I think the great lesson of this tediously long-winded story is that some preferences are more expensive than others. People with expensive preferences need higher incomes. We, in our democratic wisdom, have chosen tax rates that rise with income, and this amounts to a tax on expensive preferences, which makes those already expensive preferences even expensiver. Our intuitions about whether or not it is fair in a particular case to tax an expensive preference at a higher rate than a less expensive preference has something to do with our sense of the reasonableness of the preference, and something to do with the degree to which we think it is possible and desirable to develop other preferences. In the abstract, if two people have equally reasonable preferences, the satisfaction of which delivers equal levels of welfare, it does seem unfair for tax policy to burden one of them more than the other. But there’s just no getting around the fact that it’s impossible to tax utility. And the goal of designing an entirely fair system of taxation is probably at odds with the goal of raising revenue sufficient to finance the level of government spending voters desire.
Great points, all. I think it’s a productive way to think about potential unfairness built into the tax system to concede that disparate costs of living and preferences mean some individuals must spend more to attain the same utility as others. Can’t tax utility, can’t tax fairly (in this sense).
I think this understanding might also present a philosophical argument against tax breaks for mortgages. Federal tax policy has been used as a tool to support home ownership for decades. Besides the fact it likely played a large role in mortgage market speculation and overleveraging by consumers, it also probably means that the suburban/rural homeowner, who already had to spend less to achieve utility parity with the Manhattanite, got an even bigger and unnecessary tax break over the rich, renting, city-dwelller.
If living in expensive markets can be an implicit consumption tax, then the exemption only exacerbates the unfairness of the scheme.