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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