tax using credit. After the FairTax was in effect, the credit could be paid off using untaxed payroll. On the other hand, the FairTax includes a 23% inclusive transitional inventory tax credit on the cost of the inventory to be applied in the month that it is sold. The transitional inventory tax credit would significantly reduce any changes to the net cost after switching to the FairTax. If credit incentives do not change, opponents of the FairTax worry it could exacerbate an existing consumer debt problem. On the other hand, proponents of the FairTax note that this effect could also allow individuals to pay off their existing (pre-FairTax) debt quicker. Other indirect effects Home mortgage interest deduction The current federal income tax law allows individuals to deduct the home mortgage interest costs from taxable income (unless the taxpayer is subject to the Alternative Minimum Tax). Home mortgage interest is one of the few personal expenditures that is treated in this manner. Someone paying a 25% income tax rate would receive $250 back from the government for $1,000 expended in home mortgage interest. While there is no deduction for payroll taxes and most do not itemize the income tax deduction for full benefit, this preferential treatment of mortgage interest encourages households to spend relatively more of their income on housing than would otherwise be the case. The FairTax would be tax free on mortgage interest up to the basic interest rate as determined by the Federal Reserve. The interest above the basic rate applied by the lender is a financial intermediation service and is subject to the FairTax (on a typical home mortgage only about one-half of one percent of interest would be subject to tax). Several economic studies have estimated that switching from an income tax system to a consumption tax system such as the FairTax would result in an interest rate drop of approximately 25%. These changes would result in a decreased cost for home buyers. As a comparison to the FairTax for encouraging home ownership, the current tax system would have to allow all taxpayers to fully deduct the purchase of used property against income and payroll taxes, expand the mortgage interest deduction so that it permits a deduction against payroll taxes, fully untax interest income to lenders and institutions, and fully untax returns on savings. However, since several areas would be tax free under the FairTax plan,