Industry Eyes Flat-Tax Plans

P> Industry executives welcome the flat-tax proposals from Republican party officials, but as usual the devil is in the details.

Several Republican leaders, including Rep. Dick Armey, R-Texas, the second-ranking Republican in the House of Representatives, as well as presidential candidates Sen. Phil Gramm, R-Texas, and Lamar Alexander, want to replace the current tax code with a flat tax of roughly 20 percent.

The flat tax would replace the graduated tax, which allows the federal government to take up to 40 percent from someone earning more than $150,000. Flat-tax proponents also want to kill taxes on capital gains and nearly all tax deductions, such as those paid on home mortgage interest payments. This would supposedly free up money for further investments in equity, thereby stimulating growth that would more than make up for tax revenue initially lost.

For example, the flat-tax proposal being pushed by GOP presidential candidate Steve Forbes would eliminate capital gains taxes, which probably would attract more money to the stock market, nudge down interest rates and help industry raise the investment capital needed for growth.

However, "none of these plans... spell out the details," such as how the new flat tax would treat exports or research and development investments, said Glick. The details, which will emerge during the next year, will determine who wins and loses from any shift to a new tax system, he said.

Because the details are lacking, the infotech industry has not geared up its lobbying machine, said industry officials. The AEA's board plans to meet early next month to discuss the association's approach to the debate, said Glick.

The flat-tax proposals are politically controversial, reducing their prospects for implementation. For example, Democrat politicians oppose the flat-tax measures, saying they will transfer money from the middle class to the rich.

For industry, one of the most promising features of the new flat-tax proposal released by Jack Kemp's National Commission on Economic Growth and Tax Reform, is that it calls for an economic growth rate faster than 2.5 percent. That percentage has been widely seen as the maximum growth rate that can be sustained without creating inflation, and it has been used as a guideline by the Federal Reserve when it sets the nation's interest rates.

But under the flat-tax scheme, that growth rate could be accelerated to 4 percent without sparking inflation, Kemp said Jan. 17 in his tax report, "Unleashing America's Potential; A Pro-Growth, Pro-Family Tax System for the 21st Century."

Industry supports that view. For example, the National Association of Manufacturers is calling for a national growth rate of 3.1 percent. That rate can be achieved without inflation because of greater productivity growth and competitive labor markets, which will slow wage increases, according to Jerry Jasinowski, the association's president.