Time for some creative havoc

February 24, 1996|By HAL PIPER

ONE REASON American politics is so tiresome is that whenever someone produces an interesting idea, we don't consider its merits. Instead, we sneer at the idea-bearer.

It happened the last two times the flat tax came up. In 1988 the proponent was Jerry Brown, ''Governor Moonbeam,'' so you knew it was cockamamie lunacy. This year it is Steve Forbes, ''Richie Rich,'' so you know it's a scam for the wealthy.

Anything pushed by such dissimilar figures as Jerry Brown and Steve Forbes may not be a good idea, but it hardly fits into a neat ideological box. Other flat-tax plans have come from the Gingrich henchman, Rep. Dick Armey, and the Clinton chief of staff, Leon Panetta. Smart people on both sides of the ideological street have played with this idea.

The beguiling simplicity of the flat tax is one reason it arouses suspicion. When Mr. Forbes brandishes a postcard and says it is all the tax form we will ever need, it looks like a gimmick.

The basic plan is to sweep away the maze of deductions and special rules that make the tax code so maddening. Your tax would be a fixed percentage -- Mr. Forbes' plan sets it at 17 percent -- of your income, minus exemptions for yourself, spouse and dependents. You could figure it on a postcard.

The trade-off for this simplicity is that you would lose such deductions as mortgage interest and charitable contributions. But Mr. Forbes would lose special tax treatment for his farm in New Jersey. And all the special rules that make business planning depend as much on tax consequences as on rational production would also be gone. Maybe, taken all together, it would be worth it.

Or maybe not. Why should you and I be in the same tax bracket as Steve Forbes? Is that fair?

But we wouldn't pay at the same rate as Mr. Forbes. Tax is collected only on the income above personal and family exemptions. Under the Forbes plan -- there are other variants -- a family of four would pay no tax on its first $36,000. At $50,000 it would pay $2,380 -- 17 percent of $14,000, less than 5 percent of total income. At $100,000 it would pay about 12 percent. But Mr. Forbes would pay 17 percent on practically all his earned income. So a nominally flat tax has some progressivity.

Parity with millionaires

More to the point, because of deductions and legal loopholes, you may already be paying at the same rate the millionaires do. That may be why Mr. Forbes won't release his tax returns.

The question of fairness can be haggled out in Congress. Should investment income be included? (Some plans tax it; Mr. Forbes' does not.) Might there be postcard simplicity with two tax rates for more progressivity?

A larger problem is that the flat tax would work havoc in the national economy, and nobody knows what to expect. Tax reform in 1986 ended favorable treatment for real-estate speculation. The economy is better off today, but the adjustment caused recession in the housing industry, stagnant property values and funding crises for local governments that rely on the property tax. Imagine what a flat tax ending the mortgage deduction would do.

Phasing in the new tax is another snag. If it is done over a period of time to permit individuals and businesses to adjust, then the tax rate will have to be much higher than 17 percent to produce the same revenue the government now collects -- maybe 24 percent. At that level the promised tax savings disappear for most families.

Still, under the existing code government is largely an auction of tax breaks to campaign contributors. This distorts the economy and feeds public cynicism. A radically simple system -- treat everybody alike, treat all income alike -- might work some creative havoc.

Hal Piper edits The Sun's Opinion * Commentary page.

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