Brown Under Fire For `Unfair' Flat-Tax Plan
CAMPAIGNING along the East Coast this week, an impassioned Jerry Brown is offering to rescue voters from the clutches of the corrupt and powerful. "If you're tired of Wall Street and Washington ripping you off, you'll vote for me!" the presidential aspirant thunders into a noontime crowd.
Former California Gov. Brown (D), whose stated goal is tax fairness and economic growth, pushes an economic plan his critics say would make the poor poorer, the rich richer, and load down the government with more debt.
The centerpiece of his proposal is an across-the-board 13 percent tax on incomes, goods, and services. According to Brookings Institution and Citizens for Tax Justice calculations, the so-called "flat tax" would increase the burden for 80 percent of American taxpayers - mostly the impoverished and the middle class - and add $200 billion a year to the burgeoning federal deficit.
How can the Democratic candidate who is running on a progressive economic platform that purports to pound the rich offer a plan that's regressive?
Economists assert that Brown hasn't taken the time to think through his proposal, and has left the pundits to work out the kinks while his populism gains momentum among disaffected voters. New idea, but will it work?
"I don't think he's given any serious thought at all to what he's proposing. He just needed something new, something different to say," says Barry Bosworth, a former Carter administration economist and now a senior fellow at the Brookings Institution. "Some people think it will hurt Brown. I don't. Never underestimate the powerful appeal of simple ideas, even if they're wrong."
Brown insists he's redressing tax imbalances by eliminating write-offs for "special interests" that have historically left average taxpayers with too great a burden. Only mortgage payments, rent, and charitable contributions would be deductible under Brown's plan.
But Mr. Bosworth and a host of other economists say Brown's flat tax would actually give the top 20 percent of taxpayers large tax breaks. Tax hikes would hit the lower fifth of US income earners hard. Many low income earners "cannot afford these kinds of tax burdens without falling into poverty," Bosworth says.
Candidate Brown targets alienated voters with pledges to end the corporate tax loopholes and related write-offs, such as lavish holidays, Lear jets, and power lunches. His claim that business, not consumers, will absorb a new 13 percent value-added tax (VAT) on goods and services doesn't wash, says Bosworth. "VAT is not coming out of business. All taxes are paid by people. When wages have gone up over the past 20 years, higher prices and sales and excise taxes have always been passed along to consumers i n the form of higher retail prices." Disrupt social security
Bosworth says Brown's plan would disrupt the now self-financed social security system by ending the Social Security tax. It would also work against savings by taxing employers' contributions to pension funds and health insurance, he says.
Brown's plan was inspired by two Stanford University economists, Robert Hall and Alvin Rabushka, who published a flat-tax plan in the 1980s. The two plans differ dramatically. For example, Brown chose not to adopt the Hall-Rabushka taxes on business income and tax exemptions for business capital expenditures, such as funds spent on new equipment or expansion.
Margo Thorning, chief economist with the American Center for Capital Formation, likes the flat tax but says Brown should use the Hall-Rabushka plan. An advocate for business tax breaks and savings incentives to fortify US industry with more money to invest, Ms. Thorning has offered advice to Democratic and Republican economic strategists during this presidential campaign. She says "Brown hasn't had time to think through the plan. It's clearly not perfect; it has to be modified." Revenue shortfall
An inescapable flaw is Brown's revenue shortfall that adds $200 billion to the federal budget, says Bosworth. It puts state and local governments under more pressure to pick up where Uncle Sam drops the ball, and finance more services and social welfare programs. This is a trend that has already depleted some local coffers, and leaves states, counties, cities, towns, and even special jurisdictions little choice other than to raise taxes.
Says Bosworth: "People who thought, Oh, I'm not worried about property-tax increases, because I can deduct it from my federal taxes, will have to start worrying, because with Brown's plan, those higher taxes are not deductible from federal taxes."
Bosworth says Brown's proposal does nothing to sharpen the debate on tax fairness. "It's taken it a huge step backward. We have to start all over by explaining elementary principles of how a tax system works."