Random Tax Thoughts Jude Wanniski March 9, 1992

FLAT TAX: Jerry Brown's proposal to replace the 4,000 pages of the federal tax codes with a 13% flat tax on personal income and business value added is generating more interest as Brown's standing improves in the presidential campaign. As it is now clear that Brown may still be alive at the end of the primaries, the flat tax will get the serious national attention it deserves. In the last week, I've been getting calls from reporters around the country, referred by Jerry, to discuss the economics of this issue. This morning's New York Times elevates the idea in an op-ed piece, "The Beauty of the Flat Tax" by Michael Weinstein, the Times editorial writer who specializes in economics. Weinstein makes the case as a Keynesian, observing along the way that a flat tax essentially eliminates all taxation of investment: "By exempting investment, corporations would no longer need to calculate allowances for wear and tear -- depreciation. Gone would be a zillion pages of tax complexities. Also gone would be the need for individuals to pay tax on capital gains -- which would be indirectly captured by the corporate levy. Throw out another zillion pages of tax code." Brown bought the idea from Professors Alvin Rabushka and Bob Hall of Stanford, whose arguments are more supply-side than Keynesian. Rabushka, an old friend, is an expert on the Hong Kong economy, which comes close to having a flat tax. Jerry Brown is still a longshot to win the Democratic nomination, but if he continues to do well, the flat tax idea will become part of the political culture. It sounds zany, but it is such a wonderful idea that I'm confident it will eventually elect a president and become law. I told The Boston Globe this morning that if the stock market knew it would be in effect tomorrow, the Dow Jones industrial average would double overnight. The flat tax is the perfect adjunct to Jerry Brown's assertion that the political process has been corrupted by money; the corruption has of course occurred because of the complexity of the tax system.
 
GROWTH PACKAGE: There's always a chance that something will happen to revive prospects for tax legislation this year. At the moment, nobody we're talking to in the Administration or in Congress thinks it's likely. As long as the Democrats insist on a millionaire's surtax at a minimum to seal a compromise, it can't happen. The President has now been frozen into a no-new-taxes posture by the Buchanan campaign. The White House will make a lot of noise when the President vetoes the tax bill that he will be sent on or around March 20, but it has not been decided what kind of noise. He may ask for prime TV time to lay out his case against the Democrats. The growth faction wants the President to simply announce indexation of capital gains and a line-item veto, challenging the Democrats to fight him in the courts. They also want him to fire back at Congress immediately with a Three Point Plan that is simple and direct, as opposed to the vague laundry list outlined during the State of the Union. The argument is this: The Democrats will not enact any such plan, but at least the President will be on the offensive, able to denounce the Democrats right up to Election Day for failing to enact his Three Point Plan (whatever it is); the rhetoric will succeed at the polls and the President will introduce his Three Point Plan to a cheering Congress in January. This agenda sounds fine, but Treasury Secretary Nick Brady doesn't like it at all. He doesn't want to index capgains because Treasury's tax lawyers say it's too hard to do. He doesn't want to raise the line-item veto issue in the courts. He doesn't want to introduce new legislation after the President vetoes the bill he will be sent, preferring instead to let the campaign take its own course. Brady remains the President's largest problem, as he has been for three years. We also understand the President was very unhappy with Senator Connie Mack's recent call for Brady's resignation. Senator Mack did not get a very good response from his fellow GOP senators, by the way. Nick Brady is very popular in the Senate cloak room. But Mack's office reports he got great response from grass-roots Republicans.

BRITISH BUDGET: We're eager to see what kind of tax plans the Tory government proposes tomorrow in its new budget. The Old Guard wants a tiny cut in the ordinary income tax rate. The younger growth Tories are urging Chancellor Norman Lamont to cut the capital gains tax. We'd heard last autumn that Lamont would phase out capital gainstaxation, but only after the coming elections, now apparently scheduled for April 9. The latest polls indicates Labor with a slight lead, reflecting the depth of the recession. A capgains cut would help the Tories, I think, but that position may be too unconventional for Prime Minister John Major.