Investment in owner-occupied housing faces an effective marginal tax rate of just 3.5 percent. In contrast, investment in the business sector faces an effective tax rate of 25.5 percent. This leads to a tax-induced bias for capital to flow into housing-related uses rather than other types of projects.
Rational agents respond to incentives. If you’re thinking of investing your money, would you go with the 3.5% marginal-tax-rate investment or the 25.5% marginal-tax-rate investment? Yeah, you betcha. This is what we libertarians call “market distortion”, and incidentally points to why I favour scrapping all tax breaks (sorry, “tax expenditures”) for personal and corporate income above roughly the thirty-kilobuck/year level. Of course, those tax breaks are how Congresscritters supply kickbacks to their supporters and buy votes in their districts, so it’ll never happen.