Details Divide GOP’s Flat-Tax Boosters : Congress: Split centers on retention of mortgage interest, charitable deductions. Both sides agree there’s no way to predict reform’s effect.

A sharp division emerged Wednesday among congressional Republicans over their ambitious plan to replace the current tax system with an across-the-board flat tax, an issue that the GOP hopes to use in the 1996 presidential campaign.

The lines hardened at a hearing before Congress’ Joint Economic Committee, foreshadowing the many obstacles confronting supporters of such a tax, including House Majority Leader Dick Armey (R-Tex.) and Sen. Arlen Specter (R-Pa.), a candidate for the GOP presidential nomination.

While the two agreed on the need for a flat tax, they parted company on the details.

Specter’s proposal would partly retain two politically popular deductions--for home-mortgage interest, capped at $100,000, and for charitable contributions, capped at $2,500. He said it is “just a practical necessity” to retain the two deductions, arguing that even with them, a flat-tax bill is “going to be very, very tough legislation to pass.”

But Armey insisted that there must be no deductions, saying that reformers must adhere to a simple motto: “Stay flat or die.”

Flat-tax proponents conceded a significant point on Wednesday: There are no economic or behavioral models that can reliably predict the effects of a flat tax.

“Nobody--not the Congressional Budget Office, not the Office of Management and Budget, not the Treasury Department, nor the Joint Committee on Taxation--has predicted the dynamic potential of the flat tax,” noted Sen. Connie Mack (R-Fla.), chairman of the Joint Economic Committee and a flat-tax advocate.

Thus Wednesday’s hearing served to underscore the nature of the emerging debate: Both proponents and opponents of the flat tax will be seeking adherents who must become believers largely as a matter of faith.

The absence of empirical evidence is precisely what troubles many skeptics, among them Rep. Kweisi Mfume (D-Md.), a former chairman of the Joint Economic Committee, who nevertheless conceded Wednesday that he finds the flat-tax proposal “interesting.”

Also testifying in favor of the flat tax was Jack Kemp, a former Republican congressman who served as secretary of Housing and Urban Development in the George Bush Administration. Kemp is heading up a nine-member GOP Commission on Economic Growth and Tax Reform that is expected to make specific recommendations on the flat tax and other reforms this fall.

A flat tax is just that. It would impose the same rate on everyone, ending the maze of rates, exemptions, depreciation schedules and deductions--as well as double taxation of earnings on dividends and inheritances.

Both Specter and Armey would set the flat tax rate at 20%, although Armey would reduce that rate to 17% by the third year. By then, Armey argued, the flat tax will have spurred such an economic spurt that a broadened tax base would provide sufficient funds to sustain the government’s revenue needs even at the reduced rate.

Armey predicted that the flat tax would stimulate unprecedented growth--leading to what he called “a world” of such robust economic activity that a home-mortgage-interest deduction would “not be necessary or precious.”

Skeptics, however, argued that the rate might have to be 25% or more to avoid adding to the deficit. Others, including President Clinton, have said that the flat tax could give a greater break to the wealthy at the expense of the middle class and the poor.

Another key difference between Specter’s and Armey’s proposals is the minimum income level before families must pay the tax. Specter would exempt a family of four with less than $25,500 in annual income; Armey would set that level at $36,000.

Arguing against the need to preserve home-mortgage-interest deductions, Armey cited a study by two flat-tax proponents that projected a $7,600 increase in annual income for a family of four simply as a result of the conversion to a new tax system.

But such projections did not alleviate the concerns of Sen. Robert F. Bennett (R-Utah), who said that elimination of the mortgage interest deduction could devalue homes by 10% to 15%. If so, Bennett added, “I don’t think Congress can stand the backlash.”