NCPA - National Center for Policy Analysis

FLAT TAX AND THE HOME MORTGAGE INTEREST DEDUCTION

January 16, 1996

Opponents of the flat tax say it will never fly because homeowners will never give up the deduction for home mortgage interest. But studies show that a flat tax would drive down interest rates, which would be more beneficial to mortgage payers than retaining the present complex deduction system.

Some facts:

  • In 1992, only 27 million taxpayers out of a total 116 million claimed any deduction at all for home mortgage interest.
  • Among families making $100,000 or more, 78 percent took the deduction -- while only 14 percent of those making less than $50,000 took it.
  • A high-income family with a $1,500 monthly mortgage can reduce its tax bill by more than $5,000 -- compared to just an $800 cut for a family with a $500 per month mortgage.
  • But with the lower interest rates which a flat tax would bring, a family making $50,000 a year would benefit more from a 6 percent nondeductible mortgage than from an 8 percent deductible one.

And proponents of a flat tax forecast interest rates will, indeed, fall. They reason that it would raise the rates of return on investments, thereby increasing the pool of capital and thus driving down rates.

Source: James K. Glassman, "The Flat Tax Proposal: A Boon for Homeowners," Washington Post, January 16, 1996.

 

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