The National Association of Realtors, the trade association for real estate agents, commissioned a study that concluded the flat tax would cause housing prices to fall by 15 percent. But further research has largely discredited the Realtors study.

On balance, a flat tax would have very little effect on overall housing prices.

• The value of houses in the $300,000 range would decline by two percent, the value of homes in the $100,000 range would rise by 12 percent, and houses in the $200,000 range would rise by three percent, says Economist J.D. Foster of the Tax Foundation.

• 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," concludes a 1996 study by economist Jane Gravelle of the Congressional Research Service.

• A flat tax would actually raise housing prices by between 10 percent and 17 percent, says a new study by economists Donald Bruce and Douglas Holtz-Eakin of Syracuse University.

The principal reason that eliminating the mortgage interest deduction would have so little effect is that the supply of housing, rather than its price, will absorb most of the impact. 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.

Moreover, the mortgage interest deduction 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."

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), December 31, 1997.