It’s a ‘Flat’ Year for Tax Reformers : Notion of a single rate is appealing, but care must be taken

It’s true, as Justice Oliver Wendell Holmes Jr. observed almost a century ago, that “taxes are what we pay for civilized society.” The challenge lies in finding the fairest possible way to raise the revenue to pay for such a society. The hot idea this year for levying taxes that cause taxpayers the least pain focuses on a single-rate “flat” tax on income and the elimination of virtually all deductions. Several Republican presidential candidates have proposed their own plans. Now a 14-member commission chaired by former Housing Secretary Jack Kemp and appointed last May by the Republican congressional leadership has made its recommendations.

In common with others, the Kemp panel excoriates the present tax system with its five brackets, myriad loopholes and 437 different forms as unacceptably complex, expensive, intrusive and inequitable, a description few Americans would be inclined to dispute.

NO CONSENSUS: Like others, the commission says the system must be simplified to the point where tax returns might consist of just a few lines on a postcard. An agreeable notion. But what would the new system comprise? Here the commission chose forthrightly to waffle. It took no stand on what the single tax rate should be or whether the all-time favorite deduction for home mortgage interest should be retained. The panel ducked on these issues mainly because the GOP presidential candidates who have made the flat tax a centerpiece of their campaigns themselves cannot agree on answers.

Steve Forbes, for example, wants to eliminate all deductions while allowing fairly high personal exemptions. Phil Gramm would keep the mortgage interest and charitable contribution deductions but set his flat rate at 16%, 1% below Forbes’. Neither plan would provide sufficient revenues to fund existing programs, and neither indicates which programs should be cut to make up the difference. The calculated vagueness of the commission’s report should not, however, invite out-of-hand dismissal of its recommendations. No question about it, the current tax system is a mess, overflowing with both highly visible and obscure special-interest breaks and with an economy-retarding bias against savings and investment. The Kemp panel would scrap this system completely in favor of a single if unspecified tax rate. (Kemp himself thinks 19% would be about right.)

The panel proposes a deduction for Social Security and Medicare payroll taxes, which for many workers far exceed what they pay in income taxes; personal exemptions for lower-income workers; and an end to taxes on dividends, interest, capital gains and estates.

A COOL DOLE: Is this a feasible approach? Republican presidential candidate Bob Dole, in a tepid welcome to the commission report, said he could not back any plan that shifted more of the tax burden to the middle class or hiked the federal deficit. It’s almost certain that the Kemp panel’s proposals, in common with others that have been floated, would have one or both of these results. Politically, that makes them nonstarters.

Saying this doesn’t change the ugly facts about our present tax system. It encourages consumption when, for the nation’s economic good, it should favor savings. It is a system that sags under the weight of its inequities, from the marriage tax penalty to the favors it provides those who are rich enough or politically potent enough to command influence on Capitol Hill. It is a system that cries out for reform. The flat tax approach may be the answer. But only if it’s based on a rate that is sufficient to pay for the kind of government a civilized society needs, and only if there’s ample evidence that the new approach would be clean, reasonable and fair. A difficult goal, no doubt. But hardly unachievable.