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![handle is hein.taxfoundation/iretcgadv0048 and id is 1 raw text is: September 5, 1995 No. 50
DRI STUDY DISTORTS FLAT TAX
IMPACT ON HOME PRICES
Introduction and summary
One of the major concerns posed by Majority
Leader Dick Armey's flat tax proposal is its
elimination of the mortgage
interest deduction. The
proposal would also repeal the The DR] sti
deduction for state and local grossly exagge
taxes, including property errors in thee
taxes.1 Quite understandably, isconlception
the National Association of the Armeyfla
Realtors, homebuilders, and
others are worried about the
flat tax's consequences for real
estate activity.
The NAR commissioned a study by
DRI/McGraw Hill of the effect of a flat tax on real
estate. Although the study is entitled Residential
Construction Impacts of Flat Tax Legislation, there
is little mention in the study of the effect of repeal
of the deductions on homebuilding. Instead, the
study focuses on the effect on the prices of existing
homes. The study predicts a decline in home prices
and wealth for middle- and upper- income
homeowners, and a consequent decline in their
spending, leading to a short term recession. These
highly questionable predictions could frighten
existing homeowners into opposing any tax overhaul
proposal, to the great detriment of the whole
country.
idy's
rated
rnalys
s or
tax
The DRI study's findings are grossly
exaggerated due to serious errors in the analysis and
serious misconceptions or distortions of the Armey
flat tax proposal.
The flat tax's elimination of the mortgage
interest deduction would not reduce home prices
because interest rates would drop, leaving mortgage
borrowers and lenders virtually unaffected on an
after-tax basis. The repeal of the property tax
deduction, involving far smaller amounts, would
somewhat increase the cost of home ownership, but
not by as much as DRI assumes, and not by enough
to hurt housing in the buoyant economy that the flat
tax would generate.
Contrary to DRI's assertions, there would be no
loss of wealth for upper-income homeowners, whose
stocks and bonds would rise in value under the flat
tax, and no short term
recession due to a drop in
findings are spending by upper-income
due to serious homeowners. In fact, there
is and serious would be an increase in wealth
distortions of at all income levels due to the
roosal. resulting stronger economy.
Higher incomes and
employment under the flat tax
would increase the demand for housing.
Construction of homes would rise.
DRI study distorts Armey flat tax proposal
The DRI study presented a caricature of the flat
tax proposal of Representative Dick Anney (R-TX).
The Armey bill eliminates all itemized deductions,
including deductions for mortgage interest and
property taxes, in exchange for a single 17 percent
tax rate and a large exempt amount for individuals
and families. The bill provides a net tax reduction
for nearly all households. It also exempts all
types of interestincome from tax (and denies
deductions of all types of interest payments), which
would reduce interest rates. The reduction in
Institute for
Research on the
Economics of
Taxation
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