IS THIS TAX FLAT UNFAIR?

Monday, Jan. 29, 1996 By DAN GOODGAME/WASHINGTON
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IF THE FLAT TAX WERE A PERSON, it would be a little like Steve Forbes: straightforward and artless on the outside, more complex on closer examination. The political appeal of Forbes' flat tax--a single, 17% rate on all income above a generous personal exemption, and no deductions--lies in its apparent simplicity and its promise to close loopholes for the wealthy and well connected. The proposal has economic appeal as well: a simpler tax code could boost middle Americans' stagnant incomes, in part by freeing much of the $80 billion-plus that individuals and businesses now spend each year on tax compliance and avoidance.

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But the spareness of Forbes' flat tax is deceptive. Yes, taxpayers would pay a single rate on their income above a certain threshold: for example, above $36,000 for a family of four. (And families below that threshold would pay no income tax.) But it is almost impossible to sort out fully the economic burdens that would result from the system's new rules. This much seems clear: the scheme Forbes is pushing in his television ads looks as if it would either swell the federal deficit or raise taxes on middle Americans while bestowing extra riches on the rich.

The public fascination with Forbes' plan is based on at least one large misconception: "People think that the flat tax, by closing loopholes, will make the rich pay more," populist Republican analyst Kevin Phillips observes. Voters sometimes bluntly tell Forbes that they like his tax plan because it would ensure that rich people like him, with fancy lawyers and lobbyists and accountants, paid at least as much as the average taxpayer. In fact the rich already pay more. The Joint Committee on Taxation, which is controlled by Republicans in Congress, says the best-paid 1% of Americans, who declare more than $219,770 in annual income, fork over 27% of it to the irs, in contrast to 5% paid by Americans earning the median income of $32,364. Forbes says he knows these numbers. But rather than correct his supporters, he nods and flashes that endearing smile.

As Forbes readily concedes when he is questioned, his flat tax would deliver a double windfall to the wealthy: it would slash taxes on top salaries more than a third and eliminate taxes on savings and investments, including dividends, interest on savings, capital gains, inheritances and Social Security benefits. A family earning $1 million a year, for example, would save $168,836 in taxes under the Forbes plan--a cut of 68%. Pollster Frank Luntz, who market-tested the House Republicans' Contract with America, says his surveys and focus groups show that middle Americans don't mind if the wealthy get a tax break as long as they get one too. Forbes agrees, and claims, "Everyone gets a tax break with the flat tax."