Yes, I know that that interest isn't supposed to be taxable. But I also know that if all interest remains non-taxable, there will be a massive movement towards discounting house and durable goods sales prices and then making up the difference with high interest rates. No, none of the fairtaxers seem who wrote to me seem to know that under the legislation, only some of interest is non-taxable.
Yes, that's right the government will decide what a reasonable interest rate is, and then tax you for anything above that. I wish the author would have mentioned at least what section of the FairTax bill he is discussing here.
The word "mortgage" does not appear in the FairTax bill at all, so this cannot be a mortgage-specific provision in the bill, and I don't see where in the general provisions about interest where this "reasonable" rate applies to anything about paying mortgage interest, so I don't think he is correct about having to pay FairTax on the interest paid each month on mortgage loans made at a relatively high interest rate.
But he does have a good point about that this is indeed a viable tax avoidance mechanism: you buy something at a large markdown from the market value (a circumstance which I did see mentioned in section 804, but that is in reference to a leaseholder option to buy at the end of a lease term, not to original initial purchases at a discount when compensating financing is provided by the seller), and then the borrower pays an interest rate enough above prevailing rates to compensate the seller who is doing this self-financing.
That would indeed seem to be legitimate tax avoidance under the FairTax since the seller could then try to offload the mortgage for a premium over the principal. Whatever premium he can generate there is not subject to the FairTax, and thus whatever value you created by agreeing to these terms is untaxed by the FairTax.
I wish the author would have mentioned at least what section of the FairTax bill he is discussing here.
`SEC. 801. DETERMINATION OF FINANCIAL INTERMEDIATION SERVICES AMOUNT.
`(3) IMPLICITLY CHARGED FEES FOR FINANCIAL INTERMEDIATION SERVICES-
`(A) IN GENERAL- The term `implicitly charged fees for financial intermediation services' includes the gross imputed amount in relation to any underlying interest-bearing investment, account, or debt.
`(B) GROSS IMPUTED AMOUNT- For purposes of subparagraph (A), the term `gross imputed amount' means--
`(i) with respect to any underlying interest-bearing investment or account, the product of--
`(I) the excess (if any) of the basic interest rate (as defined in section 805) over the rate paid on such investment; and
`(II) the amount of the investment or account; and
`(ii) with respect to any underlying interest-bearing debt, the product of--
`(I) the excess (if any) of the rate paid on such debt over the basic interest rate (as defined in section 805); and
`(II) the amount of the debt.
Almost all interest paid is higher than the Fed fund...That's how banks make money. What ever interest you're paying on whatever loan you have, including mortgages, if it's above the fed fund rate (as determined monthly) you would also pay 30% tax on the difference under the Fairtax plan.