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GOP'S GOT FLAT-TAX FEVER

THE BALTIMORE SUN

WASHINGTON -- Another new Bob Dole emerged this week: the tax collector for the conservative opportunity society.

When Mr. Dole declared his presidential candidacy, he not only committed himself to cutting taxes; he also called for a tax system that's "lower, fairer, flatter and simpler."

Flat-tax fever is sweeping the Republican Party. And the Senate majority leader, the early favorite to win the Republican nomination, is only the latest to catch it.

Mr. Dole, whose push for higher taxes in the 1980s led Newt Gingrich to tag him "the tax collector for the welfare state," now envisions a day when "ordinary people like you and me could fill out our tax form without a lawyer or an accountant or both."

He isn't alone. Most, if not all, of the GOP presidential hopefuls want to overhaul the tax process and replace it with a far simpler one.

It's the Republicans' newest campaign issue for 1996. It's also their answer to the question bugging millions of Americans this income-tax-paying weekend: Isn't there a better system than the current one, with its burdensome record-keeping, complicated forms and high cost?

The last time Congress reformed the tax system was in 1986, when numerous loopholes were closed and the process made simpler.

Now, Republicans would like to go further. The party's presidential hopefuls, and key congressional leaders, are proposing either a consumption tax, such as a national sales tax, a flat tax, in which everyone would pay the same rate. The new plan would replace the current progressive system, in which people who make more pay a greater share of their income in taxes.

Radical tax-reform proposals have been around for a long time, embraced by politicians in both major parties.

But since the Republican takeover of Congress, the idea of a flat tax has zoomed to new prominence, because its proponents are suddenly in a position to do something about it.

The hottest proposal at the moment is House Majority Leader Dick Armey's plan to set a tax rate of 20 percent on wages (reduced to 17 percent after three years). That compares with current rates on adjusted gross incomes of anywhere from 15 percent to as high as 39.6 percent.

Mr. Armey would apply the flat tax to salaries and pensions, as well as to fringe benefits, such as health care, that workers now get tax-free from their employers. The plan would also retain the current payroll tax for Social Security.

There would be virtually no deductions under the Armey plan -- no mortgage interest or medical-expense deductions, for instance -- but also no inheritance taxes or taxes on gifts, money earned from savings accounts or from investments on stocks, bonds and real estate. There would be a $13,100 exemption for single individuals, $17,200 for single heads of households, $26,200 for married couples filing jointly and $5,300 for each dependent.

Mr. Armey would also do away with tax withholding and instead require taxpayers to write a monthly check to the Internal Revenue Service when they pay their other bills.

Proponents say the plan would be fairer and more efficient than the current system. They're also selling its simplicity: Taxpayers could do their annual returns on a postcard.

Congressional hearings are planned this summer on the Armey proposal, among others. But even if a flat-tax measure gained approval in congress -- which isn't likely this year -- it would almost certainly run into trouble at the White House.

President Clinton says he's open to the flat-tax idea and would like to make taxpaying simpler.

"The first time I heard about a flat tax, I thought it sounded like a pretty good idea," he told CNN this week. But after putting pencil to paper, he's worried that it would zap poor and middle-class Americans.

"Every analysis that I have seen done indicates that the flat-tax proposals that are out there now will increase the deficit and increase taxes on all Americans with incomes under $200,000," Mr. Clinton said. "We must not explode the deficit. And we must not have a big tax shift from people making over $200,000 to all people making under $200,000. That's not the fair thing to do."

An analysis by Robert Eisner, a Northwestern University economist, found that the Armey plan would raise taxes for those earning less than $100,000 a year but cut taxes for those who make more. In the $200,000-and-up category, the Armey plan would reduce the tax bite by half, according to his study, published in the Wall Street Journal this week.

Republicans see a close parallel between what's starting to happen now and the 1980 campaign, when Ronald Reagan ran on the Kemp-Roth tax-cut plan and won; the next year, Congress passed deep reductions in income tax rates.

Last week, Mr. Dole and Speaker Gingrich appointed one of the architects of that plan, Jack F. Kemp, to head a new party commission on lower tax rates. Mr. Kemp is a fan of the Armey proposal, which he has called "the Kemp-Roth of the 1990s."

Public opinion polls show a clear majority of Americans in favor of some sort of flat-tax plan. Which may be one reason the Republican presidential candidates are scrambling to come up with versions of their own.

Sen. Arlen Specter of Pennsylvania would set a 20 percent tax rate and permit deductions for interest on mortgages of up to $100,000 and $2,500 in charitable contributions. He would also allow exemptions ($16,500 for married couples; $4,500 for each child) to ease the burden on lower-income taxpayers.

Sen. Richard G. Lugar of Indiana wants to abolish federal income taxes altogether for individuals and businesses, and replace them with a national sales tax of approximately 17 percent. Under his plan, Mr. Lugar says, a typical family would enjoy bigger paychecks, greater savings and enhanced job prospects.

But critics say that if all this sounds too good to be true, it is.

"If you tax people at the top less, then some people somewhere have to pay more," says Dean Baker, an economist with the liberal Economic Policy Institute. Getting rid of the mortgage interest tax break, for example, would force middle-income homeowners to pay thousands more in taxes, he noted, and discourage home buying.

Advocates reply that a flat tax would stimulate savings and economic growth, and produce the sort of supply-side economic miracle that the Reagan tax cut of the 1980s was designed to create. Clinton administration officials contend that the increased savings and capital formation would be "small or negligible."

"We have a system today that takes in more than $1 trillion in taxes and spends every dime," says one Treasury Department official. "Do you really want to trash that and put an untested plan into effect?"

Yes, reply those who think the only missing ingredient is a man in the White House to sign the proposal into law.

"Elect a Republican president," says Grover G. Norquist, a conservative anti-tax activist, "and it will happen."

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