Forbes tax plan courts the poor

By Michael Kranish, Globe Staff, 09/11/99

ASHINGTON - Steve Forbes, the multimillionaire Republican presidential candidate who was viewed by some in 1996 as a champion of the rich, is preparing a fall campaign strategy that relies on the unlikeliest of allies: the nation's lowest-income workers.

The strategy, dubbed the ''Heartland plan'' by some campaign aides, is part of a carefully conceived effort to recast Forbes's 17 percent flat tax as a boon for lower-income people, with a family of four earning under $36,000 a year paying no taxes. That is a pool of 20 million potential supporters, Forbes said.

Now, like a marketing maven who tries to revive an old product with a new jingle, Forbes is tapping his fortune to launch an advertising campaign that focuses on the way he says lower-income workers would save thousands of dollars in taxes under his plan. That is in marked contrast to 1996, when Forbes's plan was portrayed as the epitome of trickle-down economics, with the candidate asserting that the nation's wealthy could use large tax cuts to create jobs for lower-income people.

''I tried to explain the thing, but obviously it did not succeed the way I had hoped,'' Forbes said in an interview. ''In business and in marketing you figure out how to get the message across and figure out what works. I'm going to keep at it till it works. We will hammer home how it affects real people.''

But some critics said the new strategy is just an attempt to repackage what they maintain is a giveaway to the rich.

''It is basically just crazy,'' said Robert McIntyre of Citizens for Tax Justice, which labor unions back. ''He is saying that we can cut the government revenues that pay for all the non-Social Security programs by half and still run the country. That is just not plausible. It is in excess of a $400 billion tax cut.''

McIntyre said many lower-income people would actually pay higher taxes under the plan, a point hotly disputed by Forbes.

The source of the disagreement over the impact of the plan is that, beyond imposing a flat tax, Forbes's program would change many aspects of the way government collects revenues. For example, McIntyre assumes that Forbes's plan would eliminate the earned-income tax credit, which enables lower-income people to offset federal taxes. But Forbes said his plan does not deal directly with the earned-income tax credit, and he declined to say whether he thinks it should be eliminated.

''That would be part of a welfare reform plan,'' Forbes said.

Forbes may be optimistic in thinking lower-income workers will flock to support his plan. Under current law, a family of four with an income of about $28,000 pays no federal income tax as a result of exemptions and credits, according to the Internal Revenue Service. McIntyre said the Forbes plan would result in businesses being taxed for fringe benefits paid to employees, such as health insurance and certain Social Security taxes. That could lead to higher costs passed on to workers.

Daniel Mitchell, a senior fellow with the conservative Heritage Foundation who is one of the nation's leading proponents of the flat tax, said McIntyre is correct that employers would have to swallow higher employee costs under the flat tax, as much as $1,000 for benefits for worker who makes $36,000 a year and supports a family of four.

While McIntyre believes that cost would be passed on to employees, Mitchell said businesses would absorb the expense because of so many other savings under the flat tax. The tax on profits, for example, would drop to 17 percent from 35 percent.

Mitchell is not allied with any candidate but has spoken informally on numerous occasions with the Forbes campaign.

As for Forbes, he dismissed questions about whether businesses would have to face higher costs for employee benefits, saying such details did not affect his contention that the flat tax would be better for everyone.

This is not the first time Forbes has tried to repackage the flat tax. Previously, Forbes said the flat tax would be optional, with taxpayers allowed to stay in the current system if they wish. Forbes has also recast his appeal on other fronts: Earlier this year, for example, Forbes worked to underscore his standing as a social conservative, hiring former top officials of the Christian Coalition and taking a strong antiabortion stance.

But Forbes knows the bottom line of his campaign is how the flat tax is perceived by the public.

Forbes's strategy is part of a broader attempt by the magazine publisher to contrast his own proposal with what he considers a vague call by Texas Governor George W. Bush for ''compassionate conservatism.'' Bush, the GOP front-runner, has said he favors tax cuts but has yet to provide specifics or say whether he would support a flat tax, leaving the field open for Forbes. Forbes's aides are trying to portray their candidate as a ''conservative with meaningful solutions.''

There is no dispute that the flat tax would be a boon for the wealthiest Americans. Instead of the current top rate of 39.6 percent for federal income taxes, the top rate would be 17 percent, though the actual rate might be higher due to the elimination of most deductions.

''A flat tax is very, very good for Michael Jordan and Bill Gates,'' Mitchell said, referring to the benefits for wealthy Americans. But it is also a ''boon for lower-income people,'' he said.

Forbes's new flat tax strategy is previewed in his just-published book, ''A New Birth of Freedom.''

In addition to eliminating federal income taxes for those families with an income of less than $36,000 per year, which Forbes said would save them as much as $1,600 per year, Forbes also wants to eliminate the tax on personal savings, Social Security benefits, dividends, capital gains, and the ''marriage penalty.''

Moreover, in the least-publicized aspect of the plan, Forbes also would impose the flat tax on businesses, with no tax on basic operating expenses, wages, and pensions - a potential bonanza for corporate America. All this would cost the Treasury many billions of dollars in revenue and, according to some analysts, put the nation back on a budgetary path with red ink.

While Forbes has opened the debate on taxes, all the candidates are expected to come forth with plans. Former Vice President Dan Quayle has proposed a 30 percent tax cut, similar to that proposed by Ronald Reagan in the 1980 presidential campaign. Elizabeth Dole plans to unveil her tax plan this month.

While Mitchell still believes Forbes was right in the 1996 campaign to focus on the trickle-down effect of tax cuts, the Heritage Institute scholar said he knows it's difficult to explain. So Mitchell has this advice for a candidate espousing the flat tax: ''Don't focus on economic theory. Focus on getting the IRS out of people's hair. That resonates with people.''