(MONEY Magazine) – AT LAST, VOTERS AND POLITICIANS OF both parties have found something they can agree on: the need to overhaul the federal income tax code. Virtually every Republican presidential candidate is pushing some form of tax reform: Sen. Richard Lugar favors a national sales tax, publisher Steve Forbes is touting a flat tax, and Senate Majority Leader Bob Dole is calling for a "fairer, flatter, simpler" tax. Even President Bill Clinton concedes some type of tax reform is needed. And no wonder: a new MONEY poll of 757 Americans (see below) shows an overwhelming 84% of the public favors an overhaul of the current tax code. Their No. 1 alternative: a 17% flat tax, like the kind proposed by Forbes and House Majority Leader Dick Armey of Texas.

Unfortunately, what most middle-class Americans don't know--and the pols won't tell them--is that a flat tax would likely push their taxes up and their employer-provided fringe benefits down. Hardest hit: highly leveraged homeowners, who in addition to losing their mortgage deduction could see their house values slide. By contrast, the big winners would fall into two camps: families with incomes below $40,000 or so, many of whom would fall off the tax rolls completely, and those earning more than $200,000, since they would owe zippo in taxes on their substantial investment income and capital gains. Under his own plan, multimillionaire Steve Forbes could see his personal tax bill cut by almost two-thirds (see the box opposite).

A flat tax is easy to understand, and therein lies its political appeal. As proposed by cowboy-booted economist Armey, the flat tax would levy one simple rate--initially 20% but dropping to 17% after two years--on all wage, salary and pension income. You would owe no taxes on interest, dividends, capital gains, gifts or inheritances. And you would receive personal allowances of $11,350 per individual and $5,300 per dependent ($33,300 for a family of four), generous compared with today's personal exemptions of $2,500 per person. Also, according to Armey, you could calculate your federal income tax in a few minutes on a form the size of a postcard. In exchange, however, you would lose all your other write-offs--not only mortgage interest, but state and local taxes, property taxes, IRAs and Keoghs and charitable contributions.

It's true that at 17% an Armey-style flat tax would mean a tax cut for virtually all Americans. But Congress is unlikely to pass such a tax for one reason: It loses revenue for the cash-strapped federal government. The Treasury Department estimates that a flat tax with only slightly more roomy family allowances than Armey's would require a 23% rate in order to bring in the same amount of revenue the tax system does today. At that rate, here's what you could expect:

Taxes would rise for most middle-income families. An analysis by Shvetank Shah of the Price Waterhouse accounting firm projects that a 23% flat tax rate would produce roughly a 10% tax increase for families with adjusted gross incomes (AGI) between $75,000 and $100,000. For instance, a typical family with two children and $75,000 in AGI would see its effective tax rate rise from 18% to 23%, resulting in a tax increase of $1,108 a year, or 12%. By contrast, if your AGI is $1 million, your tax bill would be sliced in half.

Mortgage rates would fall, along with home values. Mortgage rates would drop one or two points, largely because ending mortgage deductibility would reduce demand. But even so, experts say the elimination of deductions for mortgages and property taxes would push up the after-tax cost of owning a home and send prices skidding downward. Consider a couple who own a $150,000 house with a 7% mortgage. Assuming they now pay a 31% marginal income tax rate, the after-tax cost of their annual mortgage and property taxes comes to $8,280. Under a flat tax that pushed mortgage rates down a point, the after-tax cost of their home would rise 27% to $10,500, according to economist Roger Brinner at DRI/McGraw Hill. Meanwhile the value of their house would decline 15% to $127,500. Says National Association of Homebuilders economist David Crowe: "The only winners would be first-time home buyers who would find lower prices and lower mortgage rates."

Some employer-paid benefits would disappear. Under most flat-tax proposals, employers would no longer be allowed to deduct the costs of nonretirement benefits, such as health insurance, so many would stop picking up the tab. To compensate, many companies would pay their employees more in salary, which would still be deductible to employers. But when paid in the form of salary, the $3,000 or so now earned in nontaxable health benefits by the typical employee would get taxed at the flat-tax rate. At 23%, you would wind up with $690 less to buy medical coverage.

Investment portfolios would grow faster than they would otherwise, although tax-exempt bonds could suffer. The elimination of taxes on interest, dividends, capital gains and inheritances would make it much easier for upper-income Americans to accumulate financial assets. But according to University of Texas tax professor Richard Joseph, with a flat tax above 20%, the middle class would have a tougher time building their nest eggs, simply because they would have less money left to invest after paying their taxes.

As for particular investments, experts agree lower interest rates would push up prices of taxable bonds. At the same time, since all investments would be tax-free, tax-exempt municipals could lose their allure and their prices would likely drop.

But don't sell your house and load up on Treasury bonds just yet. No serious tax reform will arrive until after the '96 election at the earliest. And by that time middle-class voters may well have concluded that a simple flat tax isn't worth the price.

[SIDEBAAR]

STEVE FORBES' TAX PLAN WOULD SLASH HIS TAXES

MULTIMILLIONAIRE PUBLISHER AND Republican presidential candidate Steve Forbes would win big under his own 17% flat tax: MONEY estimates that it could slash his family's tax bill by nearly two-thirds.

Forbes' plan would scrap all deductions and levy a flat 17% rate on all earned income after personal allowances of $13,100 plus $5,300 per child. What's more, all investment income and capital gains would be tax-free. To determine how much the Forbes family--Steve, his wife Sabina and five daughters (three still dependent)--would save in taxes under his flat tax, MONEY relied on an analysis of his federal financial disclosure forms by the nonpartisan Center for Public Integrity. Our conclusion: Under Steve Forbes' tax plan, his family would have paid $112,984 in taxes in 1995 on an estimated $980,410 in income. Compared with current law, that's a tax cut of $193,892, or 63%.

The main reason for this hypothetical windfall: Forbes' earnings from his stockholdings in companies such as Ford, Microsoft and Telefonos de Mexico. Since Forbes owns 51% of the voting shares of Forbes Inc., he could further reduce his IRS tab under a flat tax by taking relatively more income in tax-exempt dividends than in taxable salary. True, he could see a drop in the value of his 500-acre spread in Bedminster, N.J. But the Forbes plan would also eliminate estate taxes--something his heirs should love. Such huge tax cuts for the rich are fair, Forbes told MONEY, because, "If you earn more, you should get to keep more." --A.R.D.