REVIEW & OUTLOOK (Editorial): Bradley-Kemp-Reagan?
Loud voices are screaming circles around the deficit, but the sleeper of this election year may yet prove to be the flat tax, an idea being played with at various ends of the political spectrum. The Democrats got their version out first with Bradley-Gephardt. The Treasury has been pondering the idea as a post-election possibility. And on Friday last, Rep. Jack Kemp unveiled his plan, co-sponsored by Sen. Robert Kasten.</br></br>The basic flat tax idea is to drop most existing deductions and exclusions and slash marginal tax rates as much as half -- to a top rate of 30% in Bradley-Gephardt and 25% in KempKasten. Both plans expand the standard exemption, which has not kept up with inflation, and both retain a progressive structure leading up to the top rates. They intend to leave the distribution of tax burden by income almost unchanged.</br></br>There are important differences between Kemp-Kasten and Bradley-Gephardt. The Bradley proposal would repeal indexing and thus re-introduce bracket creep, though its effects would be less severe under a system with a 30% top rate. The Kemp plan keeps bracket indexing, and would index capital-gains computing as well, so that only real gains are taxed. Thus, Kemp-Kasten protects the silent majority historically ripped off by inflation. Several of the Bradley-Gephardt provisions make us wonder just how much it would actually simplify the tax code. Yet the two plans point in the same direction.</br></br>Most striking is the congruence in economic thinking: Both assume "lower rates stimulate work, savings, and investment. . . . The broad general effect of lower tax rates will contribute to economic growth," as Mr. Bradley says. The great theoretical appeal of these proposals is that they can lower marginal rates without costing government revenues. And of course, it is marginal rates -- the "wedge" taken out of each additional dollar of earnings -- that has the big effect on economic incentives. This incentive effect, of course, is the central point of supply-side economics.</br></br>So far, both parties have been enthused -- and yet, they haven't. Ronald Reagan began plugging the flat tax in columns for the Copley News Service years ago, and remains a supporter, but will only promise blandly to consider the matter in 1985. Gary Hart and Walter Mondale back Bradley-Gephardt, but made it through a three-hour debate at Dartmouth College without mentioning the idea. The parties seem content to leave this strategic hill unoccupied.