An 18% Solution

New fervor for tax reform

In 1969 President Nixon declared that "reform of our federal income tax system is long overdue." In his 1976 campaign, Jimmy Carter called the Internal Revenue Code, with its reams of special deductions and loopholes, "a disgrace to the human race." Despite this presidential rhetoric and numerous reform initiatives, however, the tax system remains as convoluted and capricious as ever. People with the same incomes often pay wildly different amounts of tax.

Now a new proposal for tax reform has Washington abuzz. This plan would eliminate virtually all deductions and require everyone to pay the same flat tax rate, which would be no higher than 18%. Says Thomas Field, executive director of Tax Analysts, a Washington public interest group: "Interest in the idea is extremely high."

Six bills have been introduced in Congress that call for immediate adoption of the flat tax or studies of its feasibility. Though the White House has no official position on the issue, Treasury Secretary Donald Regan gave the idea a boost last week in testimony before a House committee. Said he: "The flat tax has a lot going for it." One of these things is that a flat 18% rate could raise approximately as much revenue as the current system, which has a top rate of 50%.

Such a simplified income tax is not an entirely new concept. It has long been advocated by conservative thinkers such as Economist Milton Friedman, former Treasury Secretary William E. Simon and William F. Buckley Jr., editor of the National Review. What is new is that the flat tax is starting to gather strong bipartisan support. Its sponsors on Capitol Hill now include Congressman Leon Panetta, a liberal Democrat from California, as well as Republican Senator Jesse Helms of North Carolina. The liberal Washington Post touted it in an editorial last month.

Supporters of a flat tax say that it would encourage people to work harder and make more money because they would no longer be taxed at ever higher rates as their incomes went up. That increased work effort, the theory goes, would spur economic growth. The flat tax would also make Form 1040 so simple to fill out that the public would save billions of dollars that now go to accountants, lawyers and tax-preparation firms like H&R Block. In addition, flat-tax advocates believe, the American people want an equitable system in which everyone pays his fair share and the rich cannot evade taxes by taking advantage of loopholes or creating tax shelters.

Opponents charge that a flat tax would be regressive. Rates would fall for the rich and rise for the poor. Many flat-tax enthusiasts are willing to compromise on this point. They suggest applying the flat rate only to incomes above a certain level, perhaps $10,000. As a result, the poor would still pay low taxes. The well-to-do, on the other hand, might wind up paying more because they could no longer benefit from tax-shelter schemes. Moreover, a flat tax would sharply reduce cheating through fraudulent deductions.

Whatever its attractions, the flat tax faces the formidable political obstacles that have blocked virtually all reform movements in the past. Behind every deduction is a powerful constituency. State and local governments rely on being able to issue tax-free bonds. Thousands of schools and charities depend upon tax-deductible contributions. Millions of families have taken on huge home mortgages because they get a tax break on the interest. Observes one Treasury official who is skeptical about the flat tax: "I can't imagine getting rid of all deductions and exemptions. There are plenty of homeowners who are struggling along, barely making it because their mortgage interest is deductible. Would the President and Congress be willing, in effect, to foreclose on those people's houses?"

For the moment at least, the answer to that question is probably no. Some popular deductions appear to be untouchable. Says a prominent conservative, who has frequently urged Reagan to come out for the flat tax: "The President likes the idea. He really does. But he thinks it is politically impossible to implement." Whatever the politics of the issue, the wide-ranging support for the flat-tax proposals shows the growing public dissatisfaction with the present tax system.

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