Question

Many tax reform proposals suggest moving to a flat tax system, one that eliminates progressive tax brackets. One proposal would be that everyone pays (say) 25% of their income. Keeping the rest of the tax code intact, how would this change the market for luxury vs. lower priced homes?

Answer 1

The market for luxury homes will see a surge. The reason for this trend is the savings accrued by the flat taxation scheme. In the United States, on an average, individuals earning more than $1Million pay close to 33.1% in taxes. In the flat taxation paradigm, these affluent people have saved additional 8% of savings which boosts their confidence to invest in real estate, thus altering the status quo. Hence the market for luxury homes will be brisk, and we can expect the house prices to soar as well.

On the other hand, the market for lower priced homes take a hit. Why? On an average, a typical middle class household pays a tax of 15-17% (roughly, taking into account the federal marginal tax rates). And these households are the ones who majorly comprise the market for cheaper homes. In the flat taxation scenario, these households ideally need to pay 10% more on taxes, thus reducing their other spending in which real estate comes into play. The extra 10% tax is immensely valuable for a middle class household rather than the affluent ones, therefore the additional taxes curb the consumer confidence in this case. When they are pessimistic and save more without spending, then obviously the lower price market takes a dip as no one's willing to risk their hard earned savings.

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