Forbes puts tax reform atop national agenda Flat tax isn't likely to pass, but some drastic changes will

February 11, 1996|By Rupert Cornwell

WASHINGTON -- Maybe the fiscal advisers of the Almighty should be credited with the idea. The notion of a flat tax, which according to some polls has made Steve Forbes the hot Republican candidate in the early stages of this year's presidential elections, is not new.

If Mr. Forbes, who is the front-running Republican candidate according to some polls, had set the rate of his proposal at 10 percent, he could have called it the tithe -- the Church's flat tax of medieval times.

In the modern era, economic supply-siders and libertarians have frequently toyed with the idea.

Back in 1992, the eccentric former governor of California, Jerry Brown, made a 13 percent flat tax part of his campaign for the Democratic nomination. The derision was almost universal, but in the end Mr. Brown proved to be Bill Clinton's most tenacious challenger.

Today, on the opposite end of the political spectrum, the pattern is repeating itself. Mr. Forbes, a multimillionaire magazine publisher whose firsthand campaign experience could be conveyed on a blank sheet of paper, has made a 17 percent flat tax the centerpiece of a run for the White House, which seems less improbable by the day.

Install a flat tax, says Mr. Forbes, and an individual's tax return form will be downsized from a magazine to a postcard, the IRS will lose much of its raison d'etre, and the special interest groups which clog the arteries of government demanding tax breaks and concessions would wither and die. The lobbyists who cram Washington pressing their interests would be out of jobs.

No one likes taxes, but Americans hate them and, not surprisingly, they are listening to Mr. Forbes' siren call.

From nowhere, Mr. Forbes has shot into the lead in the state of New Hampshire, scene of the first of the series of primary elections to select the Republican candidate.

Forbes has pushed tax reform to the top of the national agenda. Two of his presidential rivals and a blue-ribbon Republican congressional commission have endorsed variants of the idea.

A third Republican candidate, Sen. Richard G. Lugar of Indiana, would go further still: He would abolish the income tax and replace it with a sales tax. Even Democrats concede it is time to simplify the tax code.

The Forbes plan would sweep away the income tax bands of 25 and 33 percent, as well as the mountain of special exemptions for money given to charity. Most importantly, it would abolish exemptions for mortgage-interest payments.

In the place of the complex U.S. tax system, there would be a single rate of tax of 17 percent for all individuals and

corporations.

For families, the first $36,000 of income would not be taxed; so poor families would be taken out of the tax net altogether. There would be no tax on savings, dividends or other unearned income.

So far, so good. But the flat tax is double-edged. Unabashedly, Mr. Forbes concedes that a flat tax means less tax -- for everyone. From which it follows that, barring spending cuts of which even the most hawkish Republican dare hardly dream, the government budget deficit will increase.

And if there is one thing the American public feels more strongly about than taxes it is balancing the budget.

The most authoritative estimate so far, from Alvin Rabushka and Robert Hall, two Californian academics who wrote a 1985 book on the subject, is that the "pure" version of flat tax advocated by Mr. Forbes will raise the deficit by $182 billion.

If the Treasury is not to lose revenue, they say, the flat tax must be at 19 percent, and the amount of income that goes untaxed must be fixed at $25,000.

LTC Nonsense, Mr. Forbes retorts. Freed of its burdens, the U.S. economy would take off as never before, bringing a windfall for the Treasury that would more than compensate for revenues initially lost through the lower tax rate.

Alas, the United States has been around a very similar course before. Ronald Reagan, whose optimism if not oratory Mr. Forbes shares, was the last great proponent of supply-sideism, memorably if unavailingly dubbed "voodoo economics" by George Bush in that 1980 election campaign.

Under Mr. Reagan the economy grew, but so did the deficit.

"Deja voodoo," mock the critics of the Forbes plan, hastening to point out for good measure that the biggest beneficiaries of a single tax band would be people like Mr. Forbes, with an estimated fortune of $450 million and substantial unearned income.

In the words of Patrick J. Buchanan, another Republican contender, its an idea dreamt up by "the boys at the yacht club."

Ah yes, says Mr. Forbes, but with a flat tax the rich would lose the loopholes created to pander to their special interests. According to the Washington-based Tax Foundation, Americans

who make $200,000 or more a year pay tax of 28 percent. Mr. Forbes would give them a big tax cut.

While helping the very well-off, the flat tax would hit the middle classes by removing the supreme perk of middle-class, home-owning America: the mortgage-interest deduction.

By a 2-to-1 margin, according to a Time magazine poll, Americans disapprove. Yet another Republican candidate, Sen. Phil Gramm of Texas, is therefore trying to trump Mr. Forbes with a 16 percent flat tax retaining the charity and mortgage deductions. It would send the deficit into the outer atmosphere.

Amid the smoke and thunder, only one prediction can safely be made: The flat tax will not be enacted in anything like the mooted form. Many Republicans oppose it, so do the bulk of the Democrats.

Mr. Forbes' lasting contribution might be to hasten a simplification of the tax code. That and possibly throwing open the Republican race to fight Bill Clinton.

Rupert Cornwell wrote this article for The Independent, London. It was distributed by New York Times Special Features.

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