The Tax Code Is the Abundance Agenda’s Missing Villain

America faces a housing and infrastructure issue, and for once, people across the political spectrum agree that something should be done. From libertarians to many conservatives and progressives, there is a recognition that the regulatory state has hindered America’s ability to build enough homes, energy infrastructure, and productive capacity to ensure broadly shared prosperity.  

The debate that has followed has been largely focused on the right things: zoning, permitting, and the political machinery that turns two-year projects into ten-year ordeals. That work matters and deserves the attention it is getting. It is also a welcome change from stale, old arguments about why it would be in this country’s interest to abandon the pursuit of growth. 

But what has been dubbed the abundance movement has a blind spot: It ignores a tax code that compounds the damage caused by regulations. We have discussed this blind spot elsewhere. A complete abundance agenda requires tax reform driven by the same goals as regulatory reform: lower rates, immediate expensing of all capital investment, and a change in the tax base to stop penalizing saving and investment.  

Here, we narrow the focus to where the abundance movement has been most vocal — housing and infrastructure — and show just how much the tax code contributes to the problem. It rewards holding onto assets rather than relocating, favors old incumbents over new entrants, and prefers present consumption over future investment needed for consumption tomorrow.  

What a Pro-Abundance Tax Base Should Look Like 

No conversation about the tax code should start without discussing what the ideal tax system looks like. A pro-abundance tax system should ultimately tax consumption rather than wages, investment income, or wealth. There are multiple ways to do this, but the logic remains the same: tax each dollar once, treating consumption today and saving for the future equally.  

One approach pairs a wage tax with a business cash-flow tax, allowing full, immediate deductions for wages and investments rather than depreciating them over years. Investment income (interest, dividends, and capital gains) is not taxed at the individual level, since it has already been taxed at the business level. 

The critical principle is neutrality: a well-designed tax base should not favor one activity over another, one industry over another, or one form of saving over another. Those decisions should be made on the underlying economic merits, not tax optimization. Unfortunately, the United States tax code violates all these principles. 

How the Tax Code Freezes the Housing Stock We Have 

The problem begins with the existing housing stock. The U.S. tax code contains a series of provisions that, taken together, discourage a healthy turnover of existing homes while simultaneously restricting supply and freezing the market.  

Start with the mortgage-interest deduction. Demand-side housing tax subsidies like this — those focused on helping people pay for homes rather than increasing supply to make homes affordable — primarily bid up prices. By lowering the after-tax cost of borrowing, primarily for higher-income families who itemize their taxes, it encourages households to take on larger mortgages and spend more than they otherwise would. 

The deduction does not increase homeownership rates. When housing supply is constrained — as it is in many high-demand metropolitan areas — the subsidy does not produce more homes. Instead, it gets capitalized into higher home prices, making it harder for younger and first-time buyers to enter the market. 

The more damaging distortions occur on the supply side. The capital-gains tax on home sales is one. It creates a lock-in effect that penalizes homeowners for selling.  

To see how this works in practice, consider an example offered by Moody’s Analytics: Suppose a widow selling a 2,800-square-foot home faces capital gains of $750,000 on a property purchased decades ago. After applying the $250,000 exclusion available to single filers, she could still face more than $100,000 in federal and state taxes. That tax liability exceeds 20 percent of her downsizing proceeds. Instead of moving into a smaller home that better fits her needs and freeing up a larger house for a young family, the rational response is to stay put. 

For some homeowners, the existing capital-gains exclusion ($500,000 for married couples) partially mitigates the lock-in effect and can encourage an early sale to capture the tax benefit before exceeding the limit. But most families don’t move for opaque capital gains discontinuities, given the immediate costs of selling and leaving communities and schools behind. Yale Budget Lab estimates that more than 10 percent of homeowner households will have capital gains above the exemption when they sell.  

The lock-in effect compounds till death. Once the nest is empty, an older couple in San Francisco or Boston who no longer need a four-bedroom house will choose not to sell if they are above the exclusion. Holding the house till death gives their heirs a stepped-up basis, so they owe no tax on the lifetime appreciation. The home sits mostly unused, freezing inventory until aging parents die. 

None of this is the result of deliberate housing policy. It is the accumulated kludge of decades of decisions made for other reasons, such as giving a financial boost to homeowners or softening the blow of capital gains taxes for powerful constituencies, against a backdrop of a lack of consistent first principles. 

How the Tax Code Discourages the New Construction We Need 

If the provisions above freeze access to the existing stock of homes, the tax code’s treatment of construction discourages building new ones. That is the second and even more severe problem.  

Congress recently made progress on reducing tax barriers to business investment in the One Big Beautiful Bill Act, signed into law on July 4, 2025. The law made 100 percent bonus depreciation permanent for machinery, equipment, vehicles, and other shorter-lived tangible assets, and introduced a similar temporary treatment for domestic manufacturing structures. These reforms move the tax code one step closer to a consumption-based tax.  

But the reform stopped short of what’s needed. It does not apply to the majority of U.S. buildings, including apartment buildings, office space, and most other commercial real estate. These remain on the old depreciation schedules, which spread out investment deductions over either 27.5 years for residential property or 39 years for commercial property.  

The penalty imposed by the depreciation system is substantial. As the developer of an apartment building spreads the tax deduction over nearly three decades, inflation and the time value of money greatly diminish the deduction’s value. At a modest two percent inflation rate, a $1 investment that depreciated over 27.5 years is worth only about 56 cents to the business in present value.  

Developers can soften this penalty through expensive “cost segregation” studies that accelerate some deductions, but they never fully recover the true cost of construction. The result is a higher after-tax cost of building and an additional tax on structures relative to other investments. 

This is evident in recent Congressional Research Service estimates of marginal effective tax rates for each investment category. Behind inventories and land, residential and nonresidential structures face some of the highest tax rates, more than double those faced by equipment.  

Other parts of the tax code also work against housing supply. 

The low-income housing tax credit, for example, subsidizes housing projects only if developers agree to cap rents below market levels. While well-intentioned, such restrictions can discourage the additional building of competing market-rate projects, acting as de facto rent control in one segment of the market and leaving an inadequate number of homes. 

Similarly, the historic rehabilitation tax credit subsidizes the preservation of older buildings. In many cases, that means encouraging the renovation of small structures rather than allowing larger, higher-density projects to replace them and house more people. In high-demand cities, this can lock scarce land into lower-intensity uses. 

Even provisions like the federal deduction for state and local taxes can interact with housing markets in unintended ways. By partially subsidizing state and local property tax increases, the federal deduction weakens political pressure against high local property taxes — costs that can discourage additional development.  

It is worth acknowledging that the tax code does include provisions that, at the margin, support housing investment and development. Real Estate Investment Trusts (REITs) allow real estate income to avoid multiple layers of corporate taxation by taxing most returns at the investor level instead of the entity level. Section 1031 like-kind exchanges allow investors to defer capital gains taxes when reinvesting proceeds from the sale of one property into another, helping capital move between projects without triggering immediate tax penalties. 

These provisions acknowledge that taxing capital gains on real estate deals can discourage housing-focused investment and slow down the circulation of homes. However, they are also piecemeal solutions added to a fundamentally flawed system, often making things more complicated and giving advantages to certain industries or transaction setups over others. 

Still more progress is needed. 

What Should Be Done 

The tax code is creating two distinct problems that require two distinct solutions. 

For the existing stock of homes, we need housing to move more freely to its most productive use. The cleanest solution is to eliminate the capital gains tax entirely and shift to a tax base that treats saving and investment neutrally. It would remove the lock-in effect at its root rather than patching around it.  

Short of such a fundamental reform, meaningful incremental steps are available. Senator Ted Cruz has introduced legislation to index capital gains for inflation. When an investor buys an asset for $100,000 and sells it two decades later for $165,000 while inflation averaged 2.5 percent annually, the profit is illusory — yet the tax is still due on the $65,000 gain. Policymakers could also expand the existing capital-gains exclusion for primary residences and loosen the rules governing 1031 exchanges. 

These reforms could improve the allocation and turnover of existing housing by reducing the tax penalties associated with selling and reinvesting. But they would still leave the underlying distortions of the capital-gains tax in place and would need careful design to minimize new market distortions. For example, allowing investors to deduct nominal interest costs while taxing only inflation-adjusted gains creates opportunities for tax arbitrage, For example, allowing investors to deduct nominal interest costs while taxing only inflation-adjusted gains creates opportunities for tax arbitrage, as investors can borrow at the nominal rate, deduct the full interest (including the inflation component), and realize a riskless after-tax profit from inflation-driven asset appreciation.. 

For new construction, the fix is straightforward: extend full, immediate expensing to all structures, residential and commercial, on the same terms that equipment and manufacturing structures now receive. 

This single reform would do more to increase housing supply than most of the permitting changes the abundance movement has championed. It would lower the after-tax cost of building, improve the return on new construction, and remove the distortion that currently makes structures one of the most heavily taxed form of capital investment. 

The Missing Piece 

The abundance agenda has found mainstream champions across the political spectrum, and that is well deserved. But a debate focused almost entirely on permitting and regulatory reform is insufficient. 

If you are serious about building more homes, more offices, and more of the productive capacity that broadly shared prosperity requires, the tax code cannot remain a footnote. It is the missing villain. 

Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. She is a contributing editor to Civitas Outlook. 

Adam N. Michel is director of tax policy studies at the Cato Institute.