Experts See Rough Spots in Brown’s Flat-Tax Plan : Economy: Critics say the proposal could hurt the poor and the middle class. Many questions remain.

As former California Gov. Edmund G. (Jerry) Brown Jr. has moved from the fringe of the Democratic field into the midst of a three-way race, one issue more than any other has powered him forward: a flat tax rate.

“The flat tax is the single most memorable thing” that his campaign has put forward, Brown said in an interview. “People like it.”

Under his proposal, the tiered income tax rate structure would be replaced by a single 13% rate for all taxpayers. He would also impose a value-added tax--a levy on goods and services at each point of delivery--that would end up as essentially a 13% national sales tax. All deductions would be eliminated, except for home mortgages, rent and charitable contributions.

Although other issues--notably his record on the environment and his opposition to large campaign contributions--have drawn support to Brown, the flat-tax idea has been central to the iconoclastic, outsider image the former governor has adopted for this campaign.

But now, with Brown driving hard to portray himself as a friend of labor and trying to tap the votes of discontented working-class voters in next week’s Michigan primary, the flat-tax idea could become a liability.

The problem is that whatever the plan’s attraction in theory, it could in practice shift billions of dollars of tax burden off the shoulders of the richest Americans and onto the poor and the middle class, analyses of the proposal indicate.

Brown conceded that problem in an interview Wednesday, but he argued that whatever inequities the tax plan caused could be fixed by spending more money on the poor and middle class. “The way to handle social inequity is with direct expenditure programs,” he said. “Do it in a straightforward way, instead of fiddling with the tax code.” Taxes, he added, “have never been a good redistributor.”

Many economists agree with that. In practice, however, the tax code has often been used to achieve social ends--such as giving tax incentives to developers of low-income housing--because of strong political opposition to the sort of spending programs Brown advocates.

And regardless of what economists may say, Americans have grown accustomed to a so-called progressive tax system, in which tax rates increase as income increases. A system that eliminates that feature inevitably raises questions of fairness.

Consider one well-known wealthy couple--President Bush and his wife, Barbara. In 1990, they paid $99,241 in federal income tax, roughly 22% of their income. Under Brown’s proposal, their income tax bill would have shrunk to no more than $53,800 that year.

Moreover, if the Brown plan had been law in 1990, the Bushes would have been able to cut their income tax far more by taking advantage of a major potential loophole in the plan.

Because Brown would eliminate the corporate income tax, tax experts say that under his plan, the Bush family would have been able to set up a dummy corporation, transfer all their stocks, bonds and other investments to the corporation’s control and shelter their entire $255,000 in investment income, reducing their overall income tax to $20,670--a mere 4.6% of their total income.

Asked about that problem, Brown said he would “like to think about it.”

“There are a million details that you have to get into when you try to do this,” he said. “None of these are perfect, but the idea here is very powerful.”

Brown also defended the possible regressive impact of his plan by arguing that, under current law, the rich avoid paying taxes anyway.

In fact, although some wealthy taxpayers do find ways to avoid all taxes, the number is far less than commonly believed. In 1990, the Internal Revenue Service reported that out of nearly 560,000 couples with income of more than $200,000, 472 managed to avoid paying all taxes. Families with income in the top 1% paid, on average, about 27.5% of their total income in federal taxes last year, the government estimates. By comparison, a family with income at the national average paid about 18% overall.

Exactly how Brown’s plan would change those numbers is a complex matter that depends on several assumptions about how the tax burden would fall. But economists generally agree that under Brown’s plan, taxes for the rich would come down somewhat and taxes for most of the poor and some middle-class families would increase.

At least some liberal tax experts see Brown’s plan as a disaster. The Brown proposal “would be the best thing for the rich and powerful since Andrew Mellon was secretary of the Treasury under Calvin Coolidge,” said Robert McIntyre of Citizens for Tax Justice, a liberal and labor-oriented group.

McIntyre estimates that Brown’s plan would lower average taxes for the wealthiest 1% of Americans from 27.5% to 13.8%. Overall taxes on the poorest 20% of Americans would rise from 6.7% now to 23.9% under Brown’s plan, McIntyre claims.

Brown disputes those numbers but conceded that his campaign has no detailed estimates of how the plan would hit different income groups.

One key issue in deciding how the plan would affect any given group of taxpayers involves Social Security taxes.

Social Security and Medicare payroll taxes now consume 7.65% of each worker’s wages up to $55,000. On top of that, employers also pay a 7.65% payroll tax. Brown argues that companies in effect pass along all of that tax to workers, paying them less than they would if the payroll tax did not exist. Because of that, he argues, workers actually pay a Social Security tax of 15.3% in addition to their income taxes.

Brown’s tax plan, which eliminates the Social Security tax, would appear to save most workers at least some money under that scenario.

But few economists accept that argument. Most agree that workers indirectly pay some portion of their employer’s payroll tax. But in most cases, factors such as union contracts, minimum-wage laws and competitive pressures prevent companies from passing along the full burden of payroll taxes to workers. Instead, companies pass along at least some of the tax costs either to their customers or stockholders.

An additional question about Brown’s plan involves the amount of revenue raised. Brown expects his value-added tax to raise much more money than past studies of such taxes have indicated is possible. Tax experts say Brown’s plan could pull in more money because of the way it is structured, but that is uncertain.

The value-added tax, like all sales taxes, would hit lower-income families harder than the wealthy. Low- and middle-income families spend nearly all the money they take in, thus subjecting nearly all their income to sales taxes. Wealthier families save more of their income, thereby avoiding sales taxes.

Brown’s plan, although simpler than the current tax law, would not end the complexity of the IRS. Although Brown would eliminate almost all deductions, much of the tax code centers on defining income, which Brown’s plan would not change.

Nonetheless, Brown’s plan does offer some major changes over the current tax system. It would replace virtually all existing federal taxes--the federal income tax, Social Security tax, corporate income tax, estate and gift taxes and such smaller levies as the hazardous waste “Superfund” tax and the luxury tax on yachts and airplanes--with two levies, a move that most economists agree would promote economic efficiency.

If efficiency improves, the economy will grow faster, Brown argues. “And as you generate more wealth, you’ve got more to work with,” he said.

Many tax experts have proposed either a value-added tax or a flat tax as a replacement for the current tax system. But Brown is the first to advocate doing both, said Barry Bosworth, an expert on federal tax and spending policy who is part of the Brookings Institution in Washington.

Exactly who developed Brown’s plan remains mysterious. Although his campaign circulates copies of a 12-page paper describing the tax plan, campaign officials will not say who wrote it. “The person who was helping the governor on that prefers not to be contacted,” Brown spokesman Tom Pier said. “We’re not to release the name.”

Asked about that, Brown denied that his campaign wanted to hide anything, but he also refused to name the author of his plan.

Brown’s income tax plan shares some features of a widely circulated plan prepared more than a decade ago by two economists at Stanford’s Hoover Institution, Robert Hall and Alvin Rabushka. But Brown’s plan differs markedly from the Hall-Rabushka proposal. Brown did say he had consulted with economist Lester Thurow of the Massachusetts Institute of Technology, a longtime supporter of value-added taxes.

Times staff writer Alan Miller contributed to this story.