Armey Flat Tax Distributional Tables

February 6, 1996 02:35 PM | | Bookmark and Share

The flat tax plan of House Majority Leader Richard K. Armey (R-Tex) calls for a tax rate of 20% for the first two years and a 17% rate in subsequent years. At both rates the tax raises substantially less revenue than the taxes it replaces and targets the tax cuts to the wealthiest of Americans. The taxes being replaced: the personal income tax, the corporate income tax and the estate tax ,currently raise about $750 billion. About $600 billion of that is from the personal income tax.

At a a rate of 20.8% and Armey’s proposed exemptions, the flat tax would raise as much revenue as the taxes it replaces. Alternatively, at the proposed 17% rate, the exemptions could be reduced to make the plan revenue neutral.Congressman Armey has said that he would be willing to amend his plan to be revenue neutral. Such changes would cause the tax increase to substantially larger for middle-income families.

NOTE: Rep. Richard Armey proposes a 20% flat tax rate for 1996 and 1997 and a 17% rate thereafter. Source: All data are from the U.S. Treasury, Dec. 20, 1995. Some additional calculations by Citizens for Tax Justice, January 18, 1996. Figures substantially understate revenue losses and understated required tax rate or exemption reductions necessary to avoid revenue losses because they assume no transition rules.

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Armey Flat Tax, Table of Examples

February 6, 1996 02:33 PM | | Bookmark and Share

Armey Flat Tax Examples

Source: Break-even rates and exemptions from U.S. Treasury, “An Analysis of the New Armey-Shelby Flat Tax Proposal,” Dec. 1995. Calculations by Citizens for Tax Justice, Feb. 1996.

NOTE: Taxable fringe benefits under the flat tax include employer-paid health insurance, the employer share of Social Security and Medicare taxes, and miscellaneous other non-pension fringe benefits. As proposed, the Armey exemptions would be $10,700 per taxpayer plus $5,000 per child. To break even at a 17% tax rate, Treasury says that exemptions would have to be reduced to $5,100 per taxpayer and $2,400 per child.

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Malcolm S. Forbes, Jr.’s $1.9 Billion Tax Cut — for Himself

February 6, 1996 02:31 PM | | Bookmark and Share

When asked about the $200-billion-a-year increase in the federal budget deficit that his 17% “flat-tax” plan would apparently entail, Malcolm S. (“Steve”) Forbes, Jr. usually replies: “I don’t want to get stuck in static analysis.”

Taking Forbes up on his suggestion, Citizens for Tax Justice, a non-partisan research group, has updated its earlier analysis of Forbes’s personal tax savings from his proposed 17% flat tax. CTJ’s new, more “dynamic” analysis looks not only at Forbes’s current annual savings from his flat tax, but also at his long-term tax savings. Over the long term, CTJ estimates that Forbes’s tax savings from his flat tax would total approximately $1.9 billion.

Current tax law allows Forbes to defer taxes on his “unrealized” capital income, mainly accrued capital gains on his huge portfolio of stocks. Although this tax deferral is a very valuable tax break, the deferred taxes are not totally forgiven. Instead, under current law, Forbes will pay tax on his accrued capital gains either when he realizes them or through the estate and gift tax when he passes his holdings on to his heirs. In contrast, under his flat tax, Forbes’s can cash in or pass on his accrued gains completely free of income or estate tax.

“Forbes has belittled our earlier, ‘static’ estimate that his flat tax would cut his own annual income tax bill by more than half–calling that a piddling amount for someone of his vast wealth,” noted CTJ director Robert S. McIntyre. “We have now taken account of the flat tax’s complete forgiveness of tax on Forbes’s deferred and future investment income. Our new, long-term estimate shows that Forbes’s flat tax savings would be truly staggering.”

“Static” versus long-term estimates

In a previous analysis, released on December 15, 1995, CTJ found that, based on the $1.6 million annual cash income that Forbes reported on his federal disclosure forms, Forbes’s proposed flat tax would slash Forbes’s own federal income tax bill by more than half from what he pays under current law. Under this “static” analysis, Forbes’s annual tax savings under his flat-tax plan were calculated to be $174,000 in 1996.

As CTJ noted in its December 1995 release, however, “Forbes’s potential tax savings under his plan are almost certainly far larger than his financial disclosure reports indicate. He stands to enjoy tens of millions of dollars in future tax savings when he cashes in capital gains on his extensive, largely inherited portfolio of corporate stocks. Under Forbes’s plan, capital gains would be exempt from tax.”.


Forbes’s total lifetime tax cut from his plan pegged at $1.9 billion

In its new analysis, CTJ has taken a long-term approach to Forbes’s tax situation. As predicted, this shows far, far larger dollar tax savings for Forbes under his proposed flat tax than a simple, annual estimate. Assuming that Forbes earns a 10% compounded annual rate of return on his $412 million in financial holdings (Fortune, Feb. 5, 1996) over his 30-year remaining life expectancy, CTJ estimates that:


  • If Forbes maintains his current capital income realization practices, his tax savings under his flat tax plan over the next 30 years would total $1.9 billion.
  • If Forbes significantly increases his capital income realizations (and his spending), his total savings from the flat tax would still total almost $1.7 billion.
  • The present value of Forbes’s estimated long-term tax cut under his flat tax (discounting future tax savings at a 6% rate) totals $335-354 million at 1996 levels. Thus in present-value terms, Forbes’s estimated average annual tax savings from his flat tax over the next 30 years would be approximately $11.5 million a year.


Higher taxes on most families–or a huge increase in the budget deficit

Forbes flat tax plan is based on legislation introduced by House Majority Leader Richard K. Armey (R-Tex.). Like Forbes, Armey’s plan taxes wages, pensions and fringe benefits, while exempting interest, dividends and capital gains. But Armey has scaled back his proposed exemptions against the wage tax portion of his plan to reduce its projected revenue losses. Armey also proposes a 20% tax rate for the first two years of his plan.


    Recent figures from the Treasury Department show that:

  • At Armey’s proposed 20% tax rate, Armey’s flat tax would add at least $30 billion a year to the budget deficit.
  • Even so, Armey’s plan would increase taxes substantially on all income groups except those earning more than $200,000 a year.
  • Forbes’s tax plan, with its larger exemptions and 17% tax rate, would add between $180 billion and $210 billion a year to the annual federal budget deficit (depending on whether he keeps the earned-income tax credit). About two-thirds of Forbes’s proposed tax reductions would go to people making more than $200,000.

“Maybe there are some other irresponsible people out there who think that adding $200 billion a year to the budget deficit is a small price to pay for any tax cut,” noted McIntyre. “But why would anyone–other than Steve Forbes–want a tax cut plan that gives two-thirds of its benefits to those earning more than $200,000 a year?”


ADDENDUM: Other Forbes’s Personal Flat Tax Savings (not included above)

Other flat tax provisions that would appear to benefit Steve Forbes personally (not counted in the estimates presented above) include (but are not limited to):


  • A little noticed provision in the Forbes’s flat tax plan would reinstate a 100% tax write-off for “business meals and entertainment.” Current law generally allows only half of such outlays to be deducted, and in some cases disallows any deduction.

    Forbes, Inc. is well-known for its lavish parties, as well as its $14 million yacht and numerous other “corporate toys.” Under his flat-tax plan, Malcolm S. Forbes, Jr. could enjoy millions of dollars a year in company-paid meals and entertainment, and his company could deduct all the costs of these personal consumption activities.

  • Current law generally limits corporate deductions for executive pay per individual to $1 million per year. Forbes’s flat tax would repeal this limitation. (Currently, Forbes, Inc. pays Steve Forbes at an annual rate of about $850,000 annually.)
  • Forbes’s flat tax would slash the corporate tax rate from 35% to 17%, and radically change the corporate tax base (in the direction of a sales-based tax). A reportedly debt-free company such as Forbes, Inc. would appear to enjoy the full benefit of this more than 50% rate reduction, plus additional loopholes and without any significant offsetting effects.


Citizens for Tax Justice is a non-partisan Washington, D.C. tax policy group. -000- Table: Effects of Flat Tax on S. Forbes.


*Income from capital gains, dividends and interest. Assumes a 10% pretax rate of return on Forbes’s financial holdings and a 30-year life expectancy.
**The statutory estate tax rate is currently 55% on huge estates. A 24.9% rate was used here, however, based on IRS data for actual effective estate tax rates on the largest estates (adjusted for marital and debt deductions). See IRS, Statistics of Income, Compendium of Federal Estate Tax and Personal Wealth Studies (1994), pp.69-71.
***The current effective tax rate shown here is discounted to take account of tax deferrals on unrealized capital gains.

NOTES: Two different scenarios reflect (1) continuation of Forbes’s current low realization pattern for capital income; and (2) increasing realizations by a factor of 10 to 20 (and spending half the after-tax proceeds). Income taxes increase with higher realizations, but estate tax falls because of assumed higher lifetime spending. Figures do not take account of large apparent tax reductions for the Forbes family corporation, Forbes, Inc.

Source: Citizens for Tax Justice, February 6, 1996.

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Flat On Our Backs

February 1, 1996 02:23 PM | | Bookmark and Share

By Robert S. McIntyre

“The one thing I will not do is shift the tax burden from the super rich to the middle class,” Bob Dole told a GOP audience on Jan. 20 in New Hampshire. “You won’t tolerate that and I won’t tolerate it and it’s not going to happen.”

Suppose we, too, can agree that halving the top income tax rate on the rich, wiping out taxes on interest, dividends, capital gains and inheritances, and raising taxes on the vast majority of Americans–i.e., the “flat tax”–is a very bad idea. What then? Is there anything at all to like about the flat tax idea? Or should the direction of tax reform be something completely different?

With the notable exception of Dole, GOP presidential candidates are falling over each other to endorse some version of a “flat tax”–and to attack, often viciously, the others’ versions. (Malcolm S. Forbes, Jr.’s flat tax plan “looks like it was cooked up at the yacht basin,” complains GOP rival Pat Buchanan, who has his own, undefined flat tax plan.) The various GOP flat-tax plans do have some notable differences, but all have one item in common. They would compress the current, graduated tax rates into a single rate.

But progressive rates are one thing about the current income tax system that the vast majority of voters should love. Because the richest people pay the highest rates, middle-income families pay less–and low-income people pay no income tax at all. (Indeed, low- and moderate-income working families actually get an income tax rebate under the current system, as a way to offset their social security payroll taxes.) No change at all looks better than losing this critical feature of our current system.

The stakes for most people are far from trivial. A recent Treasury analysis of House Majority Leader Richard Armey’s flat-tax plan conservatively found that under Armey’s proposed 20 percent tax rate (for its first two years), taxes would go up by an average of close to $1,000 a year or more for families in every income group except those earning more than $200,000. Even so, at a 20 percent rate the plan loses at least $30 billion a year in revenues–because the tax cuts in the highest income group are gargantuan.

This fundamental problem is not solved by adding back a few of the deductions that Armey would repeal, as some flat taxers propose. The truth is that virtually any flat-rate tax plan that adds up must, by simple arithmetic, produce huge tax cuts for those with the highest incomes and therefore big tax increases on almost everyone else.

Many flat taxers try to fudge this issue by proposing a ridiculously low tax rate coupled with impossibly large family exemptions. Armey with his 17 percent tax rate starting in the third year, Forbes with a 17 percent rate and even larger exemptions right away, Sen. Phil Gramm (R-Tex.), who tries to one-up Forbes with a 16 percent rate, and the Kemp Commission with an unspecified rate and exemptions, but a plethora of deductions, face budget-busting revenue losses ranging from $140 billion a year to upwards of $300 billion annually. (That compares to about $750 billion in income and estate tax receipts under current law.) Their preposterous responses to these enormous revenue shortfalls are either to call vaguely for closing down much of the government or to rely on fatuous supply-side predictions of a doubling or tripling in the economic growth rate.

The hook that flat taxers are trying to snag us with is “simplification.” But there is nothing simpler about a single tax rate versus several rates. After all, which is easier: multiplying your taxable income by, say, 21 percent or looking your taxes up in a table where the arithmetic has already been done for you?

That leaves how we define what’s taxed. Many people believe that the current income tax system is so ridden with loopholes that the rich get away tax-free, or close to it. There’s more than a grain of truth in that feeling, but it’s vastly overstated. Although some very high-income people (and some big, profitable corporations) use loopholes to pay far less than they should, on average the top earners pay a higher share of their total income in income taxes than do ordinary families.

That’s why the current income tax–both personal and corporate– while far from perfect, is the central progressive element of our overall tax system. Almost all the other taxes we face–payroll, excise, sales, etc.–are regressive, hitting low- and middle-income people much harder than the wealthy.

And that’s why the flat-tax tribunes for the rich–or in Malcolm S. Forbes, Jr.’s case, the rich himself–want to keep all those regressive taxes while converting the progressive income tax into a regressive wage tax or a sales tax (including new taxes on employee fringe benefits). As GOP presidential candidate Richard Lugar (R-Ind.) says about his proposed flat-rate sales tax: “I admit that if the point of taxation is progressivity or so-called fairness and redistribution, then my plan will not be your cup of tea.”

For most of the flat taxers–who generally have never seen an upper-income tax break they didn’t like–the “simple” answer to the loophole problem is to consolidate the existing tax dodges for corporations and the wealthy into one all-encompassing loophole. Leading flat-tax plans from Forbes, Armey and the Kemp Commission would exempt capital income–interest, dividends, capital gains, etc.–from personal income tax entirely, and repeal the federal estate tax on the very largest estates to boot.

But lowering the taxable income of the rich is hardly what most people mean when they say they want a simpler tax code. On the contrary, the real answer to tax avoidance by the rich is to close the loopholes that make it possible. That entails cracking down on excessive “depreciation” write-offs, ending preferential treatment of capital gains, curbing multinational tax abuses and so forth. Reforms like these may or may not make the tax code simpler–often rules that are too simple are the easiest for lawyers and accountants to get around–but they would address most people’s real concern about complexity: that the rich aren’t paying their fair share.

What about itemized deductions, the major “complication” in income tax filing that large numbers of ordinary families actually face? Most of these tax breaks are popular because they’re intended to help ordinary people–not to give unfair advantage to a favored few. In fact, you can make a good case that deductions for state and local taxes, extraordinary health costs and charitable contributions make the tax laws fairer. And, of course, mortgage interest deductions can be pretty important to homeowners struggling to make ends meet. That doesn’t mean we have to keep every itemized deduction, but it is suspicious that the flat-tax “reformers” generally target some or all of these mainly middle-class deductions for elimination while vastly expanding other loopholes for those at the top of the income scale.

If we really want a simpler tax system, we don’t have to throw fairness or fiscal responsibility out the window. Instead, we need to broaden the tax base by removing unwarranted loopholes. House Minority Leader Richard Gephardt (R-Mo.) proposes closing about $50 billion a year in corporate loopholes and eliminating all itemized deductions except mortgage interest. That allows him to increase standard deductions and personal exemptions and put three out of four families in a 10% income tax bracket or less–but with higher rates on those who make the most.

The Gephardt plan reduces average taxes for every income group except those making more than $200,000 a year. The plan adds up because those at the very top would pay higher taxes. The Gephardt plan may not be perfect, but unlike the flat tax, it’s a reasonable starting ground for debating real tax reform.


Robert S. McIntyre is director of Citizens for Tax Justice.

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