NCPA - National Center for Policy Analysis

Flat Tax Would Have Little Effect On Home Values

April 16, 1999

Tax rates would fall sharply if the United States scrapped the complex income tax system for a flat tax, says Bruce Bartlett. Moreover, Rep. Dick Armey's (R-Texas) 17 percent flat tax plan would eliminate interest from the tax base, as well as the double taxation of corporate earnings.

However, a realtors' group opposed the flat tax because it would do away with the interest deduction for home mortgages. Although the deduction itself is of limited value to taxpayers -- and its loss would be more than offset by lower tax rates -- lobbyists alarmed homeowners by claiming housing prices would fall 15 percent.

But recent research from some of the country's top economists shows that replacing the income tax with a flat tax would have little or no effect on housing prices, says Bartlett.

  • "[T]he 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 Jane Gravelle of the Congressional Research Service.
  • Although there would be little overall effect, J.D. Foster of the Tax Foundation estimates the flat tax would raise the price of homes in the $100,000 range 12 percent; it would raise the price of homes in the $200,000 range 3 percent; and the price of homes in $300,000 range would decline 2 percent.
  • More recently, economists Donald Bruce and Douglas Holtz- Eakin of Syracuse University estimated that a flat tax would raise housing prices between 10 percent and 17 percent, in a study published by the National Bureau of Economic Research.

In the long run, savings would tend to be higher under a flat tax -- since interest would not be taxed -- and the demand for housing would rise.

Source: Bruce Bartlett, "How the Flat Tax Will Help Homeowners," in "The IRS v. the People: Time for Real Tax Reform," ed. Jack Kemp and Ken Blackwell (Washington: Heritage Foundation, 1999).


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