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

Article excerpt

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. …