Newspaper article St Louis Post-Dispatch (MO)

Flat Tax Could Upend Business-Tax System

Newspaper article St Louis Post-Dispatch (MO)

Flat Tax Could Upend Business-Tax System

Article excerpt

The critic H.L. Mencken once wrote that "for every problem, there is a solution which is simple, neat and wrong." He must have had the flat tax in mind.

The idea is seductive: a tax system so easy that you can file your return - individual or business - on a postcard.

You've probably read that the flat tax rains more riches on the rich, socks the working poor and shows mixed results for the middle class. At the rates proposed (16 percent to 19 percent), the federal budget deficit goes up. As for the promise that the tax cut will grow us out of the deficit - well, "deja-voodoo economics," says Deputy Treasury Secretary Lawrence Summers.

What has gotten little attention is the tax's effect on businesses. Many would pay higher taxes, others would escape tax-free. "The loopholes . . . are large enough to drive a truck through," says tax lecturer Vern Hoven of Missoula, Mont.

Consider this proposed change in law: When a business makes a capital expenditure (on land, buildings or equipment), the cost can be deducted right away. You'd no longer write it off over several years.

Under that rule, you might buy a $1 million farm that nets $100,000 a year on grain. That $1 million cost - taken upfront - will shelter your income for 10 years. And what would you do in the 11th year? "Buy another farm," Hoven says.

Now take an accountant netting $100,000. Once he's bought a computer, he has no noticeable capital expenditures. So he can't offset his income like the farmer can.

Result: capital-intensive businesses would probably pay little or no tax. Service businesses, by contrast, would have to pay their tax in full.

That is, unless the service business had plenty of ready cash. For example, take a rich accountant who's due $400,000 from his partnership. He could buy a $400,000 rental condo and immediately deduct the cost from his business income. He'd wind up with a capital asset and avoid the income tax. If he buys the condo with a mortgage, he'll have plenty of cash left over to pay his bills. …

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