Calls grow for US tax reform

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The Independent Online
For the first time in decades, a real chance exists of a radical overhaul of the US tax system which would see existing progressive income tax replaced by a single flat rate or scrapped in favour of a new tax on consumption.

The notion of a "flat tax" has long been a favourite of right-wing think tanks and the more conservative fringes of US politics. Now it has support which really matters, including the Republican leadership on Capitol Hill, and roughly half of the party's field of candidates for the White House, which the Republicans are odds-on favourites to recapture in 1996

Flat tax, at least as it has been presented so far, dovetails with the anti-bureaucracy mood of the country - its simplicity never more appreciated than these last few weeks, as Americans have scrambled to complete their labyrinthine I-1040 annual tax returns before the mid-April deadline.

The frontrunning version is that championed by Dick Armey, the House Majority Leader, who favours a basic personal exemption of $36,800 per household, after which all income, from whatever source, would be taxed at a single rate of 20 per cent, dropping to 17 per cent after three years. All deductions and loopholes would be abolished. The annual tax form, Mr Armey claims, would be no larger than a postcard.

Other variants include a 20 per cent flat tax which retains certain deductions, as promoted by Presidential candidate Senator Arlen Specter, and favoured by several of his rivals including Senator Phil Gramm. A scheme to deduct all savings from taxable income is favoured by Pete Domenici, the Senate Budget Committee chairman.

Still more revolutionary are the proposals by Bill Archer, House Ways and Means chairman, and Richard Lugar, another presidential candidate, among others, to do away with income tax and the Internal Revenue Service and introduce a straight tax on consumption. Like the Domenici plan, this idea has the added attraction of boosting America's woeful savings rate of 4.5 per cent, to which many of the country's economic ills can be traced.

However, politically the charms of the flat tax are unproven. Whatever rate is chosen it would amount to a tax break for the wealthy, who currently pay a marginal 36 per cent tax on income over $140,000 (£90,000) a year - thus allowing Democrats to assail Republicans as the heartless champions of the rich. Most serious of all in economic terms, any of the current flat-tax proposals would increase the federal deficit.

The Armey plan, says the Treasury, would add $186bn a year to the deficit, almost doubling it. Merely to keep revenue steady would require a flat rate of 22 per cent. If the rich and poor are to benefit, the consequence is higher taxes for middle income earners - the very people who decide elections, in America as everywhere else.