HOW WOULD MORTGAGE INTEREST RATES DROP BY 25%?

Under my blog title: New vs. Existing housing, Dennis wanted an explanation about how interest rates would drop by 25%. The following is a direct quote from the white paper in the research section of www.fairtax.org:

"Lower interest rates
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).7 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."

Several economic studies have estimated that switching from an income tax system to the FairTax would result in an interest rate drop of approximately 25%. Therefore, if the current interest rates are 6.6%, the resulting drop would be 4.95%. Pretty neat, huh? A homebuyer could buy more house for his money or simply pay his house off at a faster rate.

Thank you for your question, Dennis. You might want to pick up THE FAIR TAX BOOK by Neal Boortz and John Linder. It is an easy read and a good analysis of the Fair Tax bill which is now in committee in Congress. We now have 65 sponsors on this bill and if all the people who believe in The FAIRTAX would go into www.fairtax.org and sign the petition, it would show our representatives that we mean business.