Dick Armey's Flat Tax Gets Mixed Reviews

IF Congress had a list of ''in'' and ''out'' issues, the ''flat tax'' would rank high among those that are ''in.''

The House Ways and Means Committee holds hearings on tax reform, including the flat tax, next week. The flat tax has also been a subject of hearings in April and May by the Senate Finance Committee, the Senate Budget Committee, the House Small Business Committee, and the Joint Economic Committee.

Probably most Americans couldn't define a flat tax and its difference from today's income tax. Regardless, the billing by its chief congressional backer, House majority leader Dick Armey of Texas, as far simpler, fairer, and more encouraging for economic growth has brought his proposed legislation increasing attention.

''We need tax reform because today's tax code is artificially and unnecessarily suppressing living standards,'' Mr. Armey says. In thousands of letters on the issue, ''the almost unanimous sentiment is give me the flat tax, and give it to me now,'' he adds.

A cover story in the latest Fortune magazine says radical tax reform is ''a broad political movement, gaining in popularity the way a hurricane gathers force as it heads for land.''

But the flat tax has ''cons'' as well as ''pros.'' Should Congress deal with the issue in 1996, a cold wave of controversy could slow the movement.

Armey introduced his flat-tax bill in June 1994. His office expects to put forward a revised bill this month.

Under the original bill, individuals would be initially taxed at a rate of 20 percent on their wage, salary, and private pension income, less a household deduction amounting to $36,800 for a married couple with two children. The deduction for each child would be $5,300. Two years after the law is enacted, the rate would fall to 17 percent. There would be no credits or deductions, such as for interest on home mortgages or for charitable contributions.

A corporation would simply subtract expenses from revenues and pay the 17 percent rate on the remainder. Revenues are defined as corporate, partnership, professional, farm, and rental revenue. The company would subtract from gross revenues purchases of goods and services, capital equipment, structures, land, and wage and pension contributions to employees.

Armey likes to wave a postcard-size tax form for the flat tax, and talk about the 5.4 billion hours needed today to fill in the 437 tax forms used by the Internal Revenue Service. He also claims the flat tax is fairer because everyone pays the same rates, with no special breaks to politically favored groups. That fairness aspect especially appeals to taxpayers, his office says.

''But most people don't understand anything about the flat tax,'' says Robert Eisner, an economist at Northwestern University in Evanston, Ill., and a vigorous critic of such a tax change.

The Armey bill, he finds, would require a flat rate of almost 23 percent to be revenue neutral -- to collect as much as the current system. (A United States Treasury study says 22.9 percent.)

Armey's staff is currently discussing revenue estimates with the Joint Taxation Committee, the body that referees such matters for Congress. The bill will be altered to make it revenue neutral, either by boosting the tax rate, reducing deductions, or increasing federal-spending cuts included in the bill.

Professor Eisner, however, calculates that with a revenue-neutral version of the Armey flat tax, all income groups up to $100,000 would actually pay more taxes. For those in the $100,000 to $200,000 range, the Armey tax would take 16.1 percent of total income as opposed to 18.6 percent under current law. Those making more than $200,000 would see their taxes halved from 24.4 percent of income to 12.7 percent.

The Treasury study, using different assumptions as to who ultimately pays for higher corporate taxes under the Armey plan, says $200,000-plus families would enjoy a 26 percent cut in their taxes. Those with lower incomes would pay more taxes.

The Armey measure would create what economists term a ''consumption tax.'' It exempts income from savings and capital investments, but not earned income from a job. This, Armey argues, would boost savings, investment, and living standards.

It would also mean the billionaire heiress living off her estate would pay no individual tax, notes Eisner. He proposes a different flat tax, which he claims would be fairer as well as simple.