Flat tax plans count on the lure of simplicity

THE BALTIMORE SUN

WASHINGTON -- In 1994, a Texas Republican made a brash prediction based on how much he thought Americans wanted a simpler tax system.

"The next president," said Rep. Dick Armey, "will be elected on a flat tax platform."

Mr. Armey is now House majority leader, and the flat tax is the hottest idea on an otherwise dull campaign trail.

Not that Mr. Armey had Malcolm Stevenson Forbes Jr. in mind, but the multimillionaire publisher has made a flat tax the centerpiece of his Republican presidential campaign -- and has ridden it to second place in the polls behind Bob Dole.

The "flat tax" would replace the existing tax code, with its five progressively higher rates, its hundreds of deductions, its thousands of rules and regulations, with a simple tax in which everyone would pay the same rate.

"That flat tax would be so simple, you could fill it out on a postcard," Mr. Forbes tells audiences. "A postcard that would say, in effect, 'Having a wonderful time; glad most of my money is here.' "

"A singularly unwise idea," counters Robert Greenstein, a liberal economist.

"Truly nutty," says former Gov. Lamar Alexander of Tennessee, one of Mr. Forbes' rivals for the Republican nomination.

Mr. Forbes is a political neophyte and a man of inherited wealth. So much the better, say the plan's proponents: If someone who stands to make a killing can successfully push the flat tax, it must have genuine appeal.

Today's tax code calls for rates of 15 percent to 39.6 percent, though it's lower for those who itemize their federal deductions. The working poor do not have to pay. The vagaries of the myriad categories, exemptions and loopholes are what tend to infuriate middle-class taxpayers.

A common complaint is that those who can afford tax lawyers and accountants can evade their rightful share of the taxes. In some ways, this is a myth.

Under current law, according to Robert Eisner, a Northwestern University economist, those with incomes exceeding $200,000 pay some 24.4 percent of their total income in taxes -- a far higher percentage than for any other group. The wealthy would be the greatest beneficiaries of a flat tax.

Nevertheless, the complexity of the law, the desire to pay less and and fear of the Internal Revenue Service have created a climate for change. These desires have bloomed inside the Republican Party, a hothouse of anti-tax and anti-IRS sentiment.

All nine rivals for the Republican nomination, save Lamar Alexander, have embraced sweeping changes in tax policies. Even Mr. Dole has cautiously embraced the flat tax.

The flat-tax idea was floated in 1981 by two Stanford economists, Robert Hall and Alvin Rabushka, who argued that it would be fairer and would save Americans time and encourage more savings and investment.

The idea intrigued President Ronald Reagan. But one feature troubled him: eliminating the mortgage-interest deduction. The flat tax was a "very tempting thing," he mused in 1982. "I think it's not as simple as it sounds."

Ten years later, the idea was resurrected by Jerry Brown, the former California governor, who ran for president against Bill Clinton. Now comes Mr. Forbes, who has spent $12 million of his own fortune telling voters in Iowa and New Hampshire the flat tax would fuel extraordinary prosperity.

His plan parallels one offered in Congress by Mr. Armey. The Forbes plan would set the tax rate at 17 percent for everyone, while eliminating all deductions, including the mortgage deduction and the write-offs for charitable donations and state and local taxes.

Mr. Forbes' plan grants a $26,200 personal exemption to a married couple filing jointly, $13,100 to a single person and $17,200 for a single head of household. Mr. Armey's plan has slightly lower exemptions; both have a $5,300 exemption for children. Under both plans, a family of four would pay no taxes on roughly its first $36,000 of income.

Critics have taken issue with the flat tax on many grounds:

* Although it would expand the number of low-income families who pay no federal taxes, the Armey plan would hurt the 14

million working poor who today not only pay no tax but actually receive rebates under the Earned Income Tax Credit program.

* The flat tax provides huge benefit to the rich, and especially the idle rich, who would pay no tax on savings account interest, stock dividends, profits on capital gains or revenue from rental property.

"Under the Forbes flat tax, should Bill Gates, with a fortune estimated at $12 billion, decide to retire early, he would never again pay a dime in income taxes for the defense of his country," wrote Patrick J. Buchanan, another Republican presidential candidate. "But the men and women who continued to work at Microsoft would have to pay at 17 percent."

* A 17 percent tax rate would produce less revenue than under current law. So to avoid driving up the budget deficit, lawmakers would either have to raise the flat-tax rate or make deep cuts in projected spending.

"The flat tax sounds great at the first presentation, because people think at first that wealthy people who don't pay their fair share would pay more," said Mr. Greenstein, executive director of the Center on Budget and Policy Priorities. "In reality, they will pay far less, which will result in either a raise in middle-class taxes or cuts in middle-class benefits."

Most proponents acknowledge that the government would raise less money under a flat tax. In fact, they say that's one of its best features -- and good politics besides.

"I can see Bob Dole or any front-running candidate cheerfully announcing he will trade the Departments of Energy and HUD for a genuine middle-class tax cut," explained Jim Lucier, research director of the conservative Americans for Tax Reform.

Nor do flat-tax proponents apologize for proposing not to tax investment income, a provision that would greatly benefit the rich.

The current system, they say, discourages savings and investment, which is bad for the economy, and amounts to "double taxation." Their rationale is that since payments from stocks are taxed at their source -- corporations pay taxes on their profits before issuing dividends -- money put into savings accounts shouldn't be taxed again as it grows.

"I'm not talking about 'revenue-neutral' tinkering with the tax code, the usual shell game in Washington that pretends to cut some taxes while raising others," Mr. Forbes says. "We need dramatic, pro-growth tax cuts that are deep, wide and permanent. Start by scrapping the tax code. Don't fiddle with it. Throw it out."

Yet some conservatives, including Rep. Bill Archer of Texas, chairman of the House Ways and Means Committee, argue that the flat tax doesn't root out the existing system thoroughly enough. Mr. Archer would do away with income taxes altogether and replace them with consumption taxes.

Sen. Phil Gramm of Texas and Sen. Richard G. Lugar of Indiana, two other Republican candidates, have signed on to this approach. Mr. Lugar has proposed a 17 percent national sales tax.

"This would mean that the money you earn is yours," Mr. Lugar says. "The payments are bigger, savings are greater and hopes for the future abound."

If the primary attraction of the flat tax is its simplicity, the primary goal of a national sales tax is to induce Americans to save money.

The trick, Mr. Lugar's advisers concede, would be selling products that Americans wanted to buy in an era in which everything would cost 17 percent more than it does now. Even Mr. Lugar concedes that consumer spending would decline, at least initially.

There are other Republican tax-cutting, tax-flattening, IRS-gutting plans around. Some are hybrids, like the one offered last week by a commission headed by Jack Kemp.

Mr. Kemp said the idea of retaining deductions for mortgage interest and charitable donations should be part of the discussion. Mr. Dole went further, saying that those deductions need to be retained. In recent days, Mr. Forbes said he wouldn't eliminate the EITC for the working poor.

"I'm glad he said that," said Michael Ettlinger, an analyst with a liberal group called Citizens for Tax Justice. "But his form just went way off a postcard."

What all these plans have in common is that the rich would greatly benefit. Democrats insist that this is the Republicans' true aim.

Republicans counter, whether talking about the flat tax or any of their other tax-cutting plans, by trying to find subtle ways to say that helping the rich is a necessary by-product of helping the economy.

Republicans on Capitol Hill are saying that Rep. John R. Kasich, an Ohio Republican, gets chuckles from audiences when he tries to make this case. "In good economic times, the rich get richer," he says. "In bad economic times, the rich get richer."

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