The flat tax is Washington's newest rage. Of the six major contenders for the Republican presidential nomination, all but one favors a system that is at least flatter than the current one, and three have advanced detailed proposals to implement a true flat tax.

This week alone, Sen. Phil Gramm unveiled his ideas for a flat tax while Senate Majority Leader Bob Dole cautiously endorsed his party's efforts to develop a "fairer, flatter, simpler approach" to taxation. The GOP front- runner did not, however, back any specific approach.

Sen. Gramm showed no such ambivalence. The Texas Republican would establish a single tax rate of 16% and impose it on all income, with two key exemptions - charitable contributions and home mortgage deductions.

Sen. Gramm justified the first exemption by noting that he plans to ask charities to step up their efforts on behalf of the needy as the government scales back. The second he explained by extolling the old-fashioned virtues of American homeownership - as opposed to the old-fashioned political virtue of courting the American middle-class voter.

The new tax plan may not be enough to carry Sen. Gramm into the White House. But it may provide a glimpse of the next major change in the American tax system. If there is a flat tax in America's future - and it looks increasingly as though there is - it will probably look a good deal more like Sen. Gramm's vision than the simpler, no-deduction system advanced by publisher Steve Forbes.

That's good news for mortgage lenders, some of whom have already begun worrying about the future of the mortgage interest deduction.

Brian Smith, director of policy development for America's Community Bankers, thinks those who would end the mortgage interest deduction should recall the lessons of the 1986 tax reform law, which stripped away a number of real estate tax preferences.

"The '86 tax bill whacked property values by 15%," he said, arguing that a repeal of the mortgage interest deduction would have a similar effect.

For the banking industry, maintaining the mortgage interest deduction has other benefits as well. It could prove to be the slippery slope that leads to other tax exemptions.

After all, if interest on home mortgages remains exempt, why not interest on vacation homes? And if second homes are given preferential status, then how about second mortgages? And if second mortgages are protected, then banks would still be in the home equity loan business.

Sen. Gramm's plan seems safely within the mainstream of current Republican Party thinking. Conservative commentator Pat Buchannan has proposed a similar system, and former Tennessee Gov. Lamar Alexander advocates a simpler tax code with lower rates. Both men would maintain deductions for charitable contributions and home mortgage interest.

But before the industry gets too comfortable, bankers should remember that Mr. Forbes has moved himself solidly into second place in the GOP race. And he has done so largely on the basis of his flat-tax plan - a proposal that allows no deduction for mortgage interest.

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