THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saturday, January 20, 1996 TAG: 9601200027
SECTION: FRONT PAGE: A10 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 75 lines
The Kemp Commission was created by House Speaker Newt Gingrich and Majority Leader Bob Dole to devise a tax plan for Republicans to campaign on in the fall. It has now recommended sweeping changes but has also recommended the appointment of a second commission to work out details. Only in Washington.
In fact, the proposals are clear and generally unsurprising. The commission calls for a back-of-a-postcard, single-rate flat tax. It specified no rate, though Kemp calls for no more than 19 percent.
It's argued that a flat tax will eliminate cumbersome paperwork, simplifying the lives of taxpayers. But a progressive tax with a limited number of brackets could be filed on a postcard, too. It's the endless deductions, credits, loopholes and exemptions that make the current tax code millions of words long and filing taxes a nightmare.
The Kemp plan would eliminate most tax breaks but leave intact mortgage and charitable deductions. Yet Federal Reserve Board member Lawrence Lindsey - among others - notes that retaining those expensive deductions is likely to require a 24 percent rate.
A cap on the mortgage deduction could save billions. Using the tax code to encourage home ownership is one thing; using it to subsidize mansions is another.
The commission recommends requiring a two-thirds vote in Congress to raise tax rates. That might require a constitutional amendment. The touchiest political issue the commission faced was making the tax code simpler, flatter and a spur to saving and investment without massively redistributing wealth from the middle class to the wealthy.
Steve Forbes, who's running for president on a flat-tax platform, has been roundly attacked by his Republican rivals for a plan that fails this test. Lamar Alexander calls it nutty. Phil Gramm and Pat Buchanan complain that it benefits the prosperous at the expense of the average wage earner. Bob Dole, in accepting the Kemp report, insisted any reform would have to improve the lot of the middle class. Yet it is far from self-evident that the Kemp plan succeeds.
Though the commission calls for a generous standard deduction, it did not make a specific recommendation. It calls for making Social Security and Medicare taxes deductible, which would be a boon for the middle class. But every deduction comes at the price of higher rates.
And all possible benefits to the middle class are dwarfed by the huge windfall that would accrue to the wealthy. The commission proposes no tax be levied on interest, dividends, capital gains or estates. Economist Robert Eisner examined House Majority Leader Dick Armey's flat tax - a prototype for the Forbes and Kemp plans - and found that taxpayers with income less than $100,000 would pay more than at present, those with income between $100,000 and $200,000 would pay 13 percent less and those earning more than $200,000 would pay 52 percent less.
Other critics, including organizations representing accountants and actuaries, warn that abrupt changes to deductions embedded in the tax code could cost business up to $3 trillion (in lost depreciation, for instance) and might jeopardize the nation's pension systems.
The Republicans are right to call for tax reform, but the goal should be to simplify without shifting the tax burden from those most able to pay to those already being squeezed. If most deductions are eliminated, rates can be flattened without going to a single rate that would enrich the rich.
A large standard deduction to aid average taxpayers makes sense. A cap on the mortgage deduction would not cause real-estate markets to totter. Taxing capital gains only once is simple fairness. But it's a pipe dream to suppose a low rate can be achieved without adding to the deficit. The Treasury Department estimates the Armey 17 percent rate would increase deficits or require spending cuts of $139 billion a year.
Tax reform is overdue, but a simple, fair tax system is elusive. Voters - and taxpayers - need to follow this debate with great care, keep their eyes open and their hands on their wallets. Trillions are at stake. Every advocate has a vested interest. Previous reforms haven't always led to improvement. by CNB