Kemp Commission: Damn the Deficit, Full Speed Backwards

January 17, 1996 02:32 PM | | Bookmark and Share

The Kemp Commission’s loophole-ridden flat-rate tax proposal released on January 17, 1996 would balloon the budget deficit by hundreds of billions of dollars annually or require a tax rate in excess of 30 percent to break even, according to a preliminary analysis of the Commission’s report by Citizens for Tax Justice.

“Adding new upper-income loopholes to the tax code and slashing tax rates on the very rich is hardly the answer to the problems in our income tax,” said CTJ director Robert S. McIntyre. “The Kemp Commission report is an exercise in fiscal irresponsibility and grossly unfair tax policies not seen since the “rosy scenario” days of the early Reagan administration.”

Outline of the Kemp Plan

The Commission endorsed a single-rate tax to replace the current progressive personal and corporate income taxes. It also called for a vast array of new loopholes, including a 100% exemption for interest, dividends and capital gains, and outright repeal of the estate tax on very large inheritances.

The report suggests retention of most itemized deductions (for mortgage interest, charitable contributions, etc.) and calls for a new deduction for Social Security taxes paid. Corporate profits from new investments would be exempted from tax, and “transition rules” would “protect” profits generated from existing investments.

Although the Kemp Commission’s report makes no mention of new taxes on employee fringe benefits, Mr. Kemp later told reporters that employee health insurance benefits should be taxed, with the goal of encouraging employers to eliminate such benefits.

The Commission does not specify a tax rate or personal exemptions for its plan, but calls for a rate “as low as possible” and for “generous” exemptions against the wage portion of its tax proposal.

Revenue Losses of $300 Billion a Year–or a 30%+ Tax Rate

Recently, the Treasury Department estimated that the 17% Armey flat tax plan would reduce government revenues by $138 billion a year (implausibly assuming no transition rules and no changes in taxpayer behavior to avoid the new tax). Taking account of the additional write-offs, exclusions and transition rules recommended by the Kemp Commission, CTJ estimates that the Kemp plan would lose upwards of $300 billion annually at a 17% rate with family exemptions similar to the Armey plan’s. Alternatively, CTJ estimated that the Kemp plan would seem to require a tax rate in excess of 30% to break even.

The Commission disputes this mathematical logic by arguing that lower tax rates and more loopholes for the wealthy would “double the economic growth rate.” “This is the same discredited supply-side nonsense that was touted in the late seventies and early eighties,” McIntyre noted. “It didn’t work then, and it wouldn’t work now.”

Middle- and Low-Income Working Families Would Be Big Losers

“Since all but the very richest families are now in the 15% and 28% tax brackets, a break-even 30%-plus Kemp flat tax would obviously increase taxes by huge amounts on middle- and low-income working families,” McIntyre said. Previously, Treasury has estimated that a revenue-neutral flat tax such as Armey’s would increase taxes substantially on all income groups except those making more than $200,000 a year.

“If House Speaker Newt Gingrich and Senate Majority Leader Bob Dole are truly serious about balancing the federal budget, they should immediately repudiate the Kemp Commission’s budget-busting recommendations,” McIntyre concluded.


Gramm Plan: More Snake Oil

In a related development, Senator Phil Gramm (R-Tex.) called for a 16% flat tax on income. Gramm proposes new loopholes for capital gains, dividends and corporate depreciation write-offs, repeal of the estate tax, retention of itemized deductions for mortgage interest and charitable donations, and larger standard deductions and personal exemptions. Although Gramm’s plan is very sketchy, it also would appear to add hundreds of billions of dollars to the annual budget deficit–and ultimately lead to sharply increased taxes on most families or huge reductions in government services.

Citizens for Tax Justice is a non-partisan Washington, D.C. tax policy group.


Kemp Commission Recommendations (quotes except bracketed items]:

[OVERVIEW: Calls for a flat-rate quasi-consumption-based tax with an exemption for investment income from old, as well as new savings and business investments.]

[Key Goal: The rich must pay a much lower share of the taxes than now:]

  if one taxpayer earns ten times as much as his neighbor, he should pay ten times as much in taxes. Not twenty times as much.

[Therefore, there must be a single, unspecified rate:]

the single rate [should] be as low as possible

[An unspecified personal exemption:]

a generous personal exemption

[No taxes on interest, dividends, capital gains or inheritances:]

the tax system must either let savers deduct their saving or exclude the returns on the saving from their taxable income. It must end double-taxation of businesses and their owners and permit expensing of investment outlays. . . . [I]t also must abolish separate taxation of capital gains. . . . It makes little sense and is patently unfair to impose estate taxes.

[No taxes on existing (old) capital either:]

there will . . . be difficult issues to address during the transition. In particular, policy makers must take care to protect existing savings, investments, and other assets.

[Additional retirement savings incentives (on top of exemption)?]

any tax system should encourage people to save for their own retirement.

[Keep mortgage interest, charitable and perhaps other existing deductions:]

[Deductions and exclusions] should be considered with an eye to their impact on the tax rate, the costs to the Treasury, and the consequences of change–and within the context of the values of the American people. For example, the home mortgage interest deduction has spurred home ownership in America . . . . And, at a time when America needs a renaissance of private giving . . . we need a system which encourages people [to give to charity] . . . . [Kemp later said he would keep deductions for state and local taxes as well.]

[Add a new deduction for payroll taxes:]

The Commission recommends that federal payroll taxes be fully deductible.

[Tax fringe benefits such as health insurance:]

[Although not mentioned in the Commission report, Kemp said on “Face the Nation” (Jan. 21) that employer-paid health insurance and other fringe benefits should be taxed under the flat tax. According to the Washington Post, he “agreed that the flat tax might lead to a decrease in employer-funded health care. . . . [But that was the goal, he said,] ‘What we’ve got to get rid of is third-party payments–government, business or union.'”]

[Making it add up:]

We believe the changes we propose will help double the rate of economic growth. . . . We recommend that Congress . . . use . . . “dynamic” scoring . . . . It is essential to avoid overly optimistic as well as overly pessimistic projections.

[To the critics:]

The defenders of the status quo will say that our recommendations for a new tax system will mean a tax increase on the middle class or a flood of red ink.

We strongly disagree. . . . Complainers fail to understand the new world that this new system will create. The tax reform we envision will create a different climate for economic growth. It will lift incomes. It will reduce interest rates. It will put people to work. It will reduce the use of tax shelters. It will reduce the need for social safety-net spending. It will foster millions of new businesses and jobs. In the process, the transition will help to pay for itself.

[RE: Implementation of recommendations–let’s have another commission!]

we urge President Clinton to appoint a . . . commission to bring the recommendations offered by this congressionally appointed commission to the next level of public debate.

[NOTE: With Kemp’s proposed increased exemptions and his new or retained deductions and exclusions, Kemp plan would appear to take a rate in excess of 30% to break even. At a 17% rate, such a Kemp plan would appear to lose over $300 billion a year.]

January 17, 1996

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