WASHINGTON — A decade ago, when publishing magnate Steve Forbes ran for president, he vowed to deliver a new era of prosperity with a simple change in the federal income tax: Instead of people with more money paying higher rates, all would pay the same "flat" tax rate -- unleashing "the fantastic growth waiting to burst forth in our economy."
Forbes' flat-tax plan was dismissed as simplistic by many mainstream economists and viewed with horror by the legions of special interests that benefit from the deductions and loopholes that flat-tax advocates would eliminate.
But as millions of Americans face the deadline for filing their federal tax returns, they are operating in something very close to the world Forbes and other flat-tax visionaries proposed. Without any fanfare or philosophical debate, millionaires and middle-class Americans now pay taxes at almost the same rates.
So what about the "fantastic growth waiting to burst forth"? Has leveling out federal income tax rates produced a cornucopia of financial benefits?
The answer is probably yes -- if you're a millionaire. And probably no -- if you're almost anyone else. Flattened, and thus lower, tax rates have contributed to huge increases in the wealth of the wealthy, but so far most people haven't seen significant economic improvement.
"It's as if Santa Claus dropped bags of money down everybody's chimney," said Leonard E. Burman of the private Tax Policy Center. "Only he dropped extra-big bags in rich people's homes, and extra-small ones in smaller homes."
Though most pay at least somewhat less in taxes than they did a few years ago, the Federal Reserve Board, in its latest three-year examination of family finances, found that average family income fell by 2% between 2001 and 2004 after adjusting for inflation. In the previous three-year period, average family income grew by 17%.
Thanks to more credit card debt and borrowing against their homes, the 25% of Americans at the bottom of the wealth scale had negative net worth in 2004. On average, these families owed $1,400 more than their possessions were worth.
The idea that income tax rates should be graduated, with those who had more money paying a larger share of it in taxes, was a fundamental premise of the federal income tax system when it was created by constitutional amendment in 1913 on the eve of World War I.
