Background Paper No. 15
Executive Summary As taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. 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 taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. , the elimination of the home mortgage and property tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. s, the elimination of the tax on interest income, a change in tax rates, and the elimination of the gift and estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. . 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.Share