In yesterday's daily commentary, http://www.cato.org/pub_display.php?pub_id=3793, the Cato Institute's Alan Reynolds wrote about Hong Kong's progressive flat tax and other associated tax reform policies. To summarize the HK policy:

1) There is a "flat" tax applied at rates ranging from 2-20% on income
2) Businesses pay 17.5 % on profits, but no payroll tax
3) Generally speaking, deductions are limited to charitable donations not to excedd 25% of income, mortgagte interest up to 13,000 USD, continuing education, IRA, and caring for elderly relatives.
4) Taxes on salaries and profits equaled 7% of GDP in HK last year, compared to 8.6% in the US.

I think it is excellent to include a flat tax as part of an aggressive tax reform policy. HK is not the only place it is favoured. Numerous Eastern European countries also employ a flat tax as The Economist reported three weeks ago.

One interesting point about a flat tax is that it would likely (unverified opinion here) generate more income by eliminating most, if not all, deductions. Current tax law essentially comes down to arguing whether an item is deductible or not, and these deductions are often abused. Realtors buy Cadillac Escalades and deduct 100% of the cost as a "expense" under a "heavy truck" exemption. This exemption was created for contractors, farmers, and other persons who need heavy equipment to haul things, but it is (ab)used by every small business owner.

One place tax reform could be used to address a current problem is by eliminating mortgage deductions for homes that are not the primary residence of the owner and reforming the capital gains tax on profits from real estate sales.

Everyone and their sister knows that there is a housing bubble and that "affordable" housing is a joke. This effect is not caused by market forces responding appropriately to a demand for residences, but rather artificial forces that have made real estate a good investment.

The well known tax incentives for investing in real estate are one of the causes and persons who use housing as investment need to have it treated as such. Morgage interests deductions should be for persons who buy a home to live in. If it is being bought for business or investment, it should be treated as a business or investment.

If the tax benefits for buying up real estate are removed, housing will become less desirable as an investment and the price should fall inline with the demand for people who want to live in the housing, not hide their money from Uncle Sam in it. Beyond that, it would have a related effect of freeing up billions for investment in business and industry.

Housing costs could be brought into check while still using market forces, business would get a booster shot of investment, and one more tax shelter would be done away with. If this was paired with a flat tax and a broader elimination of deductions and tax dodges so much the better.