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What The Media Tell Americans About Free Enterprise

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February 1996


Issue Analysis: Forbes Proposal Draws Media Fire
A Bumpy Road for the Flat Tax

The newest rage on the political scene is the flat tax. It has propelled the presidential candidacy of Republican Steve Forbes, causing most of the other GOP candidates to formulate a version of their own. The flat tax is a simple tax system with complex arguments both for it and against it. Covering such an issue is, therefore, a difficult task. To be fair and balanced, reporters at the very least must present the best arguments for it and against it. But so far, the best arguments for the flat tax have rarely made the news.

Media Research Center analysts reviewed all of the flat-tax stories on network evening news shows (ABC World News Tonight, NBC Nightly News, CBS Evening News) and in national news magazines (Newsweek, Time, U.S. News & World Report) during the month of January. There were 16 stories which presented arguments for or against the flat tax. (There were more about the Forbes campaign generally.) In those 16 stories, arguments against the flat tax were presented 51 times, while arguments in favor of the flat tax were presented only 24 times.

Double Taxation. The argument against the flat tax most often presented -- 24 times in the 16 stories -- was that it would not tax interest income or investment income, and thus overly benefit the wealthy. For example, ABC's Dean Reynolds, on the January 29 World News Tonight, said the Forbes flat tax would mean "no taxes on inherited wealth or stock portfolios." Newsweek's Marc Levinson and Rich Thomas contended that "investment income would be tax-free." According to Peter Jennings, on the January 15 World News Tonight, "There would be no capital gains tax, no tax on interest earned at the bank, or for money you've made through investments. A millionaire living solely on dividends or inherited money wouldn't have to pay any tax."

Only twice did a reporter point out that such a millionaire, under a flat tax, would in fact be taxed. Flat-tax proponents argue that investment income would indeed be taxed, but only at the corporate or bank level. As the Heritage Foundation's Dan Mitchell wrote in the January MediaNomics, under the flat tax "a corporation must pay tax on behalf of shareholders before the income is distributed in the form of dividends." Flat-tax proponents argue that, as in the case of withholding, savers and investors currently get less money because it has already been taxed, but still must pay an additional income tax on the money. Only Newsweek's Allan Sloan, in an anti-flat tax article, pointed out that currently "some [income], like corporate dividends, is in effect taxed twice."

Mortgage Interest. The next most common argument against the flat tax was that the elimination of the mortgage interest deduction would hurt the middle class. Reporters cited such arguments 13 times in the 16 stories. According to the January 15 U.S. News & World Report, "Homeowners could see home values drop if mortgage interest payments and property taxes were no longer deductible." On the January 15 World News Tonight, Peter Jennings weighed in on the issue by only mentioning one side: "President Clinton believes that middle class homeowners will see the value of their homes go down if there is no mortgage deduction."

Reporters mentioned counterarguments to such claims only three times. For instance, Bob Schieffer, on the January 20 CBS Evening News, said, "Forbes counters those arguments by saying the deduction won't be needed because homeowners will pay less in taxes, which will cause the economy to grow, which will cause interest rates overall to go down." No reporter mentioned that the deduction is actually regressive. John Berthoud of the Alexis de Tocqueville Institution pointed out in the January 31 Investor's Business Daily that "80 percent of the break's tax benefits go to those with incomes over $50,000."

Federal Deficit. Twelve times reporters cited the claim of flat-tax opponents that the flat tax would greatly increase the federal deficit. NBC's Mike Jensen, on the January 17 Nightly News, claimed that "the biggest loser would be the government. With a 17-percent flat tax, critics say the budget deficit could double." According to Jensen: "For poor and middle class families, critics say the 17 percent flat tax is a cruel hoax, that to avoid big deficits, it would have to be much higher than 17 percent."

Echoing Jensen, ABC's John Cochran, on the January 19 World News Tonight, said that "Forbes' opponents still say his version of the flat tax won't work, that it would increase the budget deficit at a time when Republicans are trying to eliminate it." U.S. News & World Report agreed: "The Treasury Department estimates that a flat-tax rate would need to be set at 21 percent -- not 17 percent -- to raise the same level of revenues as the current income-tax system does. Without raising this rate, the federal government would see its budget deficit rise, and this would add to Washington's fiscal woes."

Only half as many times -- six -- did reporters give the counterargument that the flat tax would not increase the federal deficit. Time's Dan Goodgame, for example, wrote that Forbes "assumes that tax cuts, even when financed by federal borrowing, will generate so much economic growth that they will quickly wipe out the deficit." Goodgame, though, dismissed such a belief as a "quasi-theology."

Noting that Forbes' 17 percent rate might be a revenue-loser for the government, some reporters wondered how Forbes would make up the shortfall. Newsweek's Allen Sloan asked: "How will he fill the gap? With economic growth and spending cuts. Details? Forbes isn't saying." Time's Goodgame criticized Forbes because he "declines to specify spending he would cut." It's true that Forbes has not been specific about spending cuts. But then reporters rarely give such reprimands to politicians who oppose slowing entitlement growth, but decline to specify how much taxes will then have to increase. Why the double standard for Forbes?

Charitable Contributions. Twice reporters mentioned the argument that a flat tax would hurt charities by removing the deduction for charitable contributions. According to ABC's Peter Jennings, on the January 15 World News Tonight, "Charities worry about how generous folks will be if their contribution is no longer deductible." The January 15 U.S. News & World Report similarly warned that "charities could lose donations if contributions were no longer deductible."

No reporter mentioned the counterargument that charities would not be hurt by a flat tax. John Berthoud's Investor's Business Daily article points out that "of $117 billion donated [to charities] in 1991, $56 billion came from non-itemizers. Of the $61 billion that was deducted, 54 percent came from Americans in low-to-moderate tax brackets. Thus, three of four dollars given to charity don't lead to a substantial tax benefit." Berthoud further noted that "top marginal tax rates dropped from 70 percent in 1980 to 28 percent in 1988, thus robbing the deduction of more than half its value. And the deduction for non-itemizers was eliminated in 1986. Yet charitable contributions rose" at a record pace.

Flat Tax Favorables. Only two arguments in favor of the flat tax -- its simplicity and its closing of loopholes -- were reported thoroughly. Seven times reporters made the case that the flat tax would make the tax code simpler. CBS's Bob Schieffer, on the January 20 CBS Evening News, pointed out "the simplicity of the plan. No accountants needed to tell you what you owe. No long forms to fill out." Six times reporters pointed out that the flat tax would close loopholes for special interests. Joe Klein, for instance, on the January 21 CBS Evening News, said: "[Forbes'] is a anti-Washington campaign, and that's how he sells the flat tax. He says, `I'll eliminate a whole lobbying industry, the industry that gets tax loopholes for special interests.' And that's the advantage of the flat tax."

But those were the exceptions. Most of the time arguments against the flat tax were presented without arguments in its favor meriting a mention. At times reporters, such as Newsweek's Allan Sloan, didn't try to hide their fondness for the politics of envy: "Taxing investment income at both the corporate and personal levels, as it's taxed now, may not be sound economics. But it's reasonably sound social policy, considering that most investment income flows to upper-income people." Sloan didn't mention that many investments, such as those in pension funds and mutual funds, are made by the middle class.

At other times the opposition to the flat tax became absurd. NBC's Mike Jensen managed to find a middle class couple who claimed that the $3,146 tax cut they would get under the Forbes plan "is really not going to change our lives." For such a simple policy, the arguments over the flat tax are quite complicated. Still, reporters should not bring up the arguments of flat-tax opponents unless they're willing to give flat-tax supporters a chance to respond.


Rich Noyes


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