Gov. John Kasich, R-Ohio, speaks at the Republican Leadership Summit in of this year in Nashua, N.H. Associated Press photo
Photo: Jim Cole
Photo: Jim Cole

Kasich flirts with flat tax

Opponents say proposal benefits the wealthy.

As he toys with running for president, Gov. John Kasich also is flirting with another idea: Backing a variation of magazine publisher Steve Forbes’ plan to overhaul the federal tax code.

With Republican presidential candidates ranging from Florida Sen. Marco Rubio to former Arkansas Gov. Mike Huckabee unveiling major plans to revise the tax code, Kasich is talking about a “flatter” and “fairer” code that might reduce the seven current income tax brackets into as few as just one.

In particular, Kasich said he has “been working” with Forbes on “an intriguing idea” to allow Americans to stick with the current tax system or embrace a revolutionary new code to determine which plan saves them more money.

“I don’t want to get into details of tax plans nationally,” Kasich said while campaigning recently in South Carolina. “I’ll have more stuff when I’m ready to do that.”

Kasich said he wants to make sure that “people are going to view it as fair. Now I haven’t seen all the distribution tables, but I think flatter makes more sense and there’s no question that we need to get the corporate tax lower,” he said.

Simplifying the mind-numbingly complex federal tax code has held a tantalizing appeal for many conservatives and some Democrats. But the lure of reform has always foundered against the reality that under most single-rate income tax plans – known as a flat tax — the wealthy would receive a major tax break.

“If you ask its advocates why it’s a good idea, one of the first things they’ll say is it’s a simpler way to tax,” said Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a left-leaning non-profit organization in Washington. “I think that’s largely an illusion.”

“Any move to a flat tax includes huge cuts to the better off,” Gardner said. “That money has to be made up somewhere. The only place to go is middle and lower income families.”

Harry Stein, director of fiscal policy at the liberal-leaning Center for American Progress in Washington, said “Republicans have made these commitments to sharply reduce top marginal tax rates … and have made commitments to reduce or eliminate taxes on investments, such as capital gains.”

“They can’t find a way to square those commitments with a tax code that is fair for the middle class and low income people, because you can’t do it,” Stein said. “You either have to raise taxes on everyone else to pay for those tax cuts for those at the top or accept much, much higher deficits.”

Kasich had a say in the tax overhaul signed into law by President Ronald Reagan when the Ohio Republican was a member of the U.S. House in 1986. The law scrapped billions of dollars in tax loopholes, slashed the top marginal income tax rate from 50 percent to 28 percent, created a second tax bracket at 15 percent, and boosted to 28 percent the tax on capital gains, which are profits from the sale of real estate and stocks.

But throughout the next two decades, presidents and lawmakers tinkered with the code. In an effort to make the code more progressive, they increased the number of income tax brackets from two to seven, including a 39.6 percent rate for the richest Americans.

Congress also inserted a variety of oddities into the code, such as the infamous credit for Starbucks to roast coffee, prompting Alan Viard, resident scholar at the American Enterprise Institute in Washington to say, “This is a flawed system. There is a lot of needless complexity.”

A number of Democrats are embracing major revisions but want to retain the progressive brackets that result in wealthier people paying at higher rates. By contrast, Republicans have rallied around plans that would lead to lower tax rates for everyone.

Some Republicans, such as Huckabee, are pushing a national sales tax, an idea some analysts dismiss as shifting the tax burden to lower-income Americans.

By contrast, Forbes has resurrected his flat tax plan from his 1996 campaign. Forbes would kill virtually every deduction — including home mortgage interest — in the code, replace the seven tax brackets with one 17-percent rate for everyone. To cushion the tax burden to middle income people, a family of four would not pay any federal income tax on its first $52,000 in annual wages.

During a speech in March at the Heritage Foundation, a conservative non-profit in Washington, Forbes hoisted a challenge: “When the new system comes in, you can go with the new system, or if wish — if you lack self-esteem, if you want to torture yourself — you can stay with the old system,” he said.

“We believe that this would just empty the air out of the room of anxiety over bringing in a new tax code,” Forbes said. “People would not have to trust anybody. You can see for yourself which one is better.”

Although Kasich has not indicated which deductions he might scrap, the dual approach has resonated with him. But some economists dismiss it, with Gardner characterizing it as a “Rube Goldberg scheme,” while Viard of AEI calls it “a really bad idea,” adding that taxpayers are “going to want to compute” their taxes under two systems.

“Think of how more complicated that would be,” Viard said.

Declaring that under his plan “everyone gets a tax cut,” Forbes told the Heritage audience that the “flat tax is absolutely crucial for turbo-charging our molasses like economy.”

But skeptics warn that the flat tax would produce higher deficits, a sharp contrast to the 1986 tax overhaul designed to raise roughly the same amount of money as the old tax code.

Even without any changes in tax policy, the non-partisan Congressional Budget Office projects the federal government’s annual deficit will rise from $485 billion in the 2014 spending year to just a shade under $700 billion in 2020.

The CBO also calculates that the publicly held debt — treasury bonds or other notes held by individuals and foreign investors — will increase from $12.78 trillion in 2014 to a staggering $21.1 trillion in 2025, which would be nearly 80 percent of the nation’s gross domestic product.

Yet many Republicans are growing fond of a major overhaul, including suburban Columbus Rep. Pat Tiberi, R-Genoa Twp., who said, “We need a tax code that is simpler and fairer and I’m all for that.”

But Tiberi, a member of the tax-writing House and Ways and Means Committee, acknowledged that odds are stacked against any immediate change, given the narrow Republican majority in the Senate and a Democratic president.

“I’m going to try to be as pragmatic in terms of moving the ball in the right direction,” Tiberi said. “I’m trying focus on the art of the doable and not the art of the hopeful.”

Samuel Votaw of the Washington Bureau contributed to this story.