Saturday, November 15, 1997

Serious questions remain about flat tax

By WILLIAM A. RUSHER

Newspaper Enterprise Assn.

Both Steve Forbes and House majority leader Dick Armey have protested that I misrepresented their proposal when, in a recent column, I questioned the political viability of a flat tax.

I had simply pointed out that a flat tax of 17 percent (the rate usually proposed) would result in people with high incomes paying much less in taxes than they do under the current system, which taxes progressively higher incomes at progressively higher rates. I added that personally I thought a flat tax would be fairer than the present system. But I warned it's far from clear that American voters as a whole would still favor a flat tax over a progressive one, after the Democrats got through arguing that "the rich" don't really "need" all of the remaining 83 percent of their ill-gotten gains.

Forbes and Armey first complain my scenario didn't take into account various stool softeners incorporated in their proposals. The Armey plan, for example, would permit a family of four (the model we will use throughout) to deduct from their taxable income $23,200 as a married couple filing jointly, plus $5,300 for each of their two children, or $33,800 altogether. So any family with an income less than that would pay no tax at all.

In addition, the Armey plan includes a "Form 2," which would impose the same 17 percent tax on the income (gross revenue less allowable costs) of every business. Since many, perhaps most, really rich people derive much of their income from a business rather than a simple salary, proponents of the Armey plan argue that their true tax liability is not reflected by the tax they would pay on "wages, salary, and pensions" alone. Also, a small element of progressivity would be reintroduced by the $33,800 personal deduction, since the 17 percent tax would only be levied on incomes above that figure.

All this is quite true, but it adds up to what lawyers call "a distinction without a difference." All I ever said was that the Democrats would, in my pessimistic opinion, have a field day demagoguing the issue. On "Meet the Press" recently, President Clinton told Tim Russert that he had never seen a truly revenue-neutral flat tax proposal that didn't result in increasing taxes on the middle class while lowering them on the wealthy. Even if this is not true, there are bound to be loads of examples of CEOs with immense salaries whose taxes will fall sharply, and -- if we are to raise the same amount of money -- somebody else's are going to have to rise. Oozing hatred of "the rich," the Democrats will ask if you want to volunteer.

In a letter to the Weekly Standard, which recently expressed similar reservations about the popularity of a flat tax, Armey objected that the magazine was capitulating "to the old left-wing class warfare mantra."

But we are not capitulating to it, Congressman; we are merely warning flat tax enthusiasts not to underestimate its power. If the Republican Party nails the flat-tax flag to its mast and marches off to battle, I will be marching with it -- not because it's a Republican proposal, but because I sincerely think it's fairer, as well as overwhelmingly simpler, than the current system. But I will be gloomy about our chances.

It's true that polls show Americans are favorably disposed, in a preliminary way, to major tax reform. But they haven't been subjected, yet, to the hot blasts of that old Democratic specialty, the politics of envy. What will the flat tax look like when Clinton, Gore and Gephardt get through with it?

Maybe the American people are ready to redistribute the tax burden more fairly. But if not, we may be walking into a buzz saw.

William A. Rusher is a Distinguished Fellow of the Claremont Institute for the Study of Statesmanship and Political Philosophy.