US wealthy bank on fashion for flat tax

DAVID USBORNE

New York

When Jerry Brown, the former California Governor, ran with the idea in the presidential race four years ago, they said he had finally lost his senses. Suddenly it is the idea that no politician dare ignore: replacing America's labyrinthine tax code with a so-called flat tax, with one rate for all.

Carrying the banner this time is the magazine tycoon Steve Forbes. With his promise that with a flat tax all Americans could fit their annual tax declarations on a postcard, he finds himself polling second behind Senator Bob Dole to be this year's Republican nominee. Tax reform, if not revolution, is threatening to become a pivotal issue of the presidential season.

Thus yesterday, a Republican commission set up by Bob Dole and headed by another former presidential runner, Jack Kemp, came out swinging for a single-rate system, if not quite the model advocated by Mr Forbes. Phil Gramm, another Republican contender this year, also spelled out his backing for a form of flat tax yesterday. Even the White House this week said it is studying reforms that involve "flattening tax rates".

The beauty of the Forbes plan is its simplicity. The current five-rate tax code, ranging from 15 to 39.6 per cent, would be replaced with a single rate of 17 per cent for all personal income above $36,000 (pounds 23,530). Businesses would also pay a 17 per cent rate on the difference between their earnings and their expenses. That, essentially, would be that. No tax would be paid on income from investments, stockholdings or asset sales, while traditional deductions, for instance for mortgage payments, would be ditched.

The Forbes plan would amount to the biggest leap into the fiscal unknown undertaken by an industrialised country.

Its attractions, aside from the postcard gimmick, include its impact as a disguised consumption tax. Because income from investments would be tax-free, Americans, famous as chronically bad savers, would be encouraged to spend less and put aside more. That, in turn, would release more and much cheaper capital for businesses.

But so pure a flat tax raises serious problems, fiscal and political. It would almost certainly mean less money for the government. Ending mortgage deductions, a sacred cow for the middle class, could, by some estimates, depress house prices by 15 per cent. And it is an idea that looks fabulous to the fabulously rich, many of whom do not earn salaries but live on returns from investments. Their existences would become tax-free.

"It appears to have been drafted on the back of a menu, after a bibulous evening with the boys at the yacht basin," wrote Pat Buchanan, another Republican contender, in the New York Times yesterday. "The federal budget would be thrown deeper into deficit, and lounge lizards in Palm Beach pay a lower tax rate than steelworkers in Youngstown."

The Forbes flat tax will not happen. But as the annual nightmare of filing tax-returns by 15 April approaches, the clamour among voters for at least a cleansing of the current tax code, described by the Kemp Commission yesterday as a "seven-million-word mess", may become deafening.