Flat Tax Stirs Debate Over How It Hits Middle-Class Pocketbooks

THE tax may be flat but the argument isn't.

It's an attractive idea: Scrap today's intricate income tax system and replace it with a flat rate that applies to all income above a certain amount. Figure your taxes on a postcard. April 15 might no longer be a national day of dread.

Businessman Steve Forbes has ridden his 17 percent flat-tax proposal to second place in some GOP presidential nomination polls. A commission led by former Housing Secretary Jack Kemp has said kind words about the flat-tax concept.

The problem is that a flat tax might increase the tax burden on the American middle class. And unless the rate is substantially higher than 17 percent, a flat tax would likely increase the deficit, at least at first.

"Economically speaking, the flat tax makes a great deal of sense. But at the rates people are talking about, some middle-income people are certain to pay more tax," says J.D. Foster, chief economist at the Tax Foundation, a Washington think tank.

Flat Tax Stirs Debate Over Middle-Class Wallets

The flat tax isn't exactly a new political idea. It's experienced Washington boomlets before, most recently in the early 1980s, and has long been a favorite idea of maverick Democrat Jerry Brown, former governor of California.

But this year's race for the GOP presidential nomination has pushed the flat tax to prominent new heights. Along with Mr. Forbes, Sen. Phil Gramm has produced a flat-tax proposal. So has commentator Pat Buchanan. Sen. Richard Lugar is pushing a national-sales tax as his version of sweeping tax reform.

The flat tax's virtues, say proponents, are many. First is simplicity - filling out a Form 1040 would no longer require the math skills of an accountant and the patience of Job. This aspect appeals to many voters. A recent Boston Globe poll found that 54 percent of Republicans supported flat-tax implementation. Forbes, the candidate most identified with the flat tax, is the choice of 17 percent of New Hampshire GOP voters, according to the same survey, second to Sen. Bob Dole and his rating of 33 percent.

But to economists, a primary virtue of a flat tax is that it might be economically neutral. In other words, all those deductions and exemptions that distort economic activity would disappear. And by lowering the top marginal rates, a flat tax might unleash a burst of business activity powered by newly available capital.

The problems lie in flat-tax details. Seemingly small variations in the way a flat tax is designed end up having huge economic and political consequences. As a result, prospective GOP nominees are already squabbling among themselves about the effects of each other's tax-reform plans, raising issues of fairness and class division with all the avidity of 1930s labor activists.

TAKE Forbes's proposal - the purest of the plans. It would levy a rate of 17 percent on income above $36,000 for a family of four. All deductions - including popular mortgage-interest and charitable-contribution deductions - would be eliminated.

Perhaps most controversially, investment income wouldn't be taxed on the theory that it is already taxed once at the corporate level. Mr. Buchanan, for one, thinks that's unfair. "I just simply don't think you can have a 17 percent tax on my brother with his six kids ... and then have some trust-fund baby go down to Florida with a $200 million inheritance and live off dividends, interest, and capital gains, and never pay a dime," he says.

Buchanan's flat-tax proposal keeps the mortgage interest deduction, among others. It would tax investment income - as would the 16 percent flat-tax proposal just offered by Gramm.

A related problem is the tax burden on the middle class. A flat tax would lower the rates of those at the highest of today's five tax brackets. Most plans would also exclude many lower-income taxpayers through relatively high-income starting points. The result might saddle the middle and upper-middle classes with a higher percentage of the nation's total income taxes.

The actual tax payments of the middle class might increase as well. The theory goes this way: Flat-tax rates of 16 or 17 percent are too good to be true. The US Treasury, as well as some nongovernment tax groups, figure that such flat taxes would bring in some $200 billion a year less than the current system - adding greatly to the federal deficit.

Robert McIntyre of Citizens for Tax Justice, a labor-funded think tank in Washington, figures a flat tax might need to be set at 23 percent to bring in the same revenue as today's system. Under such a plan, a family of four with $60,000 in earnings might see its tax bill increase $3,700, he says.

Flat-tax proponents argue with some of these figures. Forbes campaign officials, for instance, claim their plan would only add about $40 billion to the deficit. But it's clear that the middle-class burden issue, and the popularity of certain deductions, will make the flat tax a delicate issue for the GOP in the long run.

That's why the Kemp Commission was so circumspect in its flat-tax endorsement. The commission, formed at the behest of Dole and House Speaker Newt Gingrich, didn't back a particular rate. It talked about building GOP consensus around the idea of tax reform.

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