THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, October 24, 1995 TAG: 9510240717
SECTION: FRONT PAGE: A10 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 51 lines
For many, it's been love at first sight with the idea of a flat tax. But not so fast. Some thing's that glitter turn out to be fool's gold.
Everyone wants a tax system that's less bother and that distorts markets less, but the versions of a flat tax being touted by Republican heavyweights like House Majority Leader Dick Armey may not be an unadulterated blessing.
Fortune Magazine polled 200 CEOs for its Oct. 2 issue on tax reform. It found that two-thirds of the top corporate leaders chose the 17 percent flat tax over competing plans including consumption taxes and progressive income taxes rejiggered to give greater rewards for saving and investment. Many individuals are as enamoured of the flat tax as the CEOs.
Yet Fortune got far different feedback when it talked to corporate tax experts, the fellows who actually spend their lives advising CEOs on taxing matters. It turns out that all those loopholes and special breaks a flat tax would eliminate add up.
Fortune quotes the CEO of office-temp giant Norrell who says his company's tax bill would jump 60 percent because the employee benefit deduction the company now uses would be lost. Research-heavy industries like software and pharmaceuticals would be hurt because the tax credit for R&D would also be eliminated. Chrysler's tax counsel says that eliminating deductions for interest, benefits and foreign taxes would encourage companies to manufacture in Mexico or Canada and export to the United States.
Not all the effects would be negative. Fortune calculates that aircraft, metals, machinery and lumber industries would come out winners while paper, auto, textile and apparel makers would suffer.
To individuals, the flat tax sounds like a winner. Yet if, as these examples suggest, the change would hit jobs hard in some industries, the individual might end up with no income to tax. Fortune worries that, for businesses, some $425 billion in unused depreciation could vanish overnight. Homeowners worry that the loss of the mortgage deduction could knock down home valuations 10 percent. And cities worry that lower property values could mean less revenues from property taxes.
These concerns don't mean that tax reform isn't needed. The tax code must be simplified. Rates can be flatter and tax breaks that distort markets should be carefully examined. Too many are a result of political deals rather than economic common sense. But the present system is complex and large changes can have expensive unintended consequences. Reformers should proceed with caution. by CNB