LIKE MOST Americans, I dread doing my taxes. My palms get sweaty as soon as the forms from the Internal Revenue Service arrive in the mail.
My taxaphobia left me initially enthusiastic about the latest economic fad: the flat income tax. With a flat tax, I could fill out a postcard listing my income, subtract the appropriate exemption and multiply by a single rate. And I'd be done -- period.
Too good to be true
Because almost everyone loathes shuffling tax forms in April, flat tax proponents are getting lots of attention. Multimillionaire Steve Forbes has jumped into the race for the Republican presidential nomination to push for adoption of a single income tax rate of 17 percent. He argues the tax would not only be simpler, but also fairer because all wage earners would pay the same rate.
The idea sounds good, but turns out to be too good. As in too good to be true.
Flat tax fever is likely to fade once more people understand what the change would do to them. For one thing, a truly flat tax would harm wage earners who own homes, raise children and give to charity.
Take the example of a family of four with a $50,000 annual income. Assume the family has a $100,000 mortgage at 8.5-percent interest over 30 years. Also assume the parents give $1,000 a year to charity and pay $2,200 in property taxes. With the usual deductions and exemptions, the family's federal income tax bill would total about $3,900 a year.
Now what would happen under a flat tax? Without the standard '' tax breaks, the rate of 17 percent would drive the family's tax bill to a whopping $8,500.
Ah, but Steve Forbes would not allow that to happen. He knows a truly flat tax would never pass Congress because it would hit so hard at the middle-class.
Instead, he proposes exempting the first $36,000 of income from any taxes. That means our hypothetical family would pay a 17-percent tax only on earnings exceeding $36,000. The family's tax bill, therefore, would fall to just $2,380.
So now everybody is happy, right?
Housing price shuffle
No, not when the family sees what happens to its net worth after the mortgage deduction disappears. Economists are unanimous: housing prices would plummet if mortgages were no longer deductible. Without a tax incentive, home ownership would become more expensive and renters would have far less reason to leave apartments.
