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Flat Out Gamble On Taxes

News: Analysis & Commentary: TAX POLICY


The flat tax is key to the GOP's '96 agenda. Politically, it's a tough sell

Mired in the actuarial agonies of budget-cutting, Republicans are about to revive the pro-growth optimism that was a hallmark of party idol Ronald Reagan. On Jan. 9, a commission led by former Housing Secretary Jack F. Kemp, an apostle of supply-side economics, is expected to endorse a flat income tax that promises to promote both growth and investment.

The commission will place the Republican Party squarely behind a radical overhaul of the tax code. Indeed, the GOP hopes that tax reform, with its accompanying IRS-bashing and pro-growth rhetoric, will form the centerpiece of its 1996 campaign. But the Kemp panel also will trigger a ferocious debate. The combatants: Democrats committed to preserving tax progressivity and curbing corporate welfare vs. Republicans bent on applying a one-size-fits-all rate to all paychecks, whether earned by a secretary or a corporate tycoon.

The panel draws its clout from its sponsors. The brainchild of Senate Majority Leader Bob Dole (R-Kan.), the group is composed of 14 members selected by Dole and House Speaker Newt Gingrich (R-Ga.). It also has won a big push from the rise of GOP White House contender Malcolm S. Forbes Jr. The publisher has ridden his advocacy of a 17% flat-tax proposal--backed by an estimated $20 million in advertising--to a surprising No.2 spot in Iowa and New Hampshire polls.

Kemp's report will offer Republicans three guiding principles for reform. It will call for a single rate on earned income, an end to the double taxation of corporate profits and dividends, and a new congressional requirement that future hikes in the tax rate receive a "supermajority"--a vote by 60% or more of both houses of Congress--to pass. For multinationals and exporters, the panel also might suggest that the Treasury tax only U.S. income and sales, wiping out a rat's nest of regulations on taxing foreign-source income.

The report is silent about just what the new flat-tax rate should be, and it skirts the politically charged issue of whether Americans would have to give up two of their cherished write-offs: deductions for home-mortgage interest and charitable contributions. Left on his own, Kemp would have provided many of the key details. But Dole, the GOP Presidential front-runner, urged Kemp to stick to generalities to deny opponents an inviting target. Grouses a Senate GOP aide: "If you stick in a rate, the debate quickly becomes `What's your deficit?' and `Who's going to pay more?"'

Instead, Kemp will lean heavily on attacks on the current tax system, indicting its complexity, its waste, and the befuddled incompetence often displayed by the Internal Revenue Service. "Our No.1 goal is to make sure that everyone knows that the tax system we've got now is broken," says S. Jackson Faris, president of the National Federation of Independent Business and a member of Kemp's panel.

That will draw cheers on the radio-talk circuit, where GOP activists have been beating the tax-overhaul drums for two years. "There really is a strong feeling across the country that the time has come to start over with a new tax code," says Kemp panelist Shirley D. Peterson, a former IRS commissioner and now president of Hood College.

Not all Republicans share Kemp's enthusiasm for the flat-tax fix. House Way & Means Committee Chairman Bill Archer (R-Tex.) will push his own national sales tax alternative, despite the lukewarm reception it got from the Kemp panel. Other Republicans worry that the flat tax is vulnerable to attacks by President Clinton as another GOP giveaway to rich investors.

Indeed, the White House can draw ammunition from dissenting GOP economists, who calculate that some flat-tax proposals will boost levies by 25% for working-class families. "If you're watching your neighbor pay less tax because he's getting most of his income from interest and dividends, the flat tax doesn't look so great," warns GOP strategist William Kristol. The flat tax "is not the magic bullet Republicans thought it would be."

TOUGH SELL. To win over the public, GOP reformers will have to make the case that the current system overtaxes capital income. In accounting terms, that's a no-brainer: Corporate profits are taxed at the corporate level, then again when they're paid to individuals as dividends or capital gains. "We've got to eliminate the bias against savings in the current code," says Kemp panelist Carroll A. Campbell Jr., president of the American Council of Life Insurance.

But easing that double burden, as GOP flat-tax or sales-tax plans propose, will give big breaks to savers and investors at the expense of wage-earners. Politically, that's a tough sell. The middle-class whammy could be doubled if the flat tax eliminates all itemized deductions. The 17% flat tax backed by House Majority Leader Richard K. Armey (R-Tex.), like Forbes's, gets rid of write-offs for mortgage interest, state and local taxes, and charitable gifts.

Although only 27% of taxpayers actually claim such breaks, GOP pollsters warn that flat-tax support plunges when surveys explain that reform may eliminate deductions. Taxpayers "are very parochial in what they want to protect," says Republican pollster Anthony Fabrizio. Kemp's report will try to put the best face on the touchy issue: It won't recommend which deductions to keep, but will note the tradeoff between keeping deductions and cutting the tax rate. Armey would have to raise his flat-tax rate from 17% to 20% to retain the mortgage-interest deduction without losing revenue.

Flat-tax activists, delighted by the backing of the GOP's top leaders, are certain that their plans can overcome any doubts about fairness to the middle-class. "We're finally bringing the debate to Washington--the only city in America where the flat tax isn't popular," exults Grover G. Norquist, president of Americans for Tax Reform, a grassroots lobbying group. Congress' tax-writing committees will launch hearings on overhaul in the spring--provided, of course, that the battle over balancing the federal budget is finally cleared away.

The real battleground, though, will be out on the hustings. For GOP candidates running against Washington, there's no juicier target than the IRS. And those with a supply-side bent can trumpet the pro-growth potential of a simpler tax system with flat rates and fewer loopholes. Republicans hope that a 1996 sweep of Congress and the White House will give them a clear mandate to overhaul the federal tax code in 1997.

Perhaps. But if Republicans plan to march behind the banner of a pure flat tax, they'll have to ask the middle-class to ignore their calculators, overlook their doubts, and vote against their pocketbooks. That's a tall order--and it makes the flat tax a huge gamble for the GOP.By Mike McNamee and Howard Gleckman, with Lee Walczak, in WashingtonReturn to top

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