SECRETS OF THE KEMP COMMISSION

By JEFFREY H. BIRNBAUM/WASHINGTON

VOTERS LOVE IT AT FIRST SIGHT. Politicians want to embrace it. there may be danger in the details, but the flat tax is becoming the hottest new issue in the G.O.P. presidential race. Riding mostly on his flat-tax proposal, magazine mogul Steve Forbes has become the fastest-rising candidate in the contest. And he's about to get some prominent company. Next week a tax-reform commission headed by former Housing Secretary Jack Kemp will make its own proposal to flatten the federal income tax. Bob Dole, the Republican front runner and co-sponsor of the commission, is expected to endorse it. The idea is picking up so much steam that the real estate lobby is planning to broadcast radio commercials in Iowa and New Hampshire to pressure candidates not to make their tax plans too flat. The lobby is worried that a flat tax might wipe out the deduction for mortgage-interest payments, which subsidizes the housing market to the tune of $60 billion a year.

Forbes is pushing a pure flat tax, with a rate of 17% and the elimination of all deductions, but that is proving too severe for most of the rest of the field. G.O.P. candidates Phil Gramm and Pat Buchanan back the general idea but say the mortgage-interest and charitable-donation deductions are too popular to end. Dole and Lamar Alexander have been cagier about how flat and how free of exceptions their plans would be. Forbes sneers at his rivals, "They are responding to a poll rather than to conviction." But their views show a respect for recent history. Former-California Governor Jerry Brown ran on a flat tax for the Democratic nomination in 1992 and was savaged by candidate Bill Clinton for proposing to cut taxes for the rich and raise them for the middle class. Those same arguments, plus the fact that a 17% rate system would raise less revenue than the current tax system and thus widen the budget deficit, will make the Forbes plan increasingly controversial.

The Kemp Commission will attempt to duck the toughest issues. It will advocate a tax with a single, low rate to replace the current five-rate system. But it will leave to the politicians the question whether to keep, trim or discard the mortgage-interest and charitable write-offs. It also will leave open the possibility of retaining the tax incentives for retirement plans like the 401(k). A partial draft of its report does not say where the flat rate or the personal exemption should be set. Although the draft does not contain it now, the report might even allow for the possibility of two rates.

On a few issues, the commission will not equivocate. It will reject a value-added tax, reasoning that such a tax would be hidden from the public and could thus be boosted easily as a way to fuel the growth of government. The commission will also urge the passage of a constitutional amendment that would require a two-thirds majority of Congress to raise tax rates. And it will recommend the elimination of the inheritance tax and the tax on dividend income.

The 14 commissioners, who were appointed by Dole and House Speaker Newt Gingrich last spring, have had their arms twisted by defenders of almost every loophole in the tax code. The commissioners staged 12 hearings in locales from Boston to South Central Los Angeles. Initially they found themselves divided into two camps on the flat-tax issue: the purists and the compromisers. One pure flat taxer was Dean Kleckner, president of the American Farm Bureau Federation. A forceful member of the not-so-flat-tax camp was John Wieland, a home builder from Atlanta. The more the commissioners talked, Kleckner says, the more he saw the folly of purity, especially when it came to the mortgage-interest deduction enjoyed by 27 million American homeowners. In the end, said Kleckner, "I came to the point of view that it was not worth the fight."

--By Jeffrey H. Birnbaum/Washington