A Flat Tax Could Boomerang On The Republicans

The Republicans are still picking themselves up after President Clinton pummeled them with charges that they're trying to hike Medicare premiums on seniors to finance tax cuts for the rich. But as the GOP looks beyond the budget battle to its next economic crusade, strategists fear the party is leading with its chin again. The new "hit me" sign: the flat tax.

Come January, a GOP commission headed by former Housing & Urban Development Secretary Jack F. Kemp is likely to endorse a simplified tax-overhaul plan with a single rate and few deductions. Hoping to capitalize on voter disgust with the Internal Revenue Service and incomprehensible tax laws, the GOP had visions of a surefire issue for the 1996 campaign. Instead, a growing number of Republicans are conceding that a pure flat tax will hike levies by up to 25% on the middle class while giving a huge break to the rich.

That's bad news for GOP Presidential front-runner Bob Dole, who put ardent tax-cutter Kemp in charge of the commission to mollify party supply-siders. But as Kemp moves toward a detailed blueprint, his sponsor is beginning to sweat. Dole, never an ideological tax-cutter, would prefer a vague endorsement of a "flatter, fairer, and simpler" tax code.

Other GOP Presidential candidates, including former Tennessee Governor Lamar Alexander and even zealous supporter Malcolm S. Forbes Jr., have voiced reservations. Still, the political drawbacks aren't stopping Kemp, co-author of the 1981 Reagan tax cuts. He packed his panel's staff with supply-siders who back a pure flat tax such as one put forward by House Majority Leader Richard K. Armey (R-Tex.). "It's not too bold to predict that they're leaning toward a flat tax modeled on Armey's," says panel adviser Stephen Moore, a Cato Institute economist. Kemp aides stress, however, that the group may preserve some deductions.

At first blush, a simple, one-rate tax looks like a winner. "Every time someone says `flat tax' in our focus groups, people start going `Yeah, yeah!"' says pollster Frank I. Luntz, whose surveys shaped the GOP's Contract With America. Armey's plan features a single 17% rate on wages, salaries, and corporate profits. Interest, dividends, and capital gains paid to individuals would be tax-exempt, but all deductions--even home-mortgage interest--would be dumped.

PAYING 25% MORE. That's where economics and politics part. The middle class doesn't want to lose a sacred deduction that props up home values. Wiping out deductions for state and local levies would punish such high-tax areas as the Northeast and California. And with investment income exempt from taxes, "you've guaranteed a tax increase for workers, especially middle-income workers," says John Mueller, a former Kemp aide who's now chief economist at investment advisers Lehrman Bell Mueller Cannon. By Mueller's calculations, voters making $20,000 to $30,000 would pay 25% more in combined federal taxes, while those earning $50,000 to $75,000 would see their taxes rise 10%. Meanwhile, taxes would fall almost 40% for those earning more than $200,000.

Supply-siders, who have never apologized for trickle-down economics, fume over such arithmetic. "That's the kind of static analysis that's failed in the past," says Alan Reynolds, the commission's economic research director. He argues that faster economic growth would override the edge for the rich.

Such ideological intransigence makes Dole's staffers nervous. "Right now, the idea should be to indict the current tax system and talk about principles for reform--not to bog down in details," says a campaign aide. But Kemp seems bent on setting up a "framework" for radical reform. For Dole, ever the pragmatist, the challenge is to keep that framework from turning into a political cage.

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