Impact Of The Fairtax On Home Ownership

Fair Tax Blog ^ | September 24, 2007

[Man50D]

The FairTax encourages home ownership and homebuilding by placing all Americans and all businesses on equal footing – no loopholes, no exceptions. The home building market would greatly benefit from enactment of the FairTax. There are two points of concern here: (1) The elimination of the home mortgage interest deduction and (2) the different treatment between new and used housing. Today I am covering the home mortgage interest deduction.

There is a lot of opposition to the removal of the mortgage interest deduction, but if you stop and think about it, ALL deductions need to be eliminated if the FairTax is going to be fair to all. And since you aren’t going to be paying any income tax, why should you receive any deductions? You don’t need deductions any more – get it? The only reason for the mortgage interest deduction is so you don’t have to pay as much in income taxes.

Well now, with the FairTax, you and you alone can regulate how much you pay in taxes. You will receive 100% of your income and will be making house payments with your entire paycheck, not just a portion of what is left after the government takes what they want. Right now, only about 35% of the taxpayers itemize their deductions and take advantage of the mortgage interest deduction.

One other thing I need to mention: With the FairTax, mortgage interest rates will fall by approximately 25%, which will allow you to buy more house or pay off your existing housing loan sooner.

[Man50D]

Fair Tax ping!

[Always Right]

The home building market would greatly benefit from enactment of the FairTax. There are two points of concern here: (1) The elimination of the home mortgage interest deduction and (2) the different treatment between new and used housing.

The 30% tax on new homes is the much bigger concern than the interest deduction. It makes the bill a non-starter for me. And I know better than to believe the line of BS that the fairtax lies about the costs coming down. We've been over that road a million times and all we get is double-speak from the fairtax organization.

[GeorgefromGeorgia]

I disagree with what you say about the FairTax. The elimination of taxes on productivity and move it to consumption will set free our economy.
As for the difference between new and used housing, I suspect that assessing the FairTax on new housing would probably result in more rehab of existing homes. This would not be bad. It could make new homes more expensive just due to the tax, but eventually supply and demand would force the building of new homes, and people would buy what they could afford. If an existing home is cheaper people would go for existing, but once supply forced up the value of existing, new would kick in, and there probably would be some equalization.

[wolfcreek]

What about that mortgage insurance fee I pay ever month on my FHA loan? Will that damn thing go away.

[Bigun]

The 30% tax on new homes is the much bigger concern than the interest deduction. It makes the bill a non-starter for me. And I know better than to believe the line of BS that the fairtax lies about the costs coming down. We've been over that road a million times and all we get is double-speak from the fairtax organization.

You are just plain wrong and too proud to admit it

The Fairtax organization has a paper out entitled Promoting home ownership: How the FairTax’s benefits for homeowners exceed the mortgage interest deduction. How about you telling us, with specificity, exactly what part(s) of it you feel to be "double-speak".

[lewislynn]

How about you telling us, with specificity, exactly what part(s) of it you feel to be "double-speak".

For starters

the interest paid on new homes at a lower rate is untaxed,

There's nothing (but rhetoric) about the Fairtax that would dictate lower interest rates and to say interest isn't taxed is a blatant lie...Specific enough for you?

[Bigun]

Well Louisd, I guess you either failed to read, or cannot comprehend, the following:

"On top of the advantage homebuyers directly receive from not being taxed on the amount of their wages used to pay mortgage interest, they will be further advantaged because interest rates are driven downward under the FairTax, making home ownership more affordable. Consider this truism: Banks and other financial institutions (or even private parties) that lend money are taxed today on the interest income received. As a result, these lenders have to charge as much as 2.5 percentage points more to cover the cost of the tax wedge imposed upon them. Mortgage debt is no different. Homeowners pay the taxes imposed on interest charged to them to the extent those taxes are “pushed forward.” One can see the price of this tax wedge pushed forward on debtors every day in the persistent difference observed between for-profit corporate bonds (which are taxed) and municipal bonds (which are not taxed). The FairTax eliminates taxation of the interest received, as it eliminates all income taxes. As a result of the non-taxation of the lender, mortgage interest rates will fall as the lender has to concern itself with only the risk-adjusted rate of return, not a combination of the tax and risk-adjusted rates of return.

Either way it does not change the fact that you are, as usual, WRONG!

[Sun]

“With the FairTax, mortgage interest rates will fall by approximately 25%, which will allow you to buy more house or pay off your existing housing loan sooner.”

Why would that happen (mortgage interest rates falling)?

[Bigun]

Why would that happen (mortgage interest rates falling)?

Read the link in post #6 or, failing that, the quote from that article in post #8. It explains it very well.

[Man50D]

Why would that happen (mortgage interest rates falling)?

The following article explains(on page 8)why mrotgage interest rates il fall by 25%.

How Would Tax Reform Effect Financial Markets?

To quote:

"Because different taxpayers are taxed at different rates, economists often use the marginal tax rate paid by the "average" taxpayer when analyzing the economic effects of taxes(Barro and Sahasukul). This approach can be used to estimate the shift in the credit demand curve. Since both individual and businesses deduct interest expenses, both of their tax rates are relevant. For individuals and businesses the average marginal rate is about 25%. With a 35% tax rate for large businesses, the effective tax rates for interest deductions should fall between 25 and 35 percent. Thus, eliminating interest deductibility would lower the credit demand curve by 25 to 35 percent."

[Sun]

Thanks. I’m still trying to learn about this.

[Sun]

Thanks. Will check it out.

[lewislynn]

Either way it does not change the fact that you are, as usual, WRONG!

Believing wishful thinking and rhetoric only makes you a fool, it doesn't dictate interest rates.

[lewislynn]

Thus, eliminating interest deductibility would lower the credit demand curve by 25 to 35 percent."

That sounds more like 25 to 35% fewer borrowers not 25% reduction in rates.

[Bigun]

Believing wishful thinking and rhetoric only makes you a fool, it doesn't dictate interest rates.

It's right there fully explained in black and white Lewis. No "wishful thinking" involved. Just sound free market economics. Others who happen to read it might just understand what it says.

I am truly sorry that you do not.

[lucysmom]

I suspect that assessing the FairTax on new housing would probably result in more rehab of existing homes.

For the homeowner, the cost of remodeling is increased by 30% because materials and labor are subject to the sales tax.

I would assume too, that the cost of permits would also increase by 30% due to the sales tax, as would architectural fees.

...but eventually supply and demand would force the building of new homes, and people would buy what they could afford.

What happens to the building industry during the period of adjustment?

If an existing home is cheaper people would go for existing, but once supply forced up the value of existing, new would kick in, and there probably would be some equalization.

In other words, rather than making homes less expensive, the FairTax would make all homes more expensive; new homes because the sales tax increases the cost, and existing homes as prices equalize.

[GeorgefromGeorgia]

You fail to account for how the elimination of income and FICA taxes would lower labor costs.

[lucysmom]

You fail to account for how the elimination of income and FICA taxes would lower labor costs.

That's because the FairTaxers claim that employees get 100% of their paychecks. Although that hasn't been defined, and the bill doesn't spell out exactly what that means, it is generally assumed that what is now withheld in income taxes and the employees share of FICA will be paid to the employee.

Obviously, what is paid to the employee can't be counted as savings in labor costs. If the money is not paid to the employee, the the employee sees a reduction of his purchasing power because current take home pay has taxes removed, but if take home remains the same after the FairTax, then the employee still has his taxes to pay.