The Armey-Shelby flat tax proposal includes a number of changes to the federal tax system that would affect the value of the nation's housing stock, including eliminating the capital gains tax, home mortgage and property tax deductions, the tax on interest income and the gift and estate tax.

A recent study from the Tax Foundation examined the net effect of these changes. The study did not take into account the increased demand for housing that a flat tax would create by increasing aftertax income and the rate of economic growth. However, the study did find that under the safest assumptions:

• On average the value of the nation's housing stock would be unaffected by the adoption of a flat tax.

• However, owners of homes currently priced $100,000 or below should expect a significant increase in the price of their asset.

• Owners of homes in the $200,000 range should expect little or no change in price.

• Owners of homes currently priced at $300,000 and above should expect a decline in price.

For example, the study estimates that a $100,000 home would increase in value by $11,000 -- entirely due to lower mortgage interest rates. If the mortgage interest rate before the flat tax was enacted was 7 percent, it would afterward fall by at least 1.4 percentage points to 5.6 percent, according to researchers.Loss of the deductibility of mortgage interest payments wouldn't affect the price of homes valued at $100,000 or less, because most of the owners or buyers of houses in this price range don't have incomes high enough to benefit from the deduction.

Source: J.D. Foster, "The Flat Tax and Housing Values," Special Report No. 59, May 1996, Tax Foundation, 1250 H Street, NW, Suite 750, Washington, DC 20005, (202) 783-2760.