Opinion Editorial | |
| Wednesday, December 31, 1997 | |
Flat Tax Wouldn't Hurt Housing |
In 1995, the flat tax emerged as a popular political issue. Its potency
was testified to by the vigor with which it was attacked by special interests
intent on preserving their tax deductions. None was more vigorous than
the National Association of Realtors, the trade association for real estate
agents. The Realtors were apoplectic about the thought of losing the mortgage
interest deduction, which they said would cause housing prices to fall by
15 percent. This attack was so effective that flat tax supporters have
been on the defensive ever since. Fortunately for flat tax advocates, further research has largely discredited
the Realtors study. One of the first was by economist J.D. Foster of the
Tax Foundation. He found that the negative effect on housing prices would
be far less than the Realtors said. The biggest effect would be a decline
of two percent for houses in the $300,000 range. However, for many homeowners
the impact of the flat tax would be to raise housing prices. Foster found
that homes in the $100,000 range would rise by 12 percent, with houses in
the $200,000 range rising by three percent. On balance, there would be
very little impact on overall housing prices. A 1996 study by economist Jane Gravelle of the Congressional Research
Service supported Foster's conclusions. She concluded that "the effects
of the flat tax on housing prices are likely to be limited in the short
run and very small in the long run." The principal reason is that
the supply of housing, rather than its price, will absorb most of the impact
of eliminating the mortgage interest deduction. Further, because taxes
on interest income would also be eliminated, people would be likely to save
more under a flat tax. Higher saving would tend to raise demand for housing
in the long-run. The latest study to look at the impact of a flat tax on housing prices
has just been published by the National Bureau of Economic Research. In
"Apocalypse Now? Fundamental Tax Reform and Residential Housing Values,"
economists Donald Bruce and Douglas Holtz-Eakin of Syracuse University also
find modest effects on housing prices from eliminating the mortgage interest
deduction. In fact, they find that a flat tax would actually raise housing
prices by between 10 percent and 17 percent. To the extent that fundamental
tax reform is worthwhile, the effects on the housing industry should not
stand in the way, they conclude. Despite such evidence, many flat tax supporters are still unwilling to
challenge the Realtors. They would rather concede the point and modify
the flat tax to accommodate the mortgage interest deduction. Unfortunately,
the ultimate effect of such a concession will not be to enhance the political
prospects for the flat tax, but to kill them completely. The reason is
because once the purity of the flat tax is abrogated, we are on a slippery
slope for which there is no end. Once we make an exception for mortgage
interest there is really no good argument for not keeping every other deduction
as well. Moreover, those who would retain the mortgage interest deduction seem
not to realize how important its elimination is to the ultimate cause of
fundamental tax reform. It causes severe distortion of investment that
slows economic growth. It is unfair because only a small number of taxpayers
benefit. And it does little to stimulate homeownership. Thus a recent
article in the University of Michigan Journal of Law Reform concluded that
the mortgage interest deduction is "inefficient, inequitable, and too
costly." The Realtors are not invincible and their self-serving studies are flawed.
Flat tax supporters should stick to their principles. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
December 31, 1997.
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