Tag: Archive

May 12, 1996 02:35 PM | Permalink |

Kemp, The Flat Tax and Employer Provided Health Care

Former housing secretary Jack Kemp agreed that the flat tax [which taxes fringe benefits] might lead to a decrease in employer-funded health care. “But people would be able to purchase their own health insurance,” he told “Face the Nation.” “What we’ve got to get rid of is third-party payments—government, business or union.”

— The Washington Post Jan. 22, 1996, A6

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Conservative Economists Tell All

 

A group of conservative Republican economists has charged that House Majority Leader Dick Armey’s [flat tax] would result in “significantly higher taxes” for the middle class.

Echoing Democratic complaints about the scheme, the economic consulting firm of Lehrman, Bell, Mueller and Cannon argues that by eliminating many popular deductions, the plan will end up increasing federal taxes for most workers.

In a letter to key Republicans, they pose the semi-rhetorical question, “Does the Republican Party want to take into 1996 a flat tax proposal that raises taxes on most American workers and worsens the middle-class squeeze?”

The team’s party credentials are solid. Lehrman ran for governor of New York and Bell ran for Senator from New Jersey, both as Republicans.

–The American Legion magazine, December 1995, p. 14

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Dick Armey, the Flat Tax’s Current Champion In Congress

Majority Leader Dick Armey seeks to undo virtually every governmental accomplishment for working people, Democrat and Republican, of the past 60 years.

Armey is a shiny-eyed ideologue who wants freer immigration plus an end to minimum-wage laws, abolition of the earned-income tax credit for the working poor, no taxes on dividends or capital gains, abolition of environmental regulations and an end to both the current Medicare system and employer-paid health insurance.

Armey is another of these latter-day Ronald Reagans who have neither Reagan’s charm nor Reagan’s intellect.

 

Lars-Erik Nelson

— NEW YORK NEWSDAY, July 9, 1995

 

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Statements of Robert Hall and Alvin Rabushka — the originators of the Flat Tax, including their distributional table.

 

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Golden Oldy Tax Quotes

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A Philosophy

 

“‘Tis true that governments cannot be supported without great charge, and it is fit everyone who enjoys a share of protection should pay out of his estate his proportion of the maintenance of it.”

 

John Locke

 

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Perfection Sought

 

“Whoever hopes a faultless tax to see, hopes what ne’er was, is not, and ne’er shall be.”

 

Alexander Pope

 

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The Original United States Chamber of Commerce

 

“Why shouldn’t the American people take half my money from me? I took all of it from them.”

 

Edward Albert Filene (1869-1937)

Filene (of Boston’s Filene’s Department Stores) founded the U.S. Chamber of Commerce to encourage businesses to contribute to the welfare of their communities. He eventually quit the organization, disappointed that it had become a bastion of right-wing conservatism and an anti-tax lobby.

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Mr. Dickens on Taxes and Herbs

 

“It was as true . . . as turnips is. It was as true . . . as taxes is. And nothing’s truer than them.”

 

Charles Dickens — DAVID COPPERFIELD (1849-1850), CH. 21

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The Father of Modern Capitalist Thought on Progressive Taxation

 

“The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state ….[As Henry Home (Lord Kames) has written, a goal of taxation should be to] ‘remedy inequality of riches as much as possible, by relieving the poor and burdening the rich.'”

 

Adam Smith

— AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS (1776)

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An American View

 

“Idleness and pride tax with a heavier hand than kings and parliaments. If we can get rid of the former, we may easily bear the latter.”

 

Benjamin Franklin

— LETTER ON THE STAMP ACT (July 11, 1765)

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A Word for the IRS

 

“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”

 

Jean Baptiste Colbert Controller General of Finances for Louis XIV

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By Definition

“EXCISE — A hateful tax levied on commodities, and adjudged not by the common judges of property, but wretches hired by those to whom excise is paid.”

 

Samual Johnson

— DICTIONARY (1755)

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National Sales Tax Quotes

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Senator Lugar explains his proposed national 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.”

 

Senator Richard Lugar (R-Ind.)

— Tax Notes, July 31, 1995, p. 522.

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May 2, 1996 04:45 PM | Permalink |

The Hidden Entitlements, released in May of 1996, describes the tax loopholes for the rich and corporations that are hidden in the tax code. Each of the entitlement programs contributing to the $455 billion in tax loopholes for 1996 is described in detail, with detailed cost estimates for the next seven years for each program.

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Read the Full Report

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March 8, 1996 02:26 PM | Permalink |

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NOTES:
• Current law figures include personal and corporate income taxes, estate & gift taxes and taxes on fiduciaries, all of which would be repealed under the flat tax. Negative current personal income tax in the lowest income group under current law reflects the earned-income tax credit, which would be repealed under the flat tax legislation.
• The revenue-neutral plans are shown with and without transition rules. In fact, there would undoubtably be either substantial transition rules (none are proposed in the flat-tax bill) or substantial corporate merger and leasing activities to reach the same result.
• The reduced wage-tax exemptions reflected in the two “smaller exemption” plans allow $5,100 per taxpayer and $2,400 per dependent, rather than the $10,700 per taxpayer and $5,000 per dependent proposed in the revenue-losing flat tax bill.
• Proposed flat taxes on fringe benefits (collected from public, private and non-profit employers) are assigned to workers. Other “business” taxes under the transition-free flat tax plan are based on optimistic estimates by the U.S. Treasury. Likely transition rules would reduce business tax revenues very substantially.

Source: Citizens for Tax Justice, March 8, 1996

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Average Federal Income Taxes on Texans Under Current Law & Armey-Forbes Flat Tax

REVENUE-LOSING PROPOSALS:

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REVENUE-NEUTRAL SCENARIOS

NOTES: Current law figures include personal and corporate income taxes, estate & gift taxes and taxes on fiduciaries, all of which would be repealed under the flat tax. Negative current personal income tax in the lowest income group under current law reflects the earned-income tax credit, which would be repealed under the flat tax legislation. Figures for the flat tax as proposed, with a two-year 20% tax rate and later a 17% tax rate, assume no transition rules and no steps by corporations to avoid taxes by merging with companies with negative taxable incomes (e.g., banks). Changes for the revenue-losing versions of the flat tax (*) are compared to current law raising equivalently lower revenues. The revenue-neutral plans are shown with and without transition rules. In fact, there would undoubtably be either substantial transition rules (none are proposed in the flat tax bill) or substantial corporate merger and leasing activities to reach the same result. The reduced wage-tax exemptions reflected the two “smaller exemptions” plans allow $5,100 per taxpayer and $2,400 per dependent, rather than the $10,700 per taxpayer and $5,000 per dependent proposed in the revenue-losing flat tax legislation. Proposed flat taxes on fringe benefits (collected from public, private and non-profit employers) are assigned to workers. Other “business” taxes under the transition-free flat tax plan are based on optimistic estimates by the U.S. Treasury. “Generous” transition rules, as suggested by the Kemp Commission, would reduce the business tax revenues very substantially. All tax figures are at 1996 levels, and are rounded to the nearest ten dollars. Source: Citizens for Tax Justice, March 8, 1996

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March 8, 1996 02:25 PM | Permalink |

Flat tax legislation sponsored by Rep. Dick Armey (R-Tex.) and endorsed by presidential candidate Malcolm S. “Steve” Forbes, Jr. would raise taxes on the vast majority of Texas families, while showering enormous tax cuts on very wealthy people such as Forbes himself.

Armey’s flat tax bill calls for a 20% tax on wages, fringe benefits and self-employment earnings, with exemptions for interest, dividends and capital gains. The flat tax rate is supposed to fall to 17% after two years–the figure usually cited by Forbes–but, in fact, the rate would actually have to be considerably higher than the proposed 20% to avoid enormous additions to the federal budget deficit.

A computer microsimulation analysis of the effects of the Armey-Forbes flat tax plan on Texans by Citizens for Tax Justice finds that under the plan at its proposed 20% tax rate:

 

• Federal revenues would plummet by at least $49 billion a year.
• Despite these huge revenue losses, the vast majority of Texans–all income groups but the top 4.6% of Texas families–would pay higher federal taxes.
• In contrast, the very best-off Texans–the 1.1% making more than $200,000 a year–would see their federal taxes cut in half.

CTJ also found that if the flat tax rate is increased to avoid revenue losses:

• Federal taxes would increase on all Texas income groups except the best off 1.1%.
• Texans in the $20,000 to $75,000 income ranges would face tax increases of 24% to 70%. That would mean $900 to $1,900 a year in higher federal taxes for these families.

(A February CTJ analysis found that under his flat tax plan, Steve Forbes personally would save a total of $1.9 billion over the rest of his lifetime.)

“Because the flat tax cuts taxes so drastically on super-rich people like Steve Forbes, it inevitably means much higher burdens on everyone else,” noted CTJ director Robert S. McIntyre. “Our new analysis quantifies the size of those increased burdens on residents of Texas.”

 

*As proposed for the first two years in the flat tax bill as introduced.
**With exemptions as proposed and no transition rules.
+Compared to federal personal and corporate income taxes and other taxes repealed by the flat tax.
++ No federal income, etc. tax under current law in this group.

Citizens for Tax Justice, March 8, 1996.

 

 

 

Description of the Armey-Forbes Flat Tax Proposal

Armey and Forbes have proposed to repeal the federal personal income tax, the corporate income tax and the estate tax, and replace them with a 20% flat tax (scheduled to drop to 17% after two years) on wages, pensions and self-employment income. (Forbes typically talks only about the 17% eventual rate, but a spokesman for his campaign told Fortune, Feb. 5, that his flat tax plan “would duplicate” the Armey plan.)

The new flat tax would also be imposed on employer-paid fringe benefits, including benefits paid by state and local governments and non-profit organizations. Individuals would no longer be taxed on their interest, dividends, capital gains and other “unearned” income. All itemized deductions, for state and local taxes, mortgage interest, charitable donations and so forth would be repealed, as would all federal tax credits.

Although the flat tax offers large exemptions against the wage portion of its tax–$10,700 per taxpayer and $5,000 per dependent in 1996 dollars–it taxes fringe benefits such as health insurance and employer-paid social security taxes with no exemptions. As a result, lower-income working families that now owe no federal income tax will pay substantial taxes under the flat tax.

Businesses would file tax returns similar to those currently filed, except that: interest and dividends income would be exempt from taxation; capital expenditures would be deducted immediately rather than depreciated over time; interest paid would no longer be deductible; and 100% of meals and entertainment outlays (rather than only 50% under current law) could be deducted.

In the aggregate, these changes in corporate taxation would eventually appear to wipe out most taxes on corporations. Flat tax proponents, however, claim their plan would raise large amounts from business. That claim is based on the absurd notion that companies that have invested heavily in recent years would be subject to huge tax penalties on their past investments (due to loss of depreciation deductions).

The Armey-Forbes flat tax plan’s cavalier attitude about business taxation has been sharply criticized as unfair and irrational. Indeed, the almost random effects on different businesses from the lack of “transition rules” could cause huge economic dislocations and a sharp downturn in the economy. That is why even the otherwise pro-flat tax Kemp Commission report called for “generous” transition rules as part of any tax overhaul.

 

Plan as proposed promises huge deficits, economic dislocations

As proposed, the flat tax would add an estimated $49 billion to the annual federal budget deficit at its proposed 20% tax rate, with the loss ballooning to $156 billion a year at the eventual 17% tax rate. These “static” estimates almost certainly vastly understate the likely revenue losses, however. Any practical flat-tax plan would undoubtably provide substantial transition rules, and there would also be a wave of corporate merging and leasing activities to avoid the new flat tax.

Huge increases in the budget deficit would drive up interest rates, and throw the economy into recession. Alternatively, were the federal government to try to offset these huge deficit increases through program reductions, that would require cuts in federal programs even larger than those contemplated in last year’s congressional budget plan. Under that legislation, not only were Medicare and Medicaid under assault, but state and local government were expected to lose huge amounts in federal aid.

 

Alternative Scenarios Show Similar Results

Besides comparing the revenue-losing Armey-Forbes flat tax plan as proposed to current law, CTJ also looked at alternative “revenue-neutral” flat tax scenarios, including ones that assume either explicit transition rules to avoid driving large numbers of companies out of business or substantial corporate merger and leasing transactions that achieve the same result. Under these more likely scenarios, CTJ found that the flat tax could potentially break even at a 24.6% tax rate with the wage-tax exemptions proposed in the Armey bill. CTJ also found that if the wage-tax exemptions were reduced to $5,100 per taxpayer and $2,400 per dependent, the plan could potentially break even at a 19.3% rate.

No matter which alternative scenario is chosen, most Texans would pay much higher taxes under the flat tax, with average tax increases in the $30,000 to $100,000 income groups ranging from $900 a year to more than $3,000 annually.

“There’s no free lunch here,” noted McIntyre. “If the flat tax is designed to cut taxes by $150 billion or $200 billion a year, that will mean doubling the deficit or huge reductions in federal services, coupled with higher taxes on most families, higher interest rates and, most likely, a deep recession. If the flat tax rate is increased or its exemptions are lowered to try to break even, then almost everyone’s taxes except the very rich’s must go up even more.”

Source:

CTJ’s analysis of the Armey-Forbes flat tax was computed using the Institute on Taxation and Economic Policy’s Microsimulation Tax Model, a tax simulation model similar in design and data sources to those used by the Treasury Department and the congressional Joint Committee on Taxation, but also equipped to analyze the effects of tax changes on a state-by-state basis.

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March 5, 1996 02:29 PM | Permalink |

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NOTES:
• Current law figures include personal and corporate income taxes, estate & gift taxes and taxes on fiduciaries, all of which would be repealed under the flat tax. Negative current personal income tax in the lowest income group under current law reflects the earned-income tax credit, which would be repealed under the flat tax legislation.
• The revenue-neutral plans are shown with and without transition rules. In fact, there would undoubtably be either substantial transition rules (none are proposed in the flat-tax bill) or substantial corporate merger and leasing activities to reach the same result.
• The reduced wage-tax exemptions reflected in the two “smaller exemption” plans allow $5,100 per taxpayer and $2,400 per dependent, rather than the $10,700 per taxpayer and $5,000 per dependent proposed in the revenue-losing flat tax bill.
• Proposed flat taxes on fringe benefits (collected from public, private and non-profit employers) are assigned to workers. Other “business” taxes under the transition-free flat tax plan are based on optimistic estimates by the U.S. Treasury. Likely transition rules would reduce business tax revenues very substantially.

Source: Citizens for Tax Justice, March 5, 1996

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Average Federal Income Taxes on New Yorkers Under Current Law & Armey-Shelby-Forbes Flat Tax

REVENUE-LOSING PROPOSALS:

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REVENUE-NEUTRAL SCENARIOS

NOTES: Current law figures include personal and corporate income taxes, estate & gift taxes and taxes on fiduciaries, all of which would be repealed under the flat tax. Negative current personal income tax in the lowest income group under current law reflects the earned-income tax credit, which would be repealed under the flat tax legislation. Figures for the flat tax as proposed, with a two-year 20% tax rate and later a 17% tax rate, assume no transition rules and no steps by corporations to avoid taxes by merging with companies with negative taxable incomes (e.g., banks). Changes for the revenue-losing versions of the flat tax (*) are compared to current law raising equivalently lower revenues. The revenue-neutral plans are shown with and without transition rules. In fact, there would undoubtably be either substantial transition rules (none are proposed in the flat tax bill) or substantial corporate merger and leasing activities to reach the same result. The reduced wage-tax exemptions reflected the two “smaller exemptions” plans allow $5,100 per taxpayer and $2,400 per dependent, rather than the $10,700 per taxpayer and $5,000 per dependent proposed in the revenue-losing flat tax legislation. Proposed flat taxes on fringe benefits (collected from public, private and non-profit employers) are assigned to workers. Other “business” taxes under the transition-free flat tax plan are based on optimistic estimates by the U.S. Treasury. “Generous” transition rules, as suggested by the Kemp Commission, would reduce the business tax revenues very substantially. All tax figures are at 1996 levels, and are rounded to the nearest ten dollars. Source: Citizens for Tax Justice, March 5, 1996

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March 5, 1996 02:28 PM | Permalink |

Most New Yorkers would pay considerably higher federal taxes under “flat tax” legislation introduced by Rep. Richard Armey (R-Tex.) and Sen. Richard Shelby (R-Ala.), and endorsed by presidential candidate Malcolm S. “Steve” Forbes, Jr. These tax increases would be compounded by either a huge increase in the federal budget deficit or sharp reductions in federal programs.

A computer microsimulation analysis of the effects of the Armey-Shelby-Forbes flat tax plan on New Yorkers by Citizens for Tax Justice finds that under the plan at its eventual 17% tax rate (the proposed rate is 20% for the first two years):

 

• Federal revenues would plummet by at least $156 billion a year–an amount that would double the current federal budget deficit.
• Despite these huge revenue losses, the vast majority of New Yorkers–all income groups but the top 11% of New York families–would pay higher federal taxes.
• In contrast, the very best-off New Yorkers–the 1.7% making more than $200,000 a year–would see their federal taxes cut by more than half.
• If the flat tax rate is increased to avoid revenue losses, federal taxes would increase on all New York income groups except the best off 1.7%. Typical tax increases on New Yorkers in the $30,000 to $75,000 income ranges would be $1,300 to $2,500 annually.

“Because the flat tax cuts taxes so drastically on super-rich people like Steve Forbes, it inevitably means much higher burdens on everyone else,” noted CTJ director Robert S. McIntyre. “Our new analysis quantifies the size of those increased burdens on residents of New York.”

 

Repeal of itemized deductions especially hurts New Yorkers

The projected tax increases on middle-income New Yorkers under the flat tax are generally 20% to 40% larger than the estimated nation-wide average tax hikes for non-New York families with similar incomes. This reflects in large part the relatively heavy reliance by New Yorkers on itemized deductions, which the flat tax would repeal. New York’s total use of itemized deductions is almost 50% above the national average. On average, about 31% of all New York families itemize deductions, compared to 26% nationwide. In addition, for those who do itemize, New Yorkers’ average deductions are 23% higher than the national average.

 

Description of the Armey-Shelby-Forbes Flat Tax Proposal

Armey, Shelby and Forbes have proposed to repeal the federal personal income tax, the corporate income tax and the estate tax, and replace them with a 20% flat tax (scheduled to drop to 17% after two years) on wages, pensions and self-employment income. (Forbes typically talks only about the 17% eventual rate, but a spokesman for his campaign told Fortune, Feb. 5, that his flat tax plan “would duplicate” the Armey-Shelby plan.)

The new flat tax would also be imposed on employer-paid fringe benefits, including benefits paid by state and local governments and non-profit organizations. Individuals would no longer be taxed on their interest, dividends, capital gains and other “unearned” income. All itemized deductions, for state and local taxes, mortgage interest, charitable donations and so forth would be repealed, as would all federal tax credits.

Although the flat tax offers large exemptions against the wage portion of its tax–$10,700 per taxpayer and $5,000 per dependent in 1996 dollars–it taxes fringe benefits such as health insurance and employer-paid social security taxes with no exemptions. As a result, lower-income working families that now owe no federal income tax will pay substantial taxes under the flat tax. Businesses would file tax returns similar to those currently filed, except that: interest and dividends income would be exempt from taxation; capital expenditures would be deducted immediately rather than depreciated over time; interest paid would no longer be deductible; and 100% of meals and entertainment outlays (rather than only 50% under current law) could be deducted.

In the aggregate, these changes in corporate taxation would eventually appear to wipe out most taxes on corporations. Flat tax proponents, however, claim their plan would raise large amounts from business. That claim is based on the absurd notion that companies that have invested heavily in recent years would be subject to huge tax penalties on their past investments (due to loss of depreciation deductions).

The Armey-Shelby-Forbes flat tax plan’s cavalier attitude about business taxation has been sharply criticized as unfair and irrational. Indeed, the almost random effects on different businesses from the lack of “transition rules” could cause huge economic dislocations and a sharp downturn in the economy. That is why even the otherwise pro-flat tax Kemp Commission report called for “generous” transition rules as part of any tax overhaul.

 

Plan as proposed promises huge deficits, economic dislocations

As proposed, the flat tax would add an estimated $49 billion to the annual federal budget deficit at its proposed 20% tax rate, with the loss ballooning to $156 billion a year at the eventual 17% tax rate. These “static” estimates almost certainly vastly understate the likely revenue losses, however. Any practical flat-tax plan would undoubtably provide substantial transition rules, and there would also be a wave of corporate merging and leasing activities to avoid the new flat tax.

Huge increases in the budget deficit would drive up interest rates, and throw the economy into recession. Alternatively, were the federal government to try to offset these huge deficit increases through program reductions, that would require cuts in federal programs even larger than those contemplated in last year’s congressional budget plan. Under that legislation, not only were Medicare and Medicaid under assault, but New York state and local government were expected to lose $40 billion in aid over seven years.

 

Alternative Scenarios Show Similar Results

Besides comparing the revenue-losing Armey-Shelby-Forbes flat tax plan as proposed to current law, CTJ also looked at alternative “revenue-neutral” flat tax scenarios, including ones that assume either explicit transition rules to avoid driving large numbers of companies out of business or substantial corporate merger and leasing transactions that achieve the same result. Under these more likely scenarios, CTJ found that the flat tax could potentially break even at a 24.6% tax rate with the wage-tax exemptions proposed in the Armey-Shelby bill. CTJ also found that if the wage-tax exemptions were reduced to $5,100 per taxpayer and $2,400 per dependent, the plan could potentially break even at a 19.3% rate.

No matter which alternative scenario is chosen, most New Yorkers would pay much higher taxes under the flat tax, with average tax increases in the $30,000 to $100,000 income groups ranging from $1,000 a year to almost $4,000 annually.

“There’s no free lunch here,” noted McIntyre. “If the flat tax is designed to cut taxes by $150 billion or more, that will mean doubling the deficit or huge reductions in federal services, coupled with higher taxes on most families, higher interest rates and, most likely, a deep recession. If the flat tax rate is increased or its exemptions are lowered to try to break even, then almost everyone’s taxes except the very rich’s must go up even more.”

 

State Revenues in Jeopardy, Too

CTJ also pointed out that were the federal government to repeal its income taxes in favor of a flat tax, then states would find it difficult or impossible to administer their own income taxes. “This would be a particular problem for states like New York that rely heavily on income taxes to pay for state services,” McIntyre noted.

Source:

CTJ’s analysis of the Armey-Shelby-Forbes flat tax was computed using the Institute on Taxation and Economic Policy’s Microsimulation Tax Model, a tax simulation model similar in design and data sources to those used by the Treasury Department and the congressional Joint Committee on Taxation, but also equipped to analyze the effects of tax changes on a state-by-state basis.

 

Detailed Tables on the Effects of the Flat Tax on New Yorkers.

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February 6, 1996 02:35 PM | Permalink |

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.

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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.

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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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February 6, 1996 02:33 PM | Permalink |

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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February 6, 1996 02:31 PM | Permalink |

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?”

 

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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-

 

*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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February 1, 1996 02:23 PM | Permalink |

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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