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Forbes is flat out wrong on tax


LIKE MOST Americans, I dread doing my taxes. My palms get sweaty as soon as the forms from the Internal Revenue Service arrive in the mail.

My taxaphobia left me initially enthusiastic about the latest economic fad: the flat income tax. With a flat tax, I could fill out a postcard listing my income, subtract the appropriate exemption and multiply by a single rate. And I'd be done -- period.

Too good to be true

Because almost everyone loathes shuffling tax forms in April, flat tax proponents are getting lots of attention. Multimillionaire Steve Forbes has jumped into the race for the Republican presidential nomination to push for adoption of a single income tax rate of 17 percent. He argues the tax would not only be simpler, but also fairer because all wage earners would pay the same rate.

The idea sounds good, but turns out to be too good. As in too good to be true.

Flat tax fever is likely to fade once more people understand what the change would do to them. For one thing, a truly flat tax would harm wage earners who own homes, raise children and give to charity.

Take the example of a family of four with a $50,000 annual income. Assume the family has a $100,000 mortgage at 8.5-percent interest over 30 years. Also assume the parents give $1,000 a year to charity and pay $2,200 in property taxes. With the usual deductions and exemptions, the family's federal income tax bill would total about $3,900 a year.

Now what would happen under a flat tax? Without the standard " tax breaks, the rate of 17 percent would drive the family's tax bill to a whopping $8,500.

Ah, but Steve Forbes would not allow that to happen. He knows a truly flat tax would never pass Congress because it would hit so hard at the middle-class.

Instead, he proposes exempting the first $36,000 of income from any taxes. That means our hypothetical family would pay a 17-percent tax only on earnings exceeding $36,000. The family's tax bill, therefore, would fall to just $2,380.

So now everybody is happy, right?

Housing price shuffle

No, not when the family sees what happens to its net worth after the mortgage deduction disappears. Economists are unanimous: housing prices would plummet if mortgages were no longer deductible. Without a tax incentive, home ownership would become more expensive and renters would have far less reason to leave apartments.

Adoption of a flat tax (without a long phase-in period) would push down the market value of all homes by about 15 percent, according to the economic consulting firm of DRI/McGraw Hill. The change would hit even harder at homes that cost about $150,000. They would drop in value to about $113,600 -- a 24 percent decline, the DRI/McGraw Hill study showed.

So with a flat tax, our hypothetical family could lose all the equity it has in its home. Next, they could lose their health benefits. If employers were to lose their exemptions for fringe benefits, many would stop offering medical benefits -- leaving workers to scramble for private insurance.

And with a flat tax, what would happen to the family's church and favorite museum? If the government were to stop granting tax breaks for charitable contributions, donations to churches, museums and other non-profit organizations would shrink dramatically.

While the parents in this family could lose their home equity, medical benefits and church, their children would suffer even more. That's because the Forbes plan is really a gigantic tax cut, masquerading as a tax reform.

The drastic lowering of the tax rate would slash government revenue -- probably by about $200 billion a year. Already Congress is struggling to lower the huge federal deficit. If tax revenues declined sharply, the deficit would balloon as it did in the early 1980s after President Reagan's tax cuts.

The workers of tomorrow will end up paying for the deficits being created today.

Certainly the flat-taxers are right in saying the tax code is too complicated. But the best Congress could do today -- given the already huge deficit -- is to eliminate many loopholes and lower tax brackets slightly.

Doing something as radical as eliminating progressive tax rates while killing socially beneficial deductions doesn't make sense -- especially when the overall impact is to sharply increase the budget deficit while slashing home values.

Support for the flat tax is being whipped up by rich people like Mr. Forbes who would like to get a really big tax cut. Fortunately, most Americans won't accept this Trojan horse once they know what is lurking inside.

K? Marilyn Geewax writes for the Atlanta Journal-Constitution.

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