April 17, 1995.
With just minutes to go before the filing deadline, the streets are filled with people.
We've got number one. Come on up, number one.
Taxes. They're complicated, cumbersome, confusing.
This is your tax stuff you have to pay?
Is there a better way?
The flat tax. People like the simplicity of it. They like the honesty of it.
The flat tax proposals that are out there now will increase the deficit and increase taxes on all Americans with incomes of under $200,000 a year.
Tonight, the flat tax. Is it the better way?
This is ABC News Nightline. Substituting for Ted Koppel and reporting from Washington, Cokie Roberts.
By the time this program is over, the tax deadline will have passed for most Americans.
The annual nightmare of going through the files, filling out the forms, or turning them over to an accountant will be over.
But what if instead of pages and pages of numbers with 53 pages of instructions, all you had to do was fill out a postcard?
Just figure out what you earned and take a percentage for the federal government.
No deductions, no credits, no one tax rate for some people, another tax rate for others.
Everyone pays the same percentage, no matter how much you make.
It's called the flat tax and it's fast gaining popularity in Washington.
This is not a new idea. In fact, it's been around for a good while.
Aspoused sometimes by conservative Republicans, sometimes by liberal Democrats.
The flat tax has never had any prospect of going anywhere before.
Never been taken seriously. But times have changed.
Here's Nightline correspondent, Chris Bury.
In Santa Rosa, California today, an IRS agent took pies in the face for a charity fundraiser.
In Washington, the IRS choir serenaded taxpayers at the post office.
But for many last-minute filers, it was business as usual.
Coping with a tax code that inspires so much fear and loathing.
It simply is too complicated. And I think people have trouble relating to the way the tax system currently is.
It is very confusing, very confusing. And not everybody has the money to go to a CPA or to H&R Block or whatever.
So therefore you have to read up on the tax laws, you have to stay abreast. And it just becomes a hassle.
And you know, I'll tell you, there are a lot of crazy things going on with the IRS. I mean it's a situation where in some cases it's a bureaucracy gone amuck.
Oh yeah, there's no doubt about it. It's too big, it's too complicated. And I think there's a widespread general agreement in America.
We've got to get rid of the tax code as you and I know it today.
Texas Congressman Dick Armey, the Republican majority leader, believes he has the perfect remedy.
Now the question is how do we replace it? I believe the flat tax is the way to replace it.
I think it's the most fair, direct, and honest way to collect taxes from the American people.
Armey says you could file his flat tax on this postcard. His plan begins with big personal exemptions.
$13,100 for individuals, $5,300 for each dependent.
A family of four would pay no taxes on the first $36,800 of income.
After that, all earned income would be taxed at a flat rate of 17%, no matter how much money you make.
There are no itemized deductions, no standard deductions, nothing. Just a family allowance that's very generous and a flat 17% rate.
Home interest deduction. All of that is gone. Charity. All of that is gone. Employer paid medical.
That's all gone. All the complexity, all the difficulty, and everybody says, look, I'm getting treated the same as everybody else.
Well, not everybody says that. It turns out it raises taxes for almost everybody in the country, except for the very rich.
They get gigantic cuts. Most people pay $1,500, $2,000 a year more in taxes.
Robert McIntyre heads a consumer group called Citizens for Tax Justice.
You have a flat rate that exempts interest, dividends, and capital gains. It has to be gigantic tax cuts for the high-income people.
And once you've done that, who's going to make up the difference? Well, it's people in the middle.
Here's how it might work according to an estimate prepared for Time Magazine.
A family of four earning $50,000 that pays $4,249 in taxes now would save more than $2,000 under the Army Plan, a 47% cut in their tax bill.
A family earning $200,000 and paying $46,000 in taxes would save more than $18,000, a 40% reduction in taxes.
The main losers would be middle-income families, incomes in the upper five-figure range and just above $100,000 perhaps,
who would be facing higher marginal tax rates in many cases than they now do,
and who would lose important personal deductions that they are now able to claim.
Here at the Treasury, officials have concluded Congressman Armie's version of a flat tax would cost the country nearly $200 billion in lost revenue every year.
To keep the Treasury from losing that money, they say, the flat tax rate would have to be significantly raised from 17% to at least 23%.
Little noticed in Armie's flat tax is an even more radical proposition to eliminate federal withholding altogether.
The American people can sit down, take their own earned income and pay their share to the government for taxes,
just as they do their house payment or their rent or their car payment, and in each check they write, they can ask the question, do I get my money's worth?
But would people really pay the taxes they owe if the money were not withheld from their paychecks?
Former IRS Commissioner Shirley Peterson is skeptical.
The overall voluntary compliance rate with respect to legal income is estimated to be in the range of about 83% at the present time.
Every one percentage point of noncompliance costs our country about $7.3 billion annually.
We simply can't afford to have the voluntary compliance rate go down.
The flat tax has been floated and sunk before.
If you like the present tax code and the elites that maintains it, then you vote for Clinton.
Liberal Democrat Jerry Brown made it the centerpiece of his primary campaign in 1992 and was widely ridiculed.
But the drum roll for a flat tax is growing in both parties.
I think the American people are fed up with a tax system that drives them crazy.
The purpose of this commission is to move beyond tax reform to a complete overhaul of the entire tax system.
We will be talking about flat taxes.
In the Capitol, the business of tax breaks attracts lobbyists like little else.
Every lobbying group you can think of has a stake in this reform battle, and members of Congress will hear from them.
That means the lobbying will be intensive, expensive, dirty, maybe dishonest.
But you won't be able to ignore the fact that it's happening.
All those tax deductions to be eliminated have their benefactors, from the health care professions to organized charities.
The housing industry is already girding for a fight over the long, sacred home mortgage deduction.
The tax benefits for homeownership account for about 15 percent of the value of the home,
which means that if you eliminate those tax benefits, the immediate impact is a reduction in value of approximately 15 percent in owned homes.
That wipes out a tremendous amount of consumer wealth, cuts down on consumption, begins that chain of events.
We take it as a point of fact that 90 percent of the enemies of the flat tax work in Washington, D.C., within the beltway.
Yes, the lobbyists are not going to like the flat tax.
The Clinton administration does not like the flat tax either, but Washington is starting to take it seriously.
The Senate has held hearings, presidential hopefuls are crafting positions,
and some Republicans want a flat tax in their 1996 platform.
After all, what could be a safer political bet than promising a simple solution to a complicated tax code that everybody loves to hate?
This is Chris Beery for Nightline in Washington.
When we return, we'll be joined by the man leading the drive for a flat tax,
and by a columnist who says the flat tax may be more simple, but a lot less fair.
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Joining us now from our Washington Bureau, former Congressman Jack Kemp is co-director of Empower America.
He's also chair of the newly formed GOP Tax Commission.
And from our Boston Bureau, Robert Kutner is co-editor of the American Prospect,
and writes a nationally syndicated column on economics.
Well, a postcard to fill out your taxes instead of the agony most of us have just been through.
It sounds too good to be true.
Congressman Kemp, is it too good to be true?
Is this something you've worked on for a long time?
Well, it's something I've believed in for a long time, Koki.
I'm sure that Professor Kutner will strongly disagree.
However, it seems to me with this day in which about five billion hours of people's time has been spent
trying to fill out and comply with about 9,000 pages of IRS regulations,
the time for a flat tax has come.
It's not just fairness and simplicity.
It seems to me, Koki, one of the most overriding and profound arguments for a flatter, fairer,
what Bob Dole called a flatter, fairer, simpler tax rate system,
would be the impact it would have on the tax base, on the economy,
on making capital and credit more available to lower income people
and help lift that tide that John F. Kennedy talked about that can raise the boats of economic activity.
Robert Kutner, fairer?
Well, the problem with it is, first of all, that it's unfair.
You heard in the piece that began this show, Koki,
that people making $50,000 a year are going to get a break,
people making $200,000 a year are going to get a break,
people making less than $37,000 a year are going to get a break.
Well, if everybody gets a break, who pays the taxes?
And the other problem with it is that it mixes up the ideal of simplicity with the ideal of fairness.
You can have a much simpler tax code.
You can get rid of all the credits, all the exemptions, all the deductions,
but you can still preserve the idea that people who make more money ought to pay tax at a higher rate
and ordinary people ought to pay tax at a lower rate.
You can simplify the whole tax code and not get rid of the ideal of tax progressivity.
The simplest part of figuring out your taxes is multiplying the taxable income times the rate.
The complicated part is figuring out what your taxable income is.
So I think the Republicans have done a very clever job of bait and switch
by confusing the idea of simplification with the idea of a flat rate.
You can have all the simplification you want and still have a graduated rate structure.
Well, may I have a shot at that?
I think Bob Kutner is making a pretty typical mistake, if I might say so,
in confusing tax rates with tax revenues.
I love to quote President Kennedy's New York Economic Club speech in 1962
in which he said it's a paradoxical truth that high tax rates cause low tax revenues.
And he said before trying to cut the tax rates by 30 percent in the early 1960s
that he wanted to bring down the rates to expand the tax base.
As I said earlier, American people spend five billion dollars, five billion hours a year
trying to fill out and comply with tax consequence.
They should be using that time to produce widgets, to produce more capital formation,
to create more savings and make the economy grow.
And if we had a bigger economy, we would ultimately get more revenue.
I think even Bob Kutner would agree with that.
I wouldn't agree with it, Jack, because we tested this theory in 1981
with the supply-side tax cuts and it didn't work.
Well, as everybody knows, the main thing we got from the supply-side tax cuts
was a quadrupling of the federal deficit.
And now the same crowd is saying, well, let's do it again.
And now the same crowd is saying, well, let's do it again.
And the technical experts at the Treasury are saying that if you do this
with Congressman Armey's 17 percent rate, you're going to widen the deficit by $200 billion a year.
Oh, that's nonsense.
Congressman Kemp, what about that, though, Congressman?
Some of your colleagues in the Republican Party have said, quite frankly,
that one of the things they want to do is starve the government
so that it cannot have the revenues to be involved in as many programs as it currently is.
Is that part of the goal here?
I can't defend every statement that's made in the Republican Party,
nor would Bob Kutner want to defend every statement that's made in the Democratic Party.
But I would say this.
Most Republicans, and certainly Newt Gingrich and Bob Dole, who asked me to head up this commission,
have suggested that we want a bigger economy, we want a broader tax base,
we want to encourage the formation of capital, which even Bob Kutner would recognize
has to flow down into the neighborhoods and unto people who have never had a...
That's good, Bob Kutner.
But when we had the so-called supply-side tax cut in 1981,
the economy grew at just the same rate it did in the 70s, savings and investment actually fell,
and the deficit quadrupled.
And there is this myth that a lot of Republicans hold on to that supply-side economics was a great success.
Well, it was.
It was not.
There's empirical evidence, Bob, now, just for a moment.
What, you're talking that the debt didn't quadruple?
Well, in the consequence of bringing down inflation, we were taxing the inflation of the economy,
and there was a built-in bias for the government to inflate because there was no indexed income tax.
We still don't index capital gain tax.
And frankly, the Army plan, albeit we're going to study all of the various plans,
I think we owe enormous debt to Dick Army for helping to start the debate.
Well, a debt of an additional $200 billion a year is what we're going to owe Dick Army.
And if you trust the Treasury Department, you'll love the Mexican peso bailout.
I mean, they made a mistake on that, and they're going to make it on this.
I think the American people want an overhaul of the taxes.
And even Jimmy Carter said it's a disgrace.
What we're going to talk about is whether they're likely to get it or not when we come back in just a moment.
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And we're back with Robert Kuttner and Jack Kemp.
Congressman Kemp, you were there in Congress through, you've talked about the 81 Cup,
but you were also there through the 1986 tax reform, quote-unquote.
You know how hard it is.
You heard all of the people lining up and saying, this will kill us.
If you get rid of charitable contributions, that will be terrible for us.
If you get rid of the income of the mortgage deduction, that will kill us.
Governors saying, if you get rid of state tax deductions, that will kill the states.
If you get rid of city tax deductions, all of that.
How likely is it to really do this?
Well, it is likely, given the fact that the Cold War is over,
the American people elected a new Congress,
and most of the Republican candidates that I know of right now
are running on some form of a flatter, fairer, simpler, lower tax rate system.
And I wouldn't be surprised, Koki, even though Robert Kuttner has mentioned the Treasury Department,
I wouldn't be surprised if even the Clinton administration isn't secretly looking
at some major overhaul of the tax system for 1996-97.
Just to finish the point.
Secondly, I think Dick Armey is right.
About 90% of all the people who disagree with the flat tax live within the beltway.
I think the American people, particularly on this day,
want an overhaul of a system that, as I said earlier, Jimmy Carter called a national disgrace.
It has to be done to make our economy more efficient and begin to grow again
and open up opportunities for low-income people to become middle-income people.
Well, you can simplify the tax system very, very substantially
without giving up the idea of taxation on the basis of ability to pay.
And secondly, this idea that everybody would be treated the same
by a complete simplified tax system with no deductions, no exemptions,
looks better than it actually is.
For example, if you make $60,000 a year and you have a serious illness,
and you have $60,000 a year, and you have a serious illness,
and you have $30,000 worth of doctor bills,
you don't have the same disposable income as somebody who makes $60,000 a year
and doesn't have doctor bills.
I think you ought to be able to deduct those doctor bills.
And I also think that the mortgage interest deduction...
Bob, let me just answer that question.
Jack, you used to be Secretary of HUD.
The mortgage interest deduction is one of the great stimuli to homeownership.
Why throw that overboard for the sake of taxable...
Well, you've made two very important points, and I would like to address them.
Thank you.
First of all, given the system with high marginal tax rates,
we should have every deduction and credit and exemption we can possibly have.
So I think they're precious.
I have defended the interest deduction for mortgages,
and I think that people ought to be able to own their own health insurance
by being able to totally deduct it off their pretax income.
However, if a $60,000 family were taxed effectively at about 4%,
they would have $56,000 today after taxes with which to purchase health insurance
that would protect them against any catastrophic long-term debilitating illness.
A $60,000 family being taxed at 4%...
That's the effective tax.
Well, it's fantasy because a $60,000 family is already better off than the average family,
and if a family that's that well off is paying a tax of 4%...
Now you're changing the goalposts.
You know a lot about football, but let's talk about taxes.
Bob, you used $60,000.
I just kind of forgot to finish from it.
If a $60,000 a year family, and don't forget the average family makes a shade under 40,
if a $60,000 a year family is paying income tax at the rate of 4%...
Effectively.
Who is going to pay the taxes, Jack?
Bob.
That's fantasy. The numbers don't work.
Well, they don't work for you because...
The Army makes it up.
Bob.
He makes it up. The numbers don't work.
Wait a minute. Wait, wait, wait, wait.
Bob, just a minute.
You are defending a system as it is currently constructed.
A. B. You've defended a 91...
You said the economy grew with a 91% tax rate,
as well as it did in the 1980s under Reagan and the tax cuts.
Well, that happens to be the fact.
And that's just demonstrably untrue. It is not a fact.
It's not empirical evidence.
The economy grew faster in the 40s than in the 70s.
Bob, let me finish my point.
The economy grew without inflation better in the 1980s under Ronald Reagan and the tax cuts
than it did in the 1970s. You can't make the American people believe
that Jimmy Carter's economic policies work better than Ronald Reagan's.
We just had an election. That's why you got Newt Gingrich, the speaker.
The American people don't buy soap to rich.
Let me ask you something, Ben. What do you think?
I mean, why has this suddenly reached a point where we really are talking about Congress actually passing it?
I'll start with you, Bob Kutner.
Well, it's reached a point where Congress is seriously considering this
because the Republicans happen to have a narrow majority in both houses.
So this is part of the program of many Republicans, and they're fairly disciplined.
And so it suddenly becomes serious, but it doesn't make it good policy.
But, Congressman Kemp, you know better than most that it wasn't always the policy of most Republicans.
No, it really wasn't.
What's happened?
It really wasn't. Well, a couple of things.
Number one, I think the 1980 experiment with supply-side economics did work,
despite Robert Kutner's arguments to the contrary.
But number two, we had a debate in 1994. Last November 8,
the American people decided that the House Republican Newt Gingrich contract,
plus the idea of electing a new Congress, has convinced the American people that Reaganomics,
despite what Bob Kutner says, and cutting tax rates is far more preferable than raising tax rates,
soaking the rich, and punishing success.
We're out of time, gentlemen. But what you're basically saying is that an election happened.
An election happened. Now we can change.
And we'll see if we do. When do we come back?
Oh, we can quadruple the debt again.
I'll be back in a moment. Thank you both.
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Tomorrow on World News Tonight with Peter Jennings, an extraordinary new device that keeps people alive while they wait for a heart transplant.
That's story tomorrow on this ABC station.
And that's our report for tonight.
I'm Cokie Roberts in Washington.
I'm Cokie Roberts here at ABC News. Good night.
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