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Flat Tax Proposals Take Center Stage

By Clay Chandler
Washington Post Staff Writer
Sunday, September 3, 1995; Page A01

After languishing on the fringes of economic policy discussions for years, a proposal to replace the current income tax system with a "flat tax" has vaulted to the top of the nation's political agenda.

A push for fundamental tax reform is rapidly gathering speed among Republicans on Capitol Hill and the flat tax, which would tax income at a single "flat" percentage rate, is far ahead of competing proposals in terms of congressional support, organizational muscle and popular appeal.

"The flat tax is where the tax reform debate is headed," said Stephen Moore, an economist at the libertarian Cato Institute, which favors a rival approach.

Unlike the current tax system, which imposes a stair step of rates on taxpayers that increase as their income rises and allows for a multitude of deductions and exclusions, a flat tax essentially would tax rich and poor households at the same rate on income beyond a minimum threshold.

To hold down the rate, flat tax plans scrap or severely limit the exemptions and deductions offered to individuals and businesses in the current code.

The flat tax's proponents say it would wipe out loopholes and vastly simplify the average American's tax filing procedure, perhaps enabling families and businesses to file a return no larger than a postcard. Advocates also say it would spur investment and economic growth by ending what they see as the current system's tendency to punish success by taxing rising income at progressively higher rates.

But many economists express misgivings about its effects. There is scant evidence, they say, that it would bolster economic growth. And some warn that the flat tax proposals offered thus far would dramatically lighten the tax burden of big corporations and the rich at the expense of the middle class.

For now, however, House Majority Leader Richard K. Armey (R-Tex.), one of the earliest boosters of the flat tax concept and author of the front-running flat tax plan, is basking in the idea's spreading fame. "To paraphrase that old Ethel Merman song," he gushed in a recent speech to the National Press Club, "everything's coming up flat tax."

Other big Republican supporters include House Speaker Newt Gingrich (Ga.) and Senate Finance Committee Chairman Bob Packwood (Ore.). It has also won endorsements from GOP presidential candidates Sen. Phil Gramm of Texas, Sen. Arlen Specter of Pennsylvania, Patrick J. Buchanan and former Tennessee governor Lamar Alexander.

In a speech to the Economic Club of Chicago on Tuesday, Senate Majority Leader Robert J. Dole (R-Kan.), the apparent front-runner for the Republican presidential nomination, also plans to signal support for a flat tax, according to advisers who have seen early drafts of his remarks.

An endorsement from Dole, who is considered a non-ideological fiscal moderate, would speak volumes about the flat tax's emergence as a political litmus test among conservative Republicans.

Until now Dole has avoided associating himself with a particular tax reform plan, saying he wanted to hear the recommendations of a GOP advisory commission led by Republican tax crusader Jack Kemp. But following his wobbly performance in the Iowa straw polls, where he ran neck-and-neck with Gramm, the Kansas senator is scrambling to shore up support from the right wing of his party. Many GOP analysts see pledging allegiance to the flat tax as a way for Dole to polish his lackluster image as a crusader.

"By coming on board with what is seen as a radical idea, Dole can send a clear signal to voters that says, I may have been {in Washington} since the 1960s, but I'm willing to dismantle the IRS and turn the Finance Committee into a toothless oversight committee,' " said Daniel J. Mitchell, a senior fellow at the Heritage Foundation.

Armey's plan, when fully implemented, would tax all households at the flat rate of 17 percent of their income after personal and family deductions. It would end some of the most popular deductions in the tax code, including mortgage interest payments, charitable contributions, state and local tax payments and employer-provided health benefits.

Analysts at the U.S. Treasury estimate that, even then, the Armey plan would lower annual federal revenue by $186 billion per year.

Other Republicans advocate retaining limited deductions for mortgage interest payments and charities and other tax breaks cherished by middle-class voters. Keeping those exceptions, though, would require pushing the flat rate higher – perhaps more than 20 percent – to avoid widening the deficit.

Though they are trailing far behind in the race to put their ideas on the national agenda, supporters of the two main alternatives to the flat tax are hardly throwing in the towel. House Ways and Means Committee Chairman Bill Archer (R-Tex.), who advocates taxing people based on what they spend – a consumption tax – rather than on their income, insists that the tax reform debate is just beginning.

"People who get exposed to the alternatives come down in major proportions in favor of a consumption tax," he said. "I'm convinced that in the long run, it will predominate." Archer contends that a consumption tax will triumph over the flat tax, mainly because it would go farther in limiting the power of the Internal Revenue Service.

So far, neither Archer nor Sen. Richard Lugar (R-Ind.), who has also called for a national sales tax, have put forth detailed proposals.

Flat tax backers contend that any effort to adopt a broad-based consumption tax will suffer from rates steep enough to frighten even the most ardent tax reformers.

In a scathing critique of the national sales tax in a recent issue of the American Enterprise Institute's bimonthly magazine, National Center for Policy Analysis fellow Bruce Bartlett argued that, to collect enough revenue to replace the current income tax system, a sales tax would require a rate of at least 19 percent.

That could rise to 32 percent, Bartlett said, if hard-to-tax items such as business investment, government purchases and exports also were excluded.

Some conservatives claim the rate could go higher still should a consumption tax offer rebates for the poor and elderly, and exempt basic items such as food and medicine, as some have advocated. When state and local sales taxes are factored in, the total rate could reach 40 percent, some critics said.

In contrast to Lugar and Archer, Sens. Sam Nunn (D-Ga.) and Pete Domenici (R-N.M.) have a detailed plan for an alternative consumption tax approach they favor. The centerpiece of their proposal is the creation of "unlimited savings allowances" that would enable families to deduct money saved – whether in the form of savings accounts, stocks and bonds or start-up capital for a small business. Some analysts describe the Nunn-Domenici proposal as a giant individual retirement account.

In contrast to the flat tax, the Nunn-Do\menici plan seeks to raise about as much from each income group as does the current income tax by imposing steeply graduated tax rates, with a top rate of 40 percent. It would preserve existing deductions for mortgage interest and charitable contributions.

But many GOP political analysts argue that the two senators' "U.S.A. Tax" proposal is so complicated that not even veteran policy wonks, let alone ordinary voters, can fully understand it.

Supporters of the U.S.A. Tax counter that it will win converts over time precisely because it has been so carefully developed. They are betting the proposal eventually will be recognized as offering a way to promote savings – Americans would not be taxed on money they didn't spend – and spur growth without the transitional problems they say will bedevil the flat tax.

Whatever its strengths and weaknesses as public policy, the flat tax has the clear advantage in terms of political resources. In addition to its growing list of advocates in Congress, the flat tax claims support in many other influential conservative quarters.

"So far, this thing is tracking exactly like Kemp-Roth," Americans for Tax Reform President Grover Norquist said, referring to the unexpectedly swift ascent of the bold tax reductions in the 1980s that were originally proposed by then-Rep. Kemp and Sen. William V. Roth (R-Del.).

Both ideas started with support from a small number of conservative ideologues, were picked up by major conservative think tanks, won popularity with the party's firebrand junior legislators, then gained grudging acceptance among the party leadership and presidential aspirants.

The flat tax has received intellectual backing from top analysts at leading conservative think tanks such as the Heritage Foundation and the American Enterprise Institute. The Cato Institute, which is helping draft a consumption tax, is a notable exception to the trend.

It also has been heavily promoted by advocacy groups such as Citizens for a Sound Economy, which has spent half a million dollars so far this year touting the virtues of the idea to voters, legislators and the media, said communications director Brent Bahler.

In advertising campaigns targeting key electoral districts and the home towns of Republican presidential candidates, the group has urged voters to take the "One Minute Challenge" – use last year's tax return and a stopwatch to test whether it would take more than a minute to compute their tax bill if the Armey plan were enacted.

Bahler said the group will roll out an aggressive half-million-dollar radio campaign to promote the flat tax in the fall, but the plan is already getting extensive airplay thanks to Rush Limbaugh and other conservative talk show celebrities.

"When Rush Limbaugh is out there talking about the flat tax, that's more important than 20 think tanks here in Washington writing Op-Ed pieces for some local paper," Heritage's Mitchell said.

© Copyright 1995 The Washington Post Company

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