritances, relative to other types of income? And would there be negative consequences if we taxed inherited income the same way as wages?

Let’s put it under review.

Who inherits, and how are they taxed?

About $600 billion was passed down to heirs in 2021, and the vast majority flowed from very rich donors to very rich heirs. Households in the top wealth decile were twice as likely to receive an inheritance as households in the bottom half of the wealth distribution from 1995-2016, and they inherited 56% of all the wealth that was passed down while less than 8% went to the bottom half of households.1 To slice it another way, heirs with more than $1 million of ordinary income in 2020 inherited about $3 million on average, while heirs with less than $50,000 in income inherited an average of $62,000. Meanwhile, a tiny pool of heirs at the very top could inherit more wealth than the rest of the U.S. population combined in any given year, since the Forbes 400 have a collective net worth of $6.6 trillion and an average age of 70.

The distribution of gifts made while donors are still alive is likewise skewed: about 70% of lifetime gifts are under $50,000, but those account for less than 10% of total gifted value.

Subscribe now

The vast majority of gifts and inheritances go untaxed in the U.S. The federal government levies estate and gift taxes with a top nominal rate of 40%, but taxes only kick in once lifetime gifts and bequests total over $15 million for an individual or $30 million for married couples, and gifts of up to $19,000 per recipient per year don’t count toward that total. As a result of such high exemption thresholds, there were only about 2,600 taxable estates and 1,800 taxable gifts reported in 2021, and the effective estate and gift tax rate was about 2%.

Among donors who are rich enough to exceed the lifetime exemption, the effective federal gift and estate tax rate is higher: about 6.8% for the Forbes 400, for instance. Still, that’s a far cry from the 40% nominal rate, due to (mainly legal) tax avoidance strategies.2 The ultra-rich claim large estate tax deductions by leaving charitable bequests, and reduce their remaining tax burden by sheltering assets in tax-advantaged entities like trusts, private life insurance policies and family foundations, or by systematically undervaluing assets.

As Ray Madoff writes in The Second Estate: How the Tax Code Made an American Aristocracy, “the absolute best way, bar none, to make wealth and avoid taxes is to do it the old-fashioned way: inherit it.”

Fifteen states and D.C. levy either estate or inheritance taxes, and they tend to have lower exemption thresholds than the federal estate tax.3 However, states collect very little revenue from wealth transfers, in part because wealthy would-be donors can move out of high-tax states before death.4

What’s the case for the status quo?

Estate and inheritance taxes aren’t very popular. When presented with a hypothetical, Americans support taxing inherited wealth at a slightly higher rate than earned wealth. But according to a survey, a solid majority of Americans (61%) think it’s unfair to tax the estate “of parents who worked hard” to accumulate their wealth, and almost half (47%) still think estate taxes are unfair if the parents’ wealth was inherited. More than half (58%) of respondents agreed with the statement that wealthy parents should be able to pass all of their wealth on to their children, even if that means that “some children will start their own life with much larger wealth just by virtue of being born in a richer family.”

People tend to think about wealth transfers within families as acts of generosity, rather than financial transactions. As a result, they see taxes on estates or inheritances as “double taxation”—income is taxed when it enters the family, and then taxed again when it’s transferred between family members. This line of reasoning holds more water when it’s applied to estate taxes, versus inheritance taxes, since they’re paid by donors who have already paid income tax as their wealth accrued.5

Estate and inheritance tax opponents also argue that taxes will force heirs to sell assets that have sentimental value, like family homes, farms and small businesses.

From a policy perspective, giving an implicit tax subsidy to gifts and inheritances only makes sense if intergenerational wealth transfers have positive spillovers. The most plausible argument for subsidies is that intergenerational wealth transfers spur economic productivity: parents might work harder or invest more productively during their lifetimes if they know they can leave a bequest to their kids and grandkids; and heirs might be more entrepreneurial or better custodians of property and businesses than non-heirs. If true, then the broader economic benefits of bequests might outweigh the foregone tax revenue.

Does the case hold up?

No. On balance, giving gifts and inheritances preferential treatment relative to wages makes the tax code less fair, and there’s no evidence that subsidizing inheritances has positive spillovers.

Inheritance tax breaks benefit rich heirs at the expense of everyone else

Fairness is subjective. As a starting point, though, most experts agree that the tax code should aim for horizontal and vertical equity: people with equal incomes should pay equal tax, and higher-income people should pay more tax than lower-income people. Leaving most gifts and inheritances untaxed violates both principles, since it means people with earned income are taxed at a higher rate than people with equivalent inherited income, with most of the tax savings accruing to rich heirs.

Some donors might argue that inheritances are earned. For instance, parents might leave a bequest to their kids in exchange for eldercare. But if that’s the case, then it’s even harder to justify preferential tax treatment. If wages for professional services are taxed while informal compensation for family care isn’t, then a dollar earned doing the same work is taxed differently depending on who does it—a clear violation of horizontal equity.

Moreover, tax breaks for gifts and inheritances are likely to widen the gap between heirs and non-heirs when it comes to accessing goods and services, including housing. When parents help their kids (or grandkids) pay for big expenses it means some people get access to better resources by dint of birth. What’s worse, though, is that gifts and inheritances can actually backfire for affordability. Like any infusion of cash into a market, bequests can be inflationary—if buyers have more money, sellers will try to raise their prices. Price inflation is especially likely in housing markets, since supply systematically lags demand. If heirs have more money for down payments, that’s likely to drive up house prices for everyone, which is good for incumbent owners but bad for new buyers in the aggregate. First-time buyers who receive a gift or inheritance will have to spend more of it, while buyers who aren’t heirs could end up priced out. To the extent that tax subsidies increase the value of gifts and bequests, they can only exacerbate this cycle.

Bequests don’t spur economic growth and probably lead to inefficient use of capital

To justify a tax break for bequests on the basis that it will cause donors to work harder, we’d need to know two things: first, that the desire to leave a bequest motivates people to work; and second, that marginally increasing the share of each earned dollar that can be passed down will motivate even more work.

This chain is tenuous.

People have a variety of reasons for continuing to earn and save money beyond the bare minimum, such as wanting to spend more on leisure now or in the future, or wanting to self-insure against unforeseen costs like medical emergencies. Even if people like the idea of leaving bequests, for most that’s probably one small factor among many determining work effort.

Furthermore, even if people do work harder for the sake of leaving something to heirs, it’s unclear whether a tax would increase or decrease their effort. People who want to maximize the size of their estate should work longer to build their wealth relative to peers who don’t care about leaving bequests, and tax breaks that increase the share of each dollar that can be passed down should reinforce their motivation. But people who want to save up a fixed amount—for instance, to compensate future heirs for eldercare—might only work until they hit their target, which will come faster if bequests aren’t taxed. There’s no good evidence that inheritance taxes affect donors’ work hours in the aggregate, which implies either that donors don’t respond to the tax or that countervailing effects cancel each other out.

As tax policy expert Lily Batchelder sums up:

Put differently, a lot of the reason why the wealthy save is to be wealthy while they are alive, which wealth transfer taxes do not affect. As a result, taxing large wealth transfers generates fewer economic distortions than many other kinds of comparably progressive taxes.

When it comes to heirs, the effect of bequests is more straightforward: getting a windfall tends to make people work less.6

People who receive inheritances in their 50s–60s tend to retire earlier than they otherwise would have,7 and women—especially mothers in their 30s—tend to reduce their paid work hours.8 Income from inheritances might simply substitute for earned income, meaning heirs work less because they can afford to. It’s also possible that gifts and inheritances serve as informal compensation for caretaking, such that heirs do unpaid care work in place of paid work. Regardless, when inheritances are taxed it appears to increase heirs’ lifetime earnings from work, which has the knock-on benefit of increasing income tax revenue.

Heirs are also more likely to branch out on their own as entrepreneurs after receiving bequests, which could lead to the creation of new, productive businesses but probably leads to some squandered capital, too.9 There’s no reason to assume heirs are better-suited to be entrepreneurs than anyone else, or more likely than other entrepreneurs to launch businesses that fuel innovation and economic growth. So while bequests might spur some business activity, they’re not an efficient way of allocating capital.

What should we do?

• Tax inheritances as income. In lieu of a compelling case for preferential treatment, lifetime gifts and inheritances should be taxed the same way as ordinary income. The leaky federal estate tax should be repealed and replaced with a federal gift and inheritance tax that treats all bequests as taxable income for heirs.

  To maintain horizontal and vertical equity, heirs should pay the same tax rate as people with equivalent income from work, and heirs who inherit more should pay more. The simplest policy option is to apply the personal income tax schedule (which has a progressive rate structure) to income from gifts and inheritances.

• Minimize exemptions. The tax shouldn’t have significant exemptions or exclusions, since those are likely to distort economic decisions.10 For instance, if family homes are tax-exempt, then donors have an incentive to over-invest in real estate; and if the tax break is contingent on heirs living in the family home, that will distort their decision about where to live.11 Likewise, if family businesses are exempt, it can encourage donors to use corporate entities as tax shelters and can cause labor and capital misallocation, since it lowers the break-even cost for family firms relative to other firms.12 Heirs who inherit illiquid assets, like homes or businesses, can be granted tax deferrals or allowed to spread their tax liability across multiple years so that they aren’t forced to sell.

• Close loopholes. Levying inheritance taxes at the federal level will cut off one easy tax avoidance strategy—relocation between states. (Since the U.S. already taxes non-resident citizens, relocation abroad is less of an issue.) Loopholes will also need to be closed, though, to make the inheritance tax more binding than the current estate tax. For example, tax preferences for assets held in vehicles like grantor retained annuity trusts and private life insurance schemes should be eliminated. In addition, a rule that currently allows appreciated assets to escape capital gains taxation—the stepped-up basis rule—will need to be replaced with a rule that treats gifts and bequests as taxable events.13

While taxing gifts and inheritances as income will make the tax code more progressive, it isn’t a substitute for other possible reforms—such as raising top income tax rates or taxing wealth. And while inheritance taxes will mainly hit rich families, the distributional effects also depend on how revenue is spent. Inheritance taxes—like any tax—will come at a nominal cost to poorer families, which can limit their economic mobility, so the proceeds should be directed toward programs that increase equality of opportunity and mitigate the impact of the lottery of birth.

According to one estimate, taxing inheritances at a similar rate to earned income could raise about $145 billion per year.14 That’s roughly equivalent to current federal spending on housing assistance, need-based grants for college, and childcare and early learning programs for low-income families combined. Whether inheritance tax revenue should be used to increase funding for existing programs, launch new ones or maintain current levels of spending while easing tax burdens elsewhere is up for debate. Nevertheless, inheritance taxes are an integral part of maintaining the fairness of the tax code and offer an opportunity to advance both equality and efficiency.

Notes

Half a century later, property value increases have triggered a fresh homeowner tax revolt. In states including Florida, Georgia, Indiana, North Dakota and Oklahoma, governors or legislators have proposed eliminating property taxes altogether (albeit unsuccessfully, so far). Elsewhere lawmakers have proposed further curtailing property taxes—for instance, by abolishing school district property taxes—or expanding credits and exemptions for groups including seniors or veterans. From 2023–2025 legislatures in 22 states considered 35 bills that would expand property tax relief.

While experts and commentators regularly argue that property taxes are actually a “good tax” and warn against cutting them, the political clout of homeowners makes it hard for politicians to take that stance. New York City’s mayor recently proposed raising property tax rates, but he’s treated the idea as a last resort or bargaining chip.

We don’t want property taxes to bankrupt homeowners or force them to move. At the same time, we want cities to have enough funding for services, and for the costs of services to be shared fairly between long-time owners, new buyers and renters.

Let’s put property tax relief under review.

What is property tax relief?

U.S. states and municipalities collected about $797 billion in property tax revenue in 2024, with the vast majority collected by local governments to pay for services like schools, police, fire and public works.1 Property taxes made up about 70% of local tax collections and 29% of total local revenue, and contributed more to combined state and local revenue than personal income taxes, sales taxes or corporate income taxes.

From a revenue perspective, property taxes are a big deal.

But from a cost perspective, property taxes arguably play an outsize role in homeowners’ mental accounting.

On average, annual property taxes amount to about 3% of personal income, and the median effective tax rate for owner-occupied homes is about 1%. The burden of property taxes is therefore in the same ballpark as sales taxes (which are levied at the state and local level), and falls well below income taxes (levied at the federal and state level, mainly). From 2019–2024 property tax bills rose in absolute terms in almost every metro area, but effective property tax rates generally fell because increases in property values were not fully taxed.

There are a couple of reasons property taxes loom so large for homeowners, though.

First, they’re levied on a relatively illiquid asset. When property values increase homeowners have more wealth on paper, but they need more cash in hand to cover their increased tax bill.

Second, property taxes are usually billed annually, which makes their total cost more salient than that of income taxes (which are usually withheld at source) or sales taxes (which are paid in dribs and drabs). The transparency of property taxes is a virtue, but it also inflames opposition.

Policymakers in all but three states have responded to homeowners’ objections by implementing property tax limits or offering relief in one form or another.2 Since homeowners’ tax bills depend on the local tax rate and the assessed—or taxable—value of their home, state laws usually limit municipalities’ ability to raise rates, property assessments or both.

• 36 states limit property tax rates, either with a hard cap or by requiring municipalities to seek voter approval for increases over a certain percentage.

• 19 states limit property assessments, meaning the taxable value of a property can only increase by a certain percentage each year. Assessments usually reset when properties are sold.

• 33 states and D.C. limit property tax levies, or the total amount of revenue that can be generated from property taxes. Municipalities can adjust either the tax rate or property assessments to comply with levy limits.

In addition to property tax limits, 45 states and D.C. offer relief to certain homeowners via tax credits or exemptions. Homestead exemptions are the most common and generally exclude part of the value of owner-occupied homes from taxation, such that owner-occupants pay a lower effective tax rate than other property owners. Other exemptions and credits are more narrowly targeted to groups including seniors, people with disabilities, veterans and first responders. Income-eligible homeowners can also apply for “circuit breakers” in 29 states and D.C., which cap tax bills at a certain income share. Finally, 21 states and D.C. offer deferrals, often restricted to seniors, wherein homeowners can accrue tax debt that needs to be paid back (with interest) at the time of sale or death.

What’s the case for property tax relief?

The main argument for property tax relief is simple: tax bills are too damn high.

Property values have risen faster than incomes in many U.S. metro areas. If taxes are assessed on the full market value of homes, then even without tax rate increases homeowners have to spend more of their income on taxes each year.

When tax bills rise as a share of income, that can force homeowners to cut other consumption or, ultimately, force them to sell their home or face foreclosure. Thus, the premise of many arguments for tax relief is that bills should track income rather than illiquid housing wealth.

Does it make sense to give homeowners tax relief?

While property tax relief sounds like an intuitive solution to rising bills, it’s not the best way of helping cash-strapped homeowners. Tax limits and exemptions tend to undermine local services and create inequities between homeowners and renters, as well as between different types of homeowners. Property tax deferrals are a better option for targeting relief to homeowners who have rising home equity, but low cashflow.

Property taxes are the best way for cities to raise revenue

So long as local governments need to raise their own revenue to pay for services—rather than relying entirely on transfers from state or federal governments—property taxes are their best option.3

Municipalities have three possible tax bases: income, sales and property.

If they tax income, anyone facing a significant bill can move or hide their income to avoid paying. It’s much easier to hop town lines than to move out of a state or country, and municipalities typically don’t have the resources to track down hidden income and pursue tax evaders.

If municipalities tax sales, anyone who wants to make a big purchase can likewise cross town lines or, easier still, shop online. Plus, sales taxes would need to be impractically high to replace property tax revenue, and would be disproportionately borne by low-income households since they spend a higher share of their income on consumption.

That leaves property. If municipalities tax property, no one can pick up and move their house—much less the land it sits on—across town lines, nor can they easily hide its value.4 As a result, property taxes are relatively easy to administer, hard to evade and unlikely to distort taxpayers’ economic decision-making. Moreover, since property values depend (in part) on local service quality, property taxes create a direct link between the cost a homeowner pays to live in a jurisdiction and the benefit they get from their local government.

Property tax relief helps some homeowners more than others, and hurts everyone else

While property taxes might be a “good tax,” they don’t always feel like it. Homeowners are, understandably, sensitive to rising bills. Tax relief looks like an expedient solution, but the gains from property tax relief aren’t equally shared.

There are two basic ways to think about property tax fairness among homeowners:

• Horizontal equity, meaning two homes of equal value should have the same tax bill

• Vertical equity, meaning that more expensive homes should have more expensive tax bills

Assessment caps and homestead exemptions that decouple tax bills from property valuations violate both principles.

To borrow an illustration from Jared Walczak at the Tax Foundation:

Imagine two homes side-by-side in Los Angeles, California, both with a current market rate of $1 million. One, however, was purchased in 1975 (the base year for Proposition 13 calculations), while the other was purchased in 2023. At a tax rate of 10 mills (1 percent), the $1 million home purchased in 1975 would yield a $451 tax bill, while the identical home purchased in 2023 would pay $10,000.

As for vertical equity, a neutral tax structure would tax homes at the same effective rate regardless of their value. If the tax rate is 1%, then the owner of a $500,000 home would pay $5,000, and the owner of a $1 million home would pay $10,000. Plenty of people would argue that property taxes should be progressive, rather than neutral—that is, the more expensive a home is, the higher its tax rate should be. A regressive tax structure, wherein less expensive homes are taxed at a higher rate than more expensive homes, is much harder to justify. And yet, due to a combination of measurement error, out-of-date assessments and assessment limits, in most jurisdictions property taxes are regressive.

Even for homeowners who don’t reap the maximum benefit of property tax relief—for instance, because they bought more recently than their neighbors, or their home is assessed closer to market value—tax relief is still a win-win. When property taxes go down, house prices go up; homeowners get lower bills, and higher equity.5 As tax policy expert Joan Youngman puts it, “abolition of a tax that has been capitalized would constitute a windfall gain to owners who purchased at lower prices because of the tax and now can sell at a higher level.”

The combination of low taxes and high prices is a bad deal for anyone who doesn’t already own a home, though. Any renters who are looking to buy will face higher upfront costs and reduced inventory, especially when the design of tax relief rewards longer tenures.6 And the more would-be buyers who are priced out of homeownership, the more competition there will be for rentals, which could lead to higher rents.

Furthermore, any revenue that’s foregone via tax relief for homeowners will either cause a decline in local service quality or will need to be made up from other sources.

If service quality declines, that has direct consequences for any households that rely on things like public schools, roads and police. If, instead, municipalities give homeowners relief while keeping the total property tax levy stable, then someone else will have to pay. Shifting the tax burden onto landlords risks driving up rents.7 Shifting the burden onto commercial properties, a system known as “split-roll” taxation, risks distorting business location and investment decisions and passing on higher prices to consumers, and it may hit renters in jurisdictions that classify multifamily housing as commercial.8

Circuit breakers and property tax credits conflate illiquidity with inability to pay

Tax relief programs that are tied to income or age decouple homeowners’ tax bills from their property values by design. For example, circuit breakers—which are available in 29 states—offer tax credits or refunds to homeowners when their tax bill exceeds a certain share of their income.

Many circuit breaker and tax credit programs target seniors, on the basis that while they hold substantial home equity they often have low, fixed incomes from pensions or retirement savings. Hypothetically, though, these programs could benefit any income-constrained homeowners who are exposed to financial distress when property taxes rise.

The trouble is that allowing housing wealth to permanently escape taxation is an inefficient solution to temporary liquidity constraints. When property value increases cause tax bill increases, they also cause wealth increases for homeowners. That wealth is relatively illiquid—owners might be unable or unwilling to borrow against their home equity, and selling their home may be suboptimal for all kinds of reasons.9 But eventually, when the home is sold, on-paper valuation increases will be converted to cash. At that point, homeowners who have benefited from tax relief will effectively reap a higher post-tax return on investment than owners who paid full taxes annually—a situation that’s unfair in terms of horizontal equity, and that risks distorting homeowners’ work and savings decisions.

One way of getting around the liquidity problem altogether is to tax capital gains at time of sale, rather than taxing property’s full asset value annually.10 One-time capital gains taxes would create a separate set of problems, though: they’re a less stable source of revenue for municipalities, weaken the link between homeowners’ tax burden and the services they consume over the course of their tenure, and exacerbate housing lock-in.11 When properties are reassessed annually and taxed at full market value, capital gains are effectively included in the tax base, so there’s no need for a separate tax on capital gains at time of sale.

What should we do?

We don’t want people to be priced out of their homes. At the same time, we don’t want to subsidize homeownership as an investment strategy by allowing owners to build wealth via rising property values without paying taxes on those gains. So, local governments should keep taxing property, should tax it at its full market value (assessed annually, fairly and equitably) and should use a neutral or progressive rate structure. Tax relief programs that allow rising property values to escape taxation should be eliminated, as should any programs that pick winners and losers among homeowners.

To mitigate the risk that rising property tax bills will price people out of their homes, local governments can offer deferrals.

When homeowners are allowed to defer tax payments until they sell their home, they can use “paper” wealth to cover rising tax bills. Deferrals are effectively liens, or secondary loans, that treat property as collateral and can be repaid when home equity is converted to cash. They prevent homeowners’ capital gains from going untaxed, yet should also prevent tax-induced displacement.

More than two dozen states already offer deferrals statewide to certain homeowners—usually income-eligible seniors—or give local governments the option to offer them. Uptake is low among eligible homeowners, which could indicate that their liquidity constraints are overstated or merely that they’re debt averse. Expanding eligibility to include all homeowners might reduce any stigma associated with deferring taxes and increase uptake. That said, as long as interest rates are pegged to the state or municipality’s real borrowing costs owners with liquidity shouldn’t have an incentive to defer tax payment.12 Programs could also be designed to facilitate deferrals for the increase in an owner’s tax bill in a given year, rather than the full amount due, to provide more predictable cashflows for both owners and municipalities.13

If some homeowners get a free pass on the housing they consume, then everyone else pays for it. By expanding deferral programs policymakers can soften the blow of rising tax bills without undermining the many virtues of property taxation.

Notes

Updated Jan 30, 2026 ↓

It’s in vogue to say that rules limiting housing density are to blame for a shortage of housing in the U.S., as well as an affordability crisis. And if that’s true, then it’s intuitive to infer that relaxing the rules will increase the supply of housing and bring down costs because, well, Econ 101.

But despite high hopes for regulatory reform, the economics of repealing rules that limit density—or of “upzoning”—are far from obvious. We’d be delighted if repealing density regulations and streamlining permitting spurred housing abundance and affordability. Before we bet the house, though, we need to figure out how likely it is that upzoning will work.

If U.S. cities allow housing to be built on any residential land, at any density, will they see more housing production and affordability?

Let’s put it under review.

How do cities restrict housing density?

Cities use zoning and permitting rules to regulate where housing can be built and at what density.

At a high level, cities often differentiate land that’s set aside for single-family housing from land where multifamily housing can be built. Large swathes of U.S. cities allow single-family housing by right, which means developers don’t need special permission to build one home per parcel. Much less land is approved for multifamily housing by right. For example, two-family homes are allowed by right on 14% of residential land in the San Francisco metro area, 17% in the Atlanta metro area and 23% in Austin. As the number of units increases, the share of land available for development tends to dwindle. In Boston, for instance, two-family homes are allowed by right on 41% of residential land, while 4+ unit buildings are allowed on just 4%.

When housing at a given density isn’t allowed by right, projects might still be allowed pending review. But in most cities, the review process to obtain permits is long and unpredictable. Developers need to face residents and politicians at public hearings, where objections about anything from traffic congestion to “neighborhood character” can derail a proposal. Environmental reviews, often spurious, can likewise tie up projects in court for years or ultimately scupper them.

And whether housing is ultimately allowed or not on a given parcel, it’s still usually subject to implicit density limits like minimum lot sizes, maximum building heights and limits on the ratio of floor area to lot area. These rules effectively cap how many homes can be built on a given area of land. For instance, if a district zoned for single-family homes requires one-acre minimum lots, its maximum density will be half that of a district that allows half-acre lots.

There’s significant variation in zoning rules and permitting processes across jurisdictions, but the pattern is consistent: higher density projects face higher barriers. “Upzoning” is a catchall term for reforms that would relax barriers to density, including both explicit restrictions and onerous permitting processes.

In practice, when cities upzone they’re often accused of doing it incompletely or in bad faith—for instance, by relaxing height restrictions while retaining discretionary review processes. Our goal isn’t to assess how effectively cities have implemented upzoning reforms to date. Instead, we want to know whether upzoning would lead to more construction and improved affordability in an ideal scenario.

For the sake of argument, when we talk about a city “upzoning” we will assume that it allows housing at any density on any residential land.

How is upzoning meant to improve housing markets?

Proponents of upzoning claim that removing limits on density will address two core problems in the housing market:

• Housing scarcity: If current regulations prevent housing from being built, then, in theory, relaxing regulations could cause more housing to get built. This isn’t an argument about the effect of upzoning on density, per se; rather, it’s about the flow of new construction over time. If upzoning is a viable way of addressing housing scarcity, then it needs to cause more housing to be built per year, not just cause the same number of new units to be built closer together.

• Housing affordability: If upzoning leads to an increase in the supply of housing, that might cause rents to decrease. There’s also a secondary argument that allowing small homes on small lots or legalizing multifamily buildings with low construction costs per unit might translate into lower rents (or rent equivalents, for owner-occupants).

Is upzoning likely to work?

Allowing density is almost certainly better than inhibiting density, but there’s little reason to think that even the most comprehensive upzoning reforms will lead to abundant, affordable housing.

We don’t know whether, when or where upzoning will unblock new construction

Let’s start with a claim that shouldn’t be controversial: upzoning won’t directly cause new construction. At best, it might unblock new construction that’s caused by something else.

For example, if a major employer moves into a city and attracts new workers, the city will need more housing. If regulations prohibit new development in the city, then new housing won’t get built. If regulations allow new development, then new housing might get built (if it’s sufficiently profitable). In either scenario, labor market expansion causes an increase in demand for housing; without the new employer, new housing won’t get built. The regulatory environment matters because it influences how construction responds to the new demand.

So, to understand what’s likely to happen if cities upzone, we need to know whether reforms will make construction more responsive to demand. Concretely: would U.S. cities with strong demand build more housing per year, but for density restrictions?

Maybe in some cases, but it’s complicated.

Subscribe now

Cities have a fixed amount of land, and in most high-demand cities, most of that land is already in use. It might be used sub-optimally—for instance, for low-turnover businesses or surface parking lots—but it’s nevertheless owned by somebody and used in some way. To increase the supply of housing in a city, existing landowners need to decide to redevelop their land into new housing, or sell it to someone who will.

When a city upzones, it increases the number of landowners who have permission to add housing units to their parcel. A single-family homeowner, for example, might suddenly have permission to build a fourplex. The owner of a single-story commercial building might be able to replace it with a taller, mixed-use building.

But giving landowners permission to build housing doesn’t necessarily give them an incentive to build. The pace of new construction depends on market conditions, which may shift in ways that are hard to predict when upzoning reforms are introduced.

As Cameron Murray and Tim Helm have explained, two things need to be true for landowners to choose to redevelop:

1. It needs to be profitable

2. It needs to be more profitable now than later

In other words, the return to building needs to be higher than the return to delaying building.

Let’s break down a landowner’s decision. If they do nothing, they’ll get returns from capital gains on their existing property and the cash they would have otherwise spent on construction, plus any revenue their property currently generates. If they redevelop, they’ll get returns from capital gains on the new and improved property, plus revenue from the new use. The decision therefore comes down to how much development will improve capital gains on the property; how much net revenue will increase; how those increases compare to the foregone return on cash; and, finally, how any net gain today compares to the net gain at any time in the future. Simple, right?

The landowner’s decision is complex under any circumstances. But how does upzoning affect their calculus? It doesn’t directly affect returns to cash or any other asset the cash could buy. It might affect capital gains on the property, but this isn’t straightforward: upzoning often increases the current value of developable land by increasing its revenue potential, but it isn’t clear how it shifts the trajectory of land values over time. And to the extent that upzoning affects projected rent growth, it creates a bit of a Catch-22: if upzoning actually increases supply enough to decrease rents, as its proponents hope, that would dampen other landowners’ incentive to build.

It’s worth flagging that landowners might have non-economic reasons to be wary of redeveloping, too. For owner-occupants, redeveloping at higher density means moving or living in much closer proximity to neighbors, both of which might be undesirable. Similarly, business owners or owners of undeveloped land might hold out on redevelopment if they have a preference for their parcel’s current use. Landowners aren’t all pure investors; they’re also consumers.

All told, we don’t fully understand what causes individual landowners to develop housing. What we know is that they face a complex strategic decision about when to build, and that in many cases they’ll choose to wait. In L.A., for example, researchers estimate that if every residential parcel were developed to its current maximum zoned capacity, the city’s housing stock would roughly double from about 1.38 million units to 2.79 million, and yet from 2010-2020 only about 128,000 units were permitted. Likewise, at any given point from 2008-2024 there were about 600,000–1.2 million vacant residential parcels in the U.S. that were ready for construction but not yet developed, with some of those presumably banked by developers for the sake of timing the market. Permission to build does not guarantee housing will get built.1

Upzoning probably won’t lower rents very much, if at all

The impact of upzoning on housing affordability isn’t straightforward, either.

Restrictive zoning rules have probably contributed to rising house prices in some places.2 House prices aren’t a good affordability metric, though, since they reflect the asset value of housing. When house prices go up, homeowners spend more but also get richer.

The key question for affordability is how regulations affect rents, which reflect the user-cost of housing, or the cost of shelter.3

Advocates for upzoning claim it will lower rents by increasing the supply of housing. There are two loose links in this causal chain, though.

First, as we’ve explained it’s not a foregone conclusion that upzoning will increase the supply of housing. Second, even if upzoning does yield new supply, any change in market rents will ultimately depend on how demand responds.

If upzoning boosts supply while demand is static, then rents should go down. That's why an immediate, widespread increase in construction after upzoning could cause rents to decrease in the short term. But supply and demand are interdependent—demand will adjust to new supply over the longer term. If new construction causes rents to drop, the effect will likely fade as new households move in from other areas, and as the economy grows. (Or, if there isn't much in-migration, developers will stop building until rents rebound). At the same time, demand will shift depending on whether people think new construction makes the upzoned area more or less attractive. When new construction improves neighborhood amenities it can cause rents to increase despite supply increases, whereas construction that's perceived as out-of-character for a neighborhood or that increases congestion can cause rents to drop via reduced demand. Since upzoning can have varied effects on demand, it's far from obvious how it will affect rents.

In theory, upzoning could lower rents via a second channel: by lowering the cost of development. Proponents claim that legalizing small homes on small lots or cheaper forms of multifamily construction will make housing more affordable. But small lots are only cheap when they have low development potential; if they’re upzoned, their price will rise. Construction costs, meanwhile, play a relatively small role in housing cost increases relative to land prices, and are largely co-determined with housing demand: regional income growth drives up both labor costs and rents. Finally, even if upzoning does make some development inputs cheaper, the extent to which cost savings are passed on to renters depends on the return demanded by investors, or “the cap rate,” which has more to do with the return to alternate assets than with development costs.

Taking all this into account, many advocates for upzoning would say that it’s a necessary but insufficient solution to high rents. We’re less sanguine—we’re not sure it’ll do much at all for rents, in the aggregate—but would say that even if upzoning slightly lowers rents in the long-term, it shouldn’t be the central plank in an affordability platform.

What should we do?

We aren't convinced upzoning will be transformative, but we still think it's better than the status quo. Even if upzoning doesn't change how much housing gets built, it might change where it gets built, allowing higher-density, more walkable neighborhoods to emerge where there's sufficient demand. At the same time, if there are people who prefer to live in low-density areas, a healthy housing market will provide that option—for a price—without regulatory constraints.

Cities should upzone. Better yet, states or the entire U.S. should upzone, since that reduces the odds that new construction in upzoned areas will merely substitute for development in more stringent places.

That said, to make housing abundant and affordable, upzoning needs to be paired with other policy solutions.

Counterintuitively, policymakers need to find ways to make housing production less responsive to demand, so that production continues even when rents soften. Otherwise supply and demand will move in lockstep, and prices won’t change. Policies that could spur countercyclical housing production include, for example, public grants or loans for construction, with increased credit availability during market downturns; or public housing construction or purchasing during market downturns.

At the same time, policymakers can try to encourage landowners to develop sooner rather than later by making land speculation less profitable. Land value taxes have gotten attention lately as a way of raising the cost of sitting on vacant land and therefore incentivizing development4, but their efficacy depends on how land prices adjust to the tax, which is uncertain.5 Increasing capital gains taxes on land at the time of sale could discourage speculation more straightforwardly, by reducing its profitability, but the efficacy of this approach would depend on how taxes are capitalized into land prices and how they affect owners’ decision to sell. Finally, public land banking—wherein a city or agency reserves land for housing, and rents it to developers on favorable terms—could help insulate land from speculative vacancy.

We’ll do a deep dive on other policies that target housing supply and affordability at a later date. For the time being, though, the takeaway is that effective policies will need to increase supply relative to demand, and increase incentives to build housing now versus later. Since upzoning doesn’t clearly shift underlying market dynamics, it isn’t plausible that it’ll bring about a new market equilibrium in which housing is abundant and affordable.

Notes

What are Wall Street landlords, and what would it mean to ban them?

“Wall Street landlords” is a catch-all term for investment firms that own large residential rental portfolios, including publicly traded companies and private equity. Calls to curb Wall Street landlords focus almost exclusively on companies with single-family holdings, though, like American Homes 4 Rent, Invitation Homes and Progress Residential.

Since 2012, large investors have gone from having virtually no presence in the single-family rental market to owning about 3.8% of single-family rentals across the U.S., with much higher market shares in certain Southern, Sun Belt and Rust Belt metros. Their rise has been met by opposition from the left and right, motivated by concerns that large investors are making it harder for renters and buyers to find decent, affordable housing.

Several proposals designed to limit investors’ single-family holdings have been introduced in Congress and statehouses. At the federal level, the Stop Wall Street Landlords Act would compel large firms to sell off their single-family portfolios by levying a 100% tax on sales after an initial grace period, while the End Hedge Fund Control of American Homes Act and American Neighborhoods Protection Act would use excise taxes to disincentivize corporate investment in single-family rentals. Bills in states including California, Minnesota, North Carolina, Ohio and Virginia would likewise cap the number or value of single-family properties a landlord could own, or use taxes to encourage divestment.

What’s the rationale for banning Wall Street landlords?

The case against Wall Street landlords is twofold:

1. They’re making it harder for people to become homeowners. The thinking here is that if a large company buys a house, that’s one less house for an owner-occupant to buy. Or, worse, if a large company buys a house at a high price, then other sellers will hold out for a high price, too, until there are no more houses that are affordable for owner-occupants.

   As Rep. Ro Khanna (D., Calif.) said in the press release for the Stop Wall Street Landlords Act, “Homes should be owned by people, not wealthy corporate landlords who are buying up affordable single-family homes and pushing the dream of homeownership out of reach for ordinary Americans.”

2. Wall Street landlords are uniquely bad landlords. If large landlords exploit their size or market share to charge excessive rents and fees, deny maintenance requests, file evictions or otherwise harm tenants, then policies that favor small landlords might be justified.

   From the same press release, this time by Rep. Chris Deluzio (D., Pa.), “Too many Wall Street investors are not good landlords; they have neglected maintenance, local taxes, and more—all while taking homes off the market.”

Does the case against Wall Street landlords hold up?

Not really.

Corporate landlords haven’t put much of a dent in owner-occupancy by buying single-family homes. (Even if they did, we’re not convinced that promoting homeownership should be a policy goal anyways.) And while big landlords are often terrible landlords, so are small and medium landlords.

Large landlords haven’t killed the American dream

If the American dream is narrowly construed to mean building wealth by buying a home, then the effect of Wall Street landlords is ambiguous at best.

Wall Street landlords own about 300,000 single-family homes, or about 0.2% of the single-family housing stock. That’s a pretty small number, but, of course, left unchecked Wall Street landlords could grow their portfolios. Merely counting landlords’ properties tends to overstate their impact on homeownership, though.

To blame large investors for decreasing homeownership, we’d need to know that they actually caused homes to shift from owner-occupancy to rentals. In other words, in the absence of large investors, would there currently be 300,000 more owner-occupied homes?

Probably not.

Large landlords have acquired homes from a mix of owner-occupants, small landlords and property flippers. In many cases, they’ve strategically purchased homes in areas with low demand. (For instance, they purchased tranches of foreclosed and distressed properties during the Great Recession, which is credited with helping the recovery by propping up house prices.) In addition, investor demand has triggered new single-family construction in some markets, which offsets any conversions from owner-occupancy to rentals.1 As a result, investor purchases don’t necessarily lead to a 1:1 reduction in homeownership.2

Similarly, their effect on house prices appears to be small in the aggregate and can go in either direction locally, depending on market conditions.3 Holding supply constant, when investors buy multiple properties in a small area over a short period, that reduces available inventory and will tend to raise prices—which is good for existing owners, but bad for new buyers with limited upfront cash. In some cases, though, supply effects may be swamped by negative amenity effects: if Wall Street landlords are bad custodians and make neighborhoods less desirable, that will tend to decrease prices. While lower house prices might be good for new buyers, that’s less true if they signal declining property or neighborhood quality. Meanwhile, declining prices are straightforwardly bad for existing owners who’ve staked their dreams on house price appreciation.

All in all, Wall Street landlords play a marginal, inconsistent role in determining who can buy houses and whether it’s profitable for them to do so.

Plus, if the American dream is defined a bit more broadly to mean that people should be able to live where they choose and give their kids a chance to succeed, then Wall Street landlords actually come out looking pretty good. Large investors have expanded the supply of rentals in tracts dominated by single-family houses, which gives credit-constrained households a chance to move into areas with better schools and amenities.4

Large landlords are often terrible, but that’s not unique

Wall Street landlords stand accused of rent gouging, charging excessive fees, neglecting properties and filing gratuitous evictions, among other offenses. They’re at least somewhat guilty on all counts.

All else equal, landlords with larger portfolios and higher market shares tend to charge higher rents than small landlords for equivalent homes. However, they’ve also driven down average rents in some markets by increasing the supply of rentals.5

Large landlords are more likely to be reported for code violations than small landlords, but in part that’s because they buy more distressed properties, and evidence is lacking on the single-family sector.6 And conversely, in some cases landlords that achieve a high market share appear particularly motivated to improve local amenities, for instance by installing street lights, since they stand to benefit from higher occupancy rates and rents.7

Finally, large landlords file significantly more evictions than smaller landlords, and are especially likely to serially file for evictions against the same tenants—a strategy that exposes tenants to high fees on top of rent, inhibits their ability to demand repairs or other entitlements, and has downstream consequences on their ability to get a new lease approved.8 But that said, in a sample of 8 million court records from 2014, about one third of households that experienced at least one eviction filing experienced multiple at the same address, meaning serial eviction filings were widespread before Wall Street landlords had much of a presence in the rental market.

Wall Street landlords are probably worse than the average landlord, but the baseline is low. Bad landlords are endemic.

What should we do?

We shouldn’t ban Wall Street landlords. Limiting the supply of single-family rentals is liable to backfire by restricting renters’ access to desirable neighborhoods and raising average rents. Replacing large landlords with small landlords—or more plausibly, causing large landlords to split up into smaller entities—will likewise do little to protect renters from high costs or predatory behavior.

As housing expert Jenny Schuetz said in testimony to Congress:

Congress is understandably concerned with easing the financial pressure of high housing costs. However, targeting a small subset of landlords without addressing underlying market conditions and policy gaps will not meaningfully improve the well-being of renters and prospective homebuyers. Private equity firms, like other real estate investors, are profit-maximizing companies that respond in predictable ways to financial incentives created by market forces and by public policies. It would be difficult to write regulations that directly exclude specific firms from purchasing real estate—and doing so would likely create some negative consequences. Rather, Congress and state and local policymakers should focus on identifying and discouraging bad practices and behaviors—poor quality housing and tenant services—performed by any type of landlord.

In the short term, policymakers should strengthen the enforcement of existing tenant protections. While most policies that improve conditions for tenants run the risk of increasing rents,9 the best will offset any cost increases for landlords by making contracts more transparent and enforceable for both parties, thereby reducing administrative overhead. Some promising strategies include:

• Fair leases - Requiring landlords to use standardized fair leases could improve the quality of rental housing by making it easier for tenants to demand repairs and maintenance,10 without much impact on the supply of rental housing11 or rents.12 This isn’t a radical idea. The U.S. military already requires private landlords that house service members to use a fair lease template, which spells out tenants’ rights and their avenues for redress. Moreover, many landlords already use standardized leases to save on legal costs; the trouble is that templates provided by online vendors and business associations tend to be skewed in landlords’ favor. In a sample of about 132,000 market-rate leases from Philadelphia eviction courts, for example, about 78% included at least one unenforceable or oppressive clause. Substituting skewed leases with fair leases is a simple, practical step toward enforcing tenants’ on-paper rights.

• Landlord registries - Requiring landlords to register or apply for a license before renting out properties is a promising way of weeding out bad actors, especially if they’re serial offenders,13 and would most likely have modest effects on rents.14 Many cities and states already use landlord registries to track property ownership and citations, but consolidating data would make it easier to identify landlords who violate the rules and to reach vulnerable tenants.

• Eviction fees - Modestly raising the cost of filing evictions could help reduce serial filings15 while increasing rents only minimally.16 When landlords can’t recoup missed payments or evict tenants who grossly violate their lease, it raises rents in the aggregate. But when landlords can wield the threat of eviction as a cudgel, it undermines tenants’ rights, since tenants at risk of removal are less likely to demand repairs or services that they’re entitled to. Modestly raising eviction filing fees can discourage landlords from serially threatening eviction, while allowing legitimate eviction cases to move ahead.

In the medium-to-long term, tenant protections need to be combined with policies that will increase the supply of housing across price points. When housing is scarce, tenants don’t have outside options—they can’t credibly threaten to move to a cheaper place if their landlord raises the rent, or to switch to a better landlord if theirs is negligent or abusive. This power imbalance between tenants and landlords (of any size) will remain until we build more housing. Changing zoning and planning rules to allow more construction would be a step in the right direction, but is probably insufficient to make supply materialize (more on this soon). Creating supply-side subsidies and financing programs that incentivize density, control project costs and ensure that savings are passed on to renters would be ideal, albeit challenging to achieve. Regardless of which strategies lawmakers pursue, they’d be wise to court investors while regulating their conduct, rather than issuing blanket bans.

The underlying evidence

How does the U.S. promote homeownership?

Policymakers at the federal, state and local level use a variety of policy levers—including tax, spending, credit and planning rules—to steer households toward owner-occupancy.

For new buyers, down payment assistance programs offer grants, forgivable loans or low-cost secondary loans to help cover mortgage deposits and closing costs. There are about 2,500 different down payment assistance programs offered by over 1,300 state and local agencies and nonprofits.

Existing homeowners, meanwhile, benefit from several tax breaks. They can deduct mortgage interest payments and some local property tax payments from their federal tax bill, although in practice these deductions are only used by high-income tax filers in expensive housing markets. They don’t pay income tax on “imputed rent” (that is, the “rent” owner-occupants effectively pay to themselves, as their own landlord), and when they sell their home most capital gains are exempt from federal tax. At the state and local level, long-term homeowners often benefit from tax assessments that are significantly lower than their property’s market value.

Government policies have also made it possible for more people to borrow more money to spend on homeownership. Fannie Mae and Freddie Mac—collectively known as “the GSEs” or government-sponsored enterprises—have increased the supply of credit for prospective homeowners by securitizing mortgages, which reduces lenders’ risk and improves their liquidity. The government is no longer actively subsidizing Fannie and Freddie, but the consensus is that without government backing for GSE loans, borrowing costs would increase and homeownership rates would fall.1

Finally, many local jurisdictions implicitly favor homeownership by making it hard to build multifamily housing and hard to rent single-family housing. While housing form and tenure aren’t inherently linked—single-family homes can be rentals, and units in multifamily buildings can be owner-occupied—they’re strongly correlated. Large swathes of the U.S. have zoning rules that only allow single-family homes, and there have been proposals in Congress and several state legislatures to restrict the conversion of single-family homes from owner-occupancy to rentals.

It’s hard to estimate state and local spending on down payment assistance and tax breaks, given policy fragmentation and variable uptake, and while credit and planning rules incentivize homeownership they don’t explicitly subsidize it. At the federal level though, the mortgage interest deduction, local property tax deduction, capital gains exclusion and non-taxation of imputed rent cost the federal government about $254 billion in 2025, according to the U.S. Treasury.

All told, U.S. policymakers spend an awful lot of time and money promoting homeownership, which might be better spent elsewhere.

It’s time to put homeownership under review.

Why does the U.S. promote homeownership?

There are three rationales that, if true, could justify government efforts to promote homeownership. As recapped by a 2019 Congressional Research Service report:

• Homeownership could have financial benefits for households. It could help people build wealth via the forced savings mechanism of paying off a mortgage, via an investment return from house price appreciation or, more indirectly, by causing better educational and employment outcomes.

• Homeownership could have non-financial benefits for households. In theory, ownership might give people a greater sense of control over their environment or confer greater psychological security than renting, all else equal, which could improve their overall health and well-being.

• Homeownership could have positive spillovers for communities. For example, it might cause people to become better custodians of their property and of nearby public spaces, or to become more involved in their neighborhood’s social and political life.

Does the case for homeownership hold up?

No. While homeownership can help households build wealth in certain cases, it’s a risky investment strategy and any payoff comes at the expense of renters and future buyers. Moreover, homeownership doesn’t have any clear positive spillovers on net. There’s no compelling justification for policies that favor homeownership over renting.

Homeownership is risky and zero-sum

Buying a house is a risky investment strategy.

The main channel for building wealth via homeownership is price appreciation: if owners can buy low and sell high, then they can earn a positive ROI. But even when average house price appreciation is high, individual owners don’t always come out ahead.2 Returns are very sensitive to location and market timing, and gains from appreciation are offset by rising property tax, insurance and maintenance costs.

In many cases, owners could get an equivalent or higher financial return, with lower risk and higher liquidity, by investing in a portfolio of stocks and bonds.

Daniel Carroll and Ross Cohen-Kristiansen at the Cleveland Fed explain:

Even in San Francisco, the home price index has grown less than has a broad mix of investment-grade corporate bonds and far less than the S&P 500. A plan for building long-run wealth should harness the growth potential of the full market.

Steering households to invest in homeownership exposes them to serious downside risk, especially if they don’t have other assets to fall back on. As Jenny Schuetz writes:

One of the principles of financial advice is to invest in a diversified portfolio, spreading savings across a range of industries and firms (for example, through mutual funds rather than individual stocks) reduces the risk of large losses. Buying a home is the opposite of diversification. For families without large amounts of wealth, homeownership concentrates a family’s resources in a single physical asset, industry, and location.

Worse, even when homeownership pays off for individual households, their gain comes at the expense of renters or would-be buyers who are then priced out of the market.

As Jerusalem Demsas puts it:

At the core of American housing policy is a secret hiding in plain sight: Homeownership works for some because it cannot work for all. If we want to make housing affordable for everyone, then it needs to be cheap and widely available. And if we want that housing to act as a wealth-building vehicle, home values have to increase significantly over time. How do we ensure that housing is both appreciating in value for homeowners but cheap enough for all would-be homeowners to buy in? We can’t.

Affordability for new buyers and wealth building for incumbents are conflicting goals. Faced with a choice between them, policymakers have tried to have their cake and eat it, too. But policies that supposedly improve affordability for first-time buyers have primarily increased the wealth of incumbent owners by propping up house prices.

• Down payment assistance programs are designed to help new buyers overcome the upfront costs of homeownership, but since sellers are wise to the subsidies, they’re largely passed through to incumbent owners.3 If a state gives buyers a $10,000 subsidy, for instance, sellers will raise their listing price by about $10,000. As a result, these subsidies don’t meaningfully expand access to homeownership.4

• Tax breaks on mortgage interest payments,5 local property taxes,6 home valuation increases7 and capital gains at the time of sale8 tend to raise house prices and increase owners’ real return for a given rate of price appreciation, which makes homeownership a better investment for incumbents but doesn’t improve affordability for newcomers.9

• Finally, policies that expand access to credit, such as government guarantees for fixed-rate mortgages10 (with periodic conforming loan limit increases11) and deregulation of home equity loans,12 are meant to help buyers overcome borrowing and liquidity constraints. But by increasing buyers’ borrowing limits,13 these implicit subsidies again allow sellers to list for higher prices.

This approach is basically a Ponzi scheme: incumbent owners only get the return they were led to expect if policymakers continuously stimulate new investment via subsidies or credit expansion. The scheme could go on indefinitely if public spending or credit were limitless. But so long as there are spending caps and credit constraints, renters who aren’t already on the cusp of ownership (by virtue of high income or parental wealth, often in the form of home equity14) will be left holding the bag.

Homeownership doesn’t have clear positive spillovers for households or communities

While policymakers have long promoted homeownership as a way of creating strong families and communities, there’s no good evidence that it works. Buying a home doesn’t appear to make people better parents,15 neighbors16 or citizens,17 nor indeed healthier18 or more upwardly mobile.19 To the extent that homeownership is correlated with positive social outcomes, it’s probably driven by the fact that owners tend to have longer tenures—and thus more residential stability—than renters. In countries where the tenure gap is smaller, renters and owners look more similar across a range of individual and social metrics.

Homeownership does make people more likely to vote,20 but since that’s at least partly due to a desire to protect house values by blocking new construction it’s arguable whether it benefits society.21 It might also make people slightly less likely to commit property crimes, but the evidence is thin.22

Meanwhile, there’s clear evidence that under certain conditions homeownership can make it harder for people to move, which may have knock-on consequences for individual households and the broader economy. Homeowners with low or negative equity—a group that includes most new buyers, and many people in cool markets—often lack the cash to cover moving costs, and can therefore end up stuck in a house23 or place that no longer serves them.24 Homeowners with ample equity can end up locked-in,25 too, if interest rate rises mean that moving would increase their monthly costs.

Finally, policies that drive up house prices may inadvertently dampen aggregate economic growth if housing costs prevent workers from moving to productive cities,26 and/or if some homeowners make such a hefty return that they actually decide to work less.27

What should we do instead?

Buying a home is a reasonable choice for households to make. Policymakers shouldn’t be promoting owner-occupancy as a superior form of housing tenure though, much less as a superior way of building wealth. Instead, they should work to deliver housing and economic security via programs that are broadly accessible and positive-sum.

If the goal is to help families build wealth for their children or themselves, then promising options include baby bonds, automatic IRAs, or other tax-advantaged or subsidized savings schemes that pay modest but stable returns. These types of funds can give middle-income households a reasonable return on investment while offering more diversification and liquidity than homeownership. Better still, they aren’t zero sum: an incumbent investor’s gain doesn’t come at a future investor’s expense.

And if the goal is to create happier and healthier communities, then policymakers should focus on improving housing affordability, stability and quality for all households, regardless of whether they rent or own. Promising options here include subsidizing housing supply instead of demand, strengthening tenant protections, and reducing frictions that inhibit residential mobility so that households can choose to stay put or move as suits their needs. While financial and residential security are correlated with homeownership, they aren’t caused by it. Policymakers would be wise to make renting better rather than nudging all renters into ownership.

The underlying evidence