GOP Panel Calls for Switch to Flat-Tax System

WASHINGTON —  Fueling a growing national debate over taxes, an influential Republican panel said Wednesday that the entire U.S. tax code should be thrown out and replaced with a drastically simplified version that features a single income-tax rate and few deductions.

“We believe the current tax code cannot be revised, should not be reinvented and must not be retained,” concluded the report by the National Commission on Economic Growth and Tax Reform, headed by former Housing and Urban Development Secretary Jack Kemp.

Revealingly, however, Senate Majority Leader Bob Dole of Kansas, the clear front-runner in the Republican presidential race, offered only a carefully phrased and artfully nuanced endorsement of the flat-tax idea. Dole expressed sympathy for taxing all income at a single rate, but stopped well short of an unequivocal embrace.

Under the sweeping flat-tax proposal, workers would be able to deduct payroll taxes and the levy on capital gains would be eliminated. But in a conspicuous bow to anxiety in Republican circles over the flat-tax idea’s political viability, the commission left many details vague and did not recommend a specific rate for a proposed levy.

It also left open the question of whether to retain the popular deductions for mortgage interest and charitable contributions.

Dole said he had “no problem” with taxing all income at a single rate, but he also indicated he could only support a flat-tax plan that did not increase the federal budget deficit or raise taxes on the middle class. Even Dole aides acknowledge that no existing flat-tax proposal has met those conditions--and some analysts believe that no conceivable single-rate plan ever could.

“Particularly if you are talking about a tax like Kemp is [proposing], I think the answer is that it is not doable,” said one Treasury Department official.

The report from Kemp, a principal architect of the supply-side tax cuts of Ronald Reagan’s presidency, arrives even as the flat tax is emerging as the most divisive issue in the race for the Republican presidential nomination. While millionaire publisher Steve Forbes has emphasized his support for a purist version of the flat tax in his rapid ascent in the polls, several of the other GOP contenders are intensifying their attacks on his proposal as unfair to the middle class and likely to swell the deficit.

“This campaign is ending up being a referendum on the flat tax,” said Mark Merritt, the communications director for GOP presidential candidate Lamar Alexander.

In pushing for a flat tax, Kemp’s panel argued that it would provide greater fairness and simplicity in the tax code, and said it would pay off in vastly greater economic growth and job creation.

Flat-tax proponents maintain that the current system is so inefficient that it saps much of the economy’s vitality, financing an army of tax-avoidance specialists but eroding growth. “We cannot meet our goals for this country and have a growth rate of 2.3% or 2.4%,” Kemp said.

The panel recommended requiring a two-thirds vote of Congress to raise income taxes, eliminating the capital-gains tax and abolishing the estate tax. It strongly suggested that income from savings also be exempted from taxation.

At the same time, it suggested a “generous personal exemption” in order to ease tax burdens for moderate-income workers--and to shield the flat tax from criticism that it favors the well-to-do. The report did not specify an income level for the personal exemption.

Kemp told reporters that a flat-tax rate should be set no higher than 19% or 20%, although his report studiously omitted such precise language.

Both Dole and House Speaker Newt Gingrich (R-Ga.) said Congress would begin examining the Kemp report, though most observers believe that Republicans will not make a serious effort to rewrite the tax code until after the 1996 presidential election.

Kemp’s commission pointedly did not endorse the most widely discussed and ideologically pure flat-tax proposals--the virtually identical plans offered by Forbes and House Majority Leader Dick Armey (D-Texas).

Both Forbes and Armey would exempt from taxation roughly the first $35,000 in annual income for a family of four, and tax all remaining income from wages at 17%. Forbes and Armey would also exempt all income from interest and capital gains and eliminate virtually all existing deductions.

Such plans would lose nearly $140 billion in their first year, the Treasury Department calculates. Kemp’s proposal could be even more expensive. Kemp’s report left open the possibility of retaining the mortgage and charitable deductions that Armey would eliminate. It also suggested allowing workers to write off the cost of their 7.6% payroll tax for Social Security and Medicare.

As a result, some advisors to the commission believe that Kemp’s vision might require a flat-tax rate of 24% to 26% to produce as much revenue as the existing system. Such a rate could actually raise taxes on many middle- and upper-middle-income families. Although the current system levies taxes up to 39.6% on some income, the typical taxpayer currently pays income tax at a much lower average rate. A typical family earning $50,000 per year, currently would pay roughly 13% of their income in federal income taxes.

But many flat-tax proponents dismiss pessimistic estimates of how high a rate would be needed to avoid increasing the deficit. They contend that their approach would spark so much economic activity that tax receipts would expand dramatically.

“If we are successful, the added growth will provide the tax revenues to pay for a portion of the change in the tax law,” the commission wrote, in an echo of supply-side arguments during the 1980s. Kemp maintained that a flat tax could double the rate of economic growth.

For all of Wednesday’s hoopla, many Democrats believe that the flat tax is a tempting target. “The flat tax is nothing but a scam to push off the tax burden from the rich to the poor,” said Rep. Sam Gibbons (D-Fla.), senior Democrat on the House Ways and Means Committee. “That is simply un-American.”

More surprisingly, the idea has also generated rising dispute in Republican circles--largely for the same reasons. Dole’s tightrope response to Kemp’s report reflected the complex politics of the issue inside the conservative camp.

On the one hand, the notion of sweeping away the existing tax code has a powerful appeal to many Americans--particularly the right-leaning voters who predominate in many Republican primaries. Many conservative activists insist that support for a single rate is the litmus test of Dole’s commitment to the tax reform cause.

If Dole doesn’t endorse a single rate, “that gives Forbes a big opening, and Forbes is going to keep the pressure on,” said James P. Lucier, director of economic research with the conservative Americans for Tax Reform group.

Against those pressures, many Dole aides worry that the most ideologically pure versions of a flat tax would either raise taxes on the middle class or balloon the federal deficit--and thus become a leaden electoral liability in a general election against President Clinton. Pressure from Dole’s advisors--who feared producing a specific blueprint that Clinton could attack--was a principal reason for the paucity of details in the Kemp report.

While Dole praised the flat-tax idea on Wednesday, he warned on a campaign swing through North Dakota one day earlier that “there’s nothing President Clinton would like more” than for Republicans to embrace the most sweeping flat-tax plans--such as Forbes’.

Injecting an unaccustomed note of class warfare to the GOP presidential race, several of Forbes’ rivals argue that his plan would hurt the middle class and provide an undeserved boon to the wealthy.

Also on Wednesday, Sen. Phil Gramm (R-Texas) proposed a competing 16% flat tax that would tax investment income and retain the deductions for mortgage interest and charitable deductions.

Alexander has deviated even further from the core flat-tax idea. He says the final system should retain not only those popular deductions but also a higher tax rate for upper-income filers.