Flat and simple, stupid - flat tax

National Review, Feb 26, 1996 by Stephen Moore

GO to one of the Republican presidential-primary debates in Iowa or New Hampshire these days and you're likely to see a hockey game break out. Smack in the center of the chaos is, of course, Steve Forbes, with his populist 17 per cent flat tax. "Reducing the culture of power in Washington," preaches Forbes, "must begin with overturning the tax system."

What is so dispiriting is that to derail this upstart millionaire, virtually the whole GOP field is now trash-talking the flat tax. Dole, for example, grumbles continuously that the 17 per cent plan would inflate the budget deficit by $182 billion. Where did this number come from? Straight out of the political office of the Clinton Treasury Department. Now there's an unimpeachable source.

Or take Lamar Alexander, who has soared to 5 per cent in recent polls. Alexander appeared on Face the Nation after the Iowa debate ridiculing the flat tax as "a truly nutty idea." "I think it would be a disaster for America" and would "cause a real-estate crash." Oh, please, Lamar. Die with dignity.

Equally disappointing have been Gramm and Buchanan, who have resorted to the Gephardtian class-warfare arsenal. The flat tax is a "giant tax cut for the rich," warns Buchanan, "and a tax hike for the middle class." The plan looks as if it was "worked up at the yacht basin." Meanwhile, Gramm lampoons Forbes regularly as "Richie-Rich." "The toughest challenge Steve Forbes ever faced in life," quips Gramm's campaign manager in New Hampshire, Jim Courtovich, "was when he was a sperm swimming upstream to the egg." Ahh, there's nothing like a fight within the family.

But while Forbes seems to be holding up nicely, the worry among supply-siders is that the flat tax is taking a merciless beating. "This is the first time I've ever seen politicians attack the message to destroy the messenger," laments House Majority Leader Dick Armey, the original torchbearer of the flat tax. It was his postcard plan that was adopted almost to the letter by Forbes. In a January 22 letter a fuming Armey lectured Lamar Alexander to "restrain your overheated rhetoric . . . on the flat tax." Armey called Alexander's flat-tax criticisms "bizarre" and "distorted." "Virtually every prominent public-finance economist in this country," writes Armey accurately, "including a number of Nobel laureates, believes the flat tax would lead to greater economic growth and higher living standards."

Armey is right to be dismayed over the pummeling of the flat tax. Flat taxers have been happily thinking that this issue could help carry the GOP to another electoral stampede in 1996. But as Washington Post political reporter David Broder correctly calculates: "Every dollar that Dole, Gramm, Buchanan, and Alexander spend trashing Forbes's flat tax is a boon to the Democrats."

Yet for all the internal warfare, the best-kept secret in the presidential sweepstakes is that Buchanan, Gramm, and yes, even Bob Dole have endorsed a flat tax of one sort of another. Gramm, for example, wants a 16 per cent flat tax that retains the levy on so-called capital income, while preserving the mortgage-interest and charitable deductions. Otherwise Gramm's plan is a virtual carbon copy of Forbes's plan. Dole hasn't endorsed any particular plan, but in January he embraced the report of Jack Kemp's commission, which recommends a generic flat tax. Three lesser candidates -- Richard Lugar, Alan Keyes, and Bob Dornan -- want to replace the income tax with a national sales tax.

Still, if the anti-flat-tax rhetoric seems to be overheated now, wait till the Olympic-caliber class-warfare demagogues, like James Carville, join the assault. Here then is a rundown of major flat-tax issues, and some unsolicited advice about how to resolve them.

"Tax cut for the rich." On this issue, Phil Gramm is right and Steve Forbes is wrong. The core principle of the Armey - Forbes plan is that all income should be taxed once, and only once. This is why Forbes eliminates the capital-gains, interest-income, and dividends tax. These capital taxes are already collected through the business tax. But our current tax system double-taxes labor income also -- once with the personal income tax, and again with the payroll tax. Under the Forbes plan capital income would be taxed once, at the business level, but labor income would still be taxed twice -- at the 17 per cent income-tax rate and at the 15 per cent payroll-tax rate. By contrast, under the Gramm plan, because all income would be taxed, Ross Perot and Archie Bunker would each pay 16 per cent tax on their postcard returns. Flat-tax purists, especially Dick Armey, loathe the Gramm approach, but the truth is that the investment community would do cartwheels down Wall Street for a 16 per cent capital-gains tax. And the Gramm plan gives the middle class a lower rate and a lighter burden. Everyone's happy -- except Dick Gephardt.

"Increases the deficit." Sometimes even Republicans -- particularly Bob Dole -- need to be reminded: the great fiscal lesson of the 1980s is that lower tax rates often produce more, not less, revenue. After Reagan's tax cuts, federal revenues doubled, from $530 billion in 1980 to $1,031 billion in 1990. Tax revenues climbed at a 20 per cent faster clip in the 1980s than in the 1990s, which saw two world-record tax increases.