August 1995, Vol 20, No 2

Abstract: In the purest form of a flat tax, itemized deductions are repealed, such as the home mortgage interest and property tax deductions. Thus, debt-financed activities are dicouraged. Since real estate activities are generally highly leveraged, they tend to suffer under a flat tax system as compared to current law. A flat tax would increase the after-tax cost of owning a home and cause the value of homes to fall. Reductions in house values would also reduce the property tax revenues of local governments. For commercial real estate, the flat tax would have a negative impact on the cash flow and the internal rate of return on typical real estate investment projects.