• This is a partial transcript from "Your World with Neil Cavuto," July 18, 2005, that was edited for clarity.

    NEIL CAVUTO, HOST: Well, you know, it is the one thing that some, not all, but some European countries have that the U.S. does not. It's a flat tax (search).

    But my next guest says it is possible and it should be done here in the U.S. of A.

    With us now, Steve Forbes (search), the president and CEO of Forbes, Inc., and author of "Flat Tax Revolution: Using a Postcard to Abolish the IRS."

    One thing I love about Steve on this subject is, he was saying it when nobody was. So, long before this got to be chic, well, you were chic.

    (LAUGHTER)

    CAVUTO: It's a fascinating idea. But, after reading it, Steve, then I said, God, I wish Steve were right, but it ain't going to come to pass. Prove me otherwise.

    STEVE FORBES, CEO, FORBES INC.: I think it will come to pass, in part because people are realizing we now face competition, serious competition, from India and China (search), two billion plus people.

    The European countries in Central and Eastern Europe are starting to do it, which I think eventually is going to bleed over into Western Europe. And people I think in this country are going to say, why do we have a code nobody understands full of corruption, full of special exemptions? Why, as a free people, do we put up with this, especially when we need to get our own economic act together?

    CAVUTO: But those same people are going to say, but what about my mortgage deduction? Steve won't allow it.

    FORBES: Well, that's why I think what you have to do, what I propose in the book is, give people a choice, sort of turn the alternative minimum tax on its head.

    Put in a flat tax and let you decide. Do you want to go with the flat tax or stay with the old code? Ninety-nine percent of the people would say, go with the new. But, this way, you can say to people, don't take our word for it. See for yourself which one is better. And so, that way, people don't get hung up. Am I going to lose this? Am I going to lose that?

    CAVUTO: But as you know, say, under your plan, there would be a big housing, you know, burp.

    FORBES: Actually, it would be good for housing. One, you would keep more of what you earn. Interest rates would go down. So, if you keep more of what you earn, the cost of your mortgage goes down, that's good for housing.

    CAVUTO: All right.

    Let's talk about fat cats. They end up doing very well, because, if the end result is pay 17 percent on your income, fine. It's a fixed rate across the board. The rich end off getting off jack-free.

    FORBES: The rich actually end up paying more money.

    We've seen in the past, when you lower tax rates, people at the top pay a higher percentage of income tax receipts. We first saw that 20 years ago, Neil. The top 1 percent, before Reagan took over — I hate to use numbers — but they paid 18 percent of federal income tax revenues. Today, that top 1 percent pay 30 percent. You want to collect more from the rich, make the code simple, so you can't hide the income. Make it flat and simple and you'll get more money from those at the top.

    CAVUTO: I'm going to give you one liberal line after another. One liberal line says, 17 percent for a guy earning $10 million a year has got to hurt a lot more than the guy who is getting 17 percent on $50,000 a year.

    FORBES: The nice thing about the way I proposed it is, there are generous exemptions for adults and for children. A family of four, mom, dad, two kids, would pay no federal income tax on the first $46,000 of income. And I don't tax their interest. I don't double tax their dividends. So, that way, salaried people can have a chance to put real capital together, keep more of what they earn, not get punished for succeeding. That's the American way.

    CAVUTO: Let's talk a little bit about a simple sales tax. A lot of people think that would be a good. Not you. Why not?

    FORBES: Well, first of all, if you put in a new tax, you better be careful, because you're going to end up with what most states have and European countries have. You'll end up with both a high income tax and a sales tax, or a value-added tax.

    CAVUTO: And a sales tax could kill spending, right?

    FORBES: Kill spending. Imagine paying a 30 percent tax on your tuition. It's high enough already.

    CAVUTO: But would there be enough money to the government after all that? Because this is all, like you mentioned, the Reagan example — and you're right — more revenues came in, but would the same happen here?

    FORBES: Yes.

    And we brought in a firm, Fiscal Associates, to do runs, dynamic runs on this.

    CAVUTO: Yes.

    FORBES: And they found that the government would raise more money. We would have more jobs. And, over a 10-year period, the assets of the nation would be trillions of dollars higher than it would have been otherwise.

    CAVUTO: But the problem with those yahoos in Washington is, the extra money that comes in, they spend like drunken sailors.

    FORBES: Well, I'd rather have that problem and have the nation wealthy than these guys spending, which they'll do anyway, and have the nation poorer. And that's what the flat tax is about.

    CAVUTO: Are you ever going to run for office again?

    FORBES: I'm an agitator now. I want to make things happen.

    (LAUGHTER)

    FORBES: Hold their feet to the fire.

    CAVUTO: All right, Steve Forbes. "Flat Tax Revolution" is the book, getting a lot of buzz in all circles. Agree or disagree, it's a good, cogent argument about things we're not thinking about in this country.

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