NCPA - National Center for Policy Analysis


January 23, 1996

Anti-flat tax alarmists argue that a pure, no-deductions-of-any-kind flat tax would rock the housing market and discourage charitable giving. Many policy analysts argue otherwise.

Take home ownership:

  • Without deductions for any interest paid, even by businesses, and no taxes on any interest received, interest rates would fall.
  • In a hypothetical 25 percent tax bracket, a 10 percent interest rate equals an after-tax yield of 7.5 percent for both borrower and lender.
  • If interest were neither deductible nor taxable, the yield would fall to the same 7.5 percent rate.
  • The resulting lower rates would reduce mortgage interest payments.

Most public finance economists maintain that a low flat tax would increase overall economic growth by one percentage point or more a year for the next seven years.

What about those charities?

  • From 1980 to 1989, total contributions increased from $49 billion to $107 billion -- despite a fall in the top marginal tax rate from 70 to 28 percent.
  • Strong economic growth, which increases real incomes and wealth, is a more important factor in giving than any tax break.

Source: Alvin Rabushka (Hoover Institution), "Flat Tax Lite," New York Times, January 23, 1996.


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