May 1, 1996

The Flax Tax and Housing Values

Download Background Paper No. 15

Background Paper No. 15

Executive Summary As tax reform develops, there is no more compelling issue to millions of homeowners than the effect the new tax system will have on housing values. For many taxpayers, the equity built up in their home represents a large share o f their total net worth .If tax reform reduced home values significantly, as some have suggested would occur, this could significantly affect consumption pattern s and saving rates. The prospect of a loss in home value would also create a significant political obstacle to enacting tax reform. On the other hand, if it can be shown that tax reform would cause housing prices to rise, thereby increasing individuals’ net worth, this would obviously improve the prospects for tax reform.

One of the leading tax reform proposals, the flat tax designed by Professors Hall and Rabushka of the Hoover Institute and introduced as legislation in the U.S. Congress by Representative Richard Armey (R-TX) and Senator Richard Shelby (R-AL), includes a number of changes that would clearly affect the value of the nation’s housing stock .These changes include the elimination of the capital gains tax, the elimination of the home mortgage and property tax deductions, the elimination of the tax on interest income, a change in tax rates, and the elimination of the gift and estate tax. Each of these changes would affect housing prices, some offering the hope of greater appreciation, others clearly threatening to reduce housing values. This study attempts to work through these issues to net out the various tax changes’ effects.