Fair Tax Nation

Replace All Federal Taxes on Income with the Fair Tax Act , HR 25

Not Just Interest, but the Principal Too!

One of the linchpins of the arguments against the FairTax is the supposed loss of the mortgage interest deduction for middle-income homeowners. The answer should look like this:

Not only are the benefits of the mortgage interest deduction (MID) still in place, the FairTax adds a mortgage principle deduction as well. That's something that the current system just doesn't offer. Let's take a look...

Under the current system, a taxpayer deducts personal exemptions for him/herself and dependents, and has a choice of taking either the standard deduction or the deductions from Schedule A, which includes the MID. The exemptions and the deduction add up to what should be close to the income necessary for that household to pay for basic necessities. That number is deducted from total income (not from total tax due!) to reveal what the taxpayer's taxable income is.

Regarding the MID, the interest paid on a taxpayer's homestead is deductible from his income. This means that the interest is paid with UNTAXED dollars. However, the principle of the loan paid doesn't have a deduction, so that part of the mortgage paid with TAXED dollars. And the MID doesn't even matter if the MID along with other Schedule A deductions don't add up to the standard deduction anyway. That leaves many middle-class people with older mortgages without the deduction. They just aren't paying enough in interest.

Now the FairTax:

The taxpayer now receives his entire paycheck with which to pay his mortgage payment. Now, however, the payment on a loan that already exists is not subject to the sales tax, therefore not only is the interest paid on the loan paid with UNTAXED dollars, but so is the principle paid with UNTAXED dollars, regardless of how far along in the mortgage payment process he is. Let's go further...

Current system: Taxpayer must pay mortgage with NET income, leaving less money to pay for other goods and services

FairTax: Taxpayer pays mortgage with GROSS income, allowing him to pay for more goods and services, and save more...AND we haven't even talked about the prebate. So let's...

Compare to the third paragraph: FairTax replaces the standard deduction and personal exemptions with a "prebate" or what I like to call a "prefund": a refund of sales tax one would pay on new goods and services up to the poverty level of his household size, before the fact. Instead of a deduction from taxable income (there would be no such thing anymore), it is a cash rebate on sales taxes paid on what YOU consider to be your family's essentials.

Is there really a comparison? The influx into the family budget would be more than any stimulus plan could offer, without costing a dime of federal money.

When you understand it, you will demand it.

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Comment by Nathanniel Martin on August 7, 2013 at 12:23pm

BC, you're right. There is no 'taxable income' under the FairTax. The article isn't intended to show a need for the MID under the FairTax. It's intended to illustrate that the benefits of it are retained when implemented while adding the benefit that mortgage principle would be paid with untaxed dollars as well.

Comment by cary henderson on August 6, 2013 at 2:45pm

Well put Nathanniel!

Comment by BC on August 6, 2013 at 12:19pm

Why would someone need a mortgage deduction under the Fairtax?  The mortgage is to reduce your taxes on your income.  Not taxing income, no deduction needed.

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