Forbes and the Flat Tax

[Editor's note: In a mid-December poll, Steve Forbes ran behind only Bob Dole as the California Republican candidate of choice. Forbes' strong California showing is believed to reflect a growing dissatisfaction with Dole, along with support his "flat tax" platform.]

Steve Forbes and the Flat Tax
by Alex Benes, Center for Public Integrity

Other candidates like the flat tax, but Forbes has cornered the issue
While the merits of the flat tax championed by Republican presidential hopeful Steve Forbes and its broader impact on tax-paying Americans continue to be debated, one thing seems clear: If the flat tax becomes law, Forbes himself could save almost half of what he currently pays in taxes, a figure neither he nor his campaign is willing to disclose.
To get a more precise picture of Forbes' financial situation and tax liability, the Center for Public Integrity requested Forbes' tax returns from his campaign office. Although most of the 1996 presidential candidates do not make their tax returns available to the public and such disclosure is not required by law, according to their campaign offices candidates Bill Clinton and Lamar Alexander disclose their tax return information, though you have to go to Alexander's Nashville, Tennessee, campaign office to make copies of his returns. Other candidates like the flat tax, but Forbes has cornered the issue.
Neither Forbes nor his campaign staff would release the candidate's tax returns or additional financial data, nor would they assess precisely how Forbes' own proposed policy, the centerpiece of his presidential campaign, would affect him.
"We have complied with all the [disclosure] requirements. We are not required to make them [tax returns] available to the public. And we are not going to make them public," said Forbes' press secretary, Gretchen Morgenson. "All Americans would benefit from a flat tax,"
Morgenson added. "Americans are less interested in how this flat tax will benefit Steve Forbes, but how it will benefit them." Forbes has called the flat tax "the single best way to get America moving again."
"I am straightforwardly calling for a tax cut to expand the economy and make everyone better off," Forbes writes on his campaign's World Wide Web-site. "We need dramatic, pro-growth tax cuts -- tax cuts that are deep, wide and permanent, that reach down to all American families and businesses -- especially small businesses -- and get the suffocating weight of the IRS off our backs. Start by scrapping the tax code. Don't fiddle with it. Throw it out. Put as many IRS bureaucrats as possible into job retraining." Forbes' plan eliminates all deductions, but exempts the first $36,000 of income from a family of four. What Forbes does not disclose on the Internet is how his American family might fare.

A flat tax would cut Forbes' taxes almost in half
A Center for Public Integrity analysis of Forbes' finances, calculated by Clovis Sanford, a certified public accountant who heads Sanford and Associates in Dallas, and using only information and numbers from the low end of the range available on disclosure forms Forbes filed with the Federal Election Commission, indicates that under a flat tax of 17 percent, Forbes would pay roughly $149,440 on an estimated annualized taxable income of $879,057. Under the current tax system, Forbes would pay roughly 37 percent on an estimated taxable (after deductions and adjustments) income of $757,936. That would amount to an estimated $278,420 tax bill (including a self-employment tax of $2,589), assuming that 30 percent of income, or $342,306, was deducted in contributions to charity. That would result in an estimated net tax savings of $128,980, or about 46.3 percent.
Forbes might pay more or less depending on how his finances are structured, and according to Pete Sepp, vice president for communications at the National Taxpayers Union, a group that supports tax reform and a flat-tax proposal made by House Majority Leader Dick Armey (R-TX), from which Forbes' plan copies many details, a more generous assessment of how much Forbes pays in taxes, although "very speculative," would include deductions that Sepp figures could lower Forbes' tax rate to about 25 percent of his annualized income under the current system.
Forbes' gross income from January 1994 to September 1995 was about $1,972,924, according to his financial disclosure statement filed at the Federal Election Commission. To arrive at an estimated gross annual income of $1,182,458 (with a deduction of $1,295 in self-employment tax) we divided the $1.9 million by 20 months, then multiplied by 12 months. Forbes has taken an unpaid leave of absence from Forbes magazine while he runs for president. If Forbes were to become president, his salary would be reduced. Some financial experts speculate that under a flat tax, private citizen Forbes could do even better than anticipated if he were able to restructure his compensation package by reducing his salary and taking home more pay in dividends. His company could benefit significantly as well, though because details of his plan are unavailable, it's not precisely clear how.

Forbes' Financial Disclosure
Forbes' income between January 1994 and September 1995 includes $1,355,622 in compensation from Forbes Inc., and $161,140 in honoraria from Samford University, Nissan Motor Corp., Toyota Motor Sales U.S.A., Readers Digest, and Silicon Valley Business & Conference, to name a few. He reported $9,124 from farm income.
Forbes, his wife and dependent child received a minimum of $447,038 in dividends, capital gains, interest and rent, according to the FEC disclosure forms. The high range is $1.9 million. Under Forbes' flat tax, all this income would be tax free.
Forbes would ultimately pay "taxes that amount to nothing," said Robert McIntyre, executive director at Citizens for Tax Justice. "With a 17 percent flat-tax rate it is clear the rich will pay far less in taxes," McIntyre contended.
Not necessarily so, according to James Lucier of Americans for Tax Reform, a group that supports Armey's flat-tax proposal, one similar to Forbes' plan except that Armey's plan would start with a 20 percent flat tax and phase in a 17 percent tax after three years. "Obviously, Forbes will do well as an individual under the flat tax. But he could pay more taxes as a businessman since the tax breaks and loopholes for businesses will be significantly reduced or eliminated. It is effectively a tax on profits," said Lucier.
A flat tax would require businesses to pay a 17 percent tax on revenue, minus expenses. Expenses would include payment of salaries, wages and pensions; purchase of goods, services, materials, buildings, land and capital equipment. All business write-offs and loopholes would be eliminated under Forbes' plan.
Forbes holds five assets each of which is worth more than $1 million dollars: Forbes Inc.; rental property in New Jersey; investment property in New Jersey; Forbes Inc. Thrift Plan; and a farm in New Jersey. Among Forbes stock holdings, he has between $500,001 and a million in Forbes Inc. Pension Plan, and shares in Telefonos de Mexico, a Mexican telecommunications company, valued between $250,001 and $500,000. Over a 20 month period Forbes reaped between $15,001 and $50,000 in dividends from this holding. He also holds stock in American International Group and Federal Home Loan Mortgage each valued between $100,001 and $250,000. He has stock in Chase Manhattan and Citicorp each valued between $50,001 and $100,000 and stock in Bell Atlantic, AT &T, American Express and Apple Computer each valued between $15,001 and $50,000. He holds various stocks and bonds in international funds in Argentina, Brazil and Taiwan.
Forbes is a board member and trustee of several companies and non-profit groups including the Center for Strategic & International Studies, Hudson Institute, Empower America, Freedom House, Memorial Sloan-Kettering, National Endowment for Democracy and Princeton University.
When the patriarch of the family, Malcolm Forbes, died of a heart attack in 1990, his empire -- estimated at a value from $600 million to $1 billion -- was divided among his five children. The empire included Forbes magazine, American Heritage magazine, 12 weeklies in New Jersey, a 20-room mansion in New Jersey, a Colorado ranch, offices in Manhattan, a palace in Morocco, a Fiji island, fine art, and a yacht.
Steve Forbes, the eldest son of Malcolm Forbes and executor of his estate, inherited 51 percent of the voting stock of Forbes Inc., and became the editor-in-chief of Forbes magazine. His brothers inherited the remaining shares of stock in Forbes Inc.

"The rich will become vastly richer and the poor, poorer"
There is little consensus about the effects of a flat tax on the nation. Even the Forbes for President campaign has not written a formal position paper on the specifics of the plan. The campaign referred the Center for Public Integrity to the flat-tax plan put forth by Rep. Dick Armey (R-TX), the House majority leader for details.
The general outline of Forbes' proposal looks like this: A 17 percent flat tax on wages, salary and pension income after subtracting a family allowance. Under the Forbes' plan, deductions like mortgage interest and charitable contributions would be eliminated. His plan also eliminates taxes on capital gains, individual savings, and real estate, as well as the earned-income tax credit. A family of four that earns less than $36,000 a year would pay no taxes.
Businesses also would be taxed at a 17 percent rate on their profits. All exemptions, tax breaks, loopholes and graduated rates for businesses would be eliminated.
"But Forbes' plan would do little to disabuse taxpayers of the notion that the rich get a better deal from the tax system," Time magazine reported in its December 4, 1995, issue. "Under his proposal, an investor in Boca Raton, Florida, who racks up $500,000 in income from bonds, stock dividends and capital gains would pay no income tax at all, while a teacher in Detroit earning $50,000 would pay $6,290. Because Forbes has yet to release all the details of his proposal, it is impossible to evaluate how it would affect middle-class Americans. However, an analysis of Representative Dick Armey's 17% flat tax done by Citizens for Tax Justice claims that such a system would raise taxes $1,740 to $4,600 on families earning between $45,000 and $85,000. The principal reason, according to the University of Michigan's [tax expert Joel] Slemrod, that Forbes' plan could ultimately weigh down the middle class is his intent not to permit companies to deduct interest or the cost of employee fringe benefits. Somebody will bear the burden of these increased business taxes, probably in higher prices, maybe also in lower wages,' says Slemrod. Without the ability to write off the cost of employee health insurance, companies might pay such benefits in the form of salary, which could conceivably increase a worker's tax bill."
A press release from the Forbes campaign complained about Time's story and said the "most appalling" attack was on Forbes' flat-tax proposal. The campaign called Citizens for Tax Justice "an ultra-liberal organization funded by labor unions."
"We are to the left of Steve Forbes," said Bob McIntyre of the Citizens for Tax Justice. "But so is most of the world." McIntyre confirmed that most of the group's funding comes from labor unions and added that the group is interested "in responsible tax policy and in fairness not at the expense of intelligent fiscal policy."
Not only will a flat-tax system be simpler than the current complicated tax system, some say a flat-tax system will be fairer. "The flat-tax makes rich people like a Ross Perot and Steve Forbes pay taxes like the rest of us. Everybody pays the same [rate] of taxes," said Jim Lucier of Americans for Tax Reform.
According to Donald Alexander, who served as commissioner of the Internal Revenue Service for Presidents Richard Nixon, Gerald Ford and Jimmy Carter, the flat-tax is not fair. "It will increase the divide between the rich and poor in America. The rich will become vastly richer and the poor, poorer," Alexander said.
Alexander also signaled concern about what a flat tax will do to the national treasury. "This tax will not produce any revenues. I have serious questions about this," he said. Forbes has conceded that the flat tax will cost the treasury in the range of $40 billion a year.
Martha Phillips, executive director of the Concord Coalition, a group concerned with balancing the budget agreed with Alexander. "We need to be careful or else a flat-tax will deplete the treasury," Phillips said.
A flat-tax would be a hurdle to balancing the budget, according to Alexander. "Since we are already in a budget imbalance, a flat tax makes certain we will never balance the budget," he said.
Armey's proposed flat-tax differs from Forbes' plan in that there is an initial two year flat-tax of 20 percent. "After an initial $40 billion [revenue] short fall which is made up with spending cuts, growth in the economy will be there to sustain a balanced budget," said Paul Morrell, an administrative assistant in Armey's office. The economy will grow with a flat-tax, Morrell said, arguing, "The 17 percent flat tax will end double-taxation. It will be a boon to investment savings and there will be a rise in wages."

Other candidates like the flat tax, but Forbes has cornered the issue	While the merits of the flat tax championed by Republican presidential hopeful Steve Forbes and its broader impact on tax-paying Americans continue to be debated, one thing seems clear: If the flat tax becomes law, Forbes himself could save almost half of what he currently pays in taxes, a figure neither he nor his campaign is willing to disclose. To get a more precise picture of Forbes' financial situation and tax liability, the Center for Public Integrity requested Forbes' tax returns from his campaign office. Although most of the 1996 presidential candidates do not make their tax returns available to the public and such disclosure is not required by law, according to their campaign offices candidates Bill Clinton and Lamar Alexander disclose their tax return information, though you have to go to Alexander's Nashville, Tennessee, campaign office to make copies of his returns. Other candidates like the flat tax, but Forbes has cornered the issue. Neither Forbes nor his campaign staff would release the candidate's tax returns or additional financial data, nor would they assess precisely how Forbes' own proposed policy, the centerpiece of his presidential campaign, would affect him. "We have complied with all the [disclosure] requirements. We are not required to make them [tax returns] available to the public. And we are not going to make them public," said Forbes' press secretary, Gretchen Morgenson. "All Americans would benefit from a flat tax," Morgenson added. "Americans are less interested in how this flat tax will benefit Steve Forbes, but how it will benefit them." Forbes has called the flat tax "the single best way to get America moving again." "I am straightforwardly calling for a tax cut to expand the economy and make everyone better off," Forbes writes on his campaign's World Wide Web-site. "We need dramatic, pro-growth tax cuts -- tax cuts that are deep, wide and permanent, that reach down to all American families and businesses -- especially small businesses -- and get the suffocating weight of the IRS off our backs. Start by scrapping the tax code. Don't fiddle with it. Throw it out. Put as many IRS bureaucrats as possible into job retraining." Forbes' plan eliminates all deductions, but exempts the first $36,000 of income from a family of four. What Forbes does not disclose on the Internet is how his American family might fare.
A flat tax would cut Forbes' taxes almost in half	A Center for Public Integrity analysis of Forbes' finances, calculated by Clovis Sanford, a certified public accountant who heads Sanford and Associates in Dallas, and using only information and numbers from the low end of the range available on disclosure forms Forbes filed with the Federal Election Commission, indicates that under a flat tax of 17 percent, Forbes would pay roughly $149,440 on an estimated annualized taxable income of $879,057. Under the current tax system, Forbes would pay roughly 37 percent on an estimated taxable (after deductions and adjustments) income of $757,936. That would amount to an estimated $278,420 tax bill (including a self-employment tax of $2,589), assuming that 30 percent of income, or $342,306, was deducted in contributions to charity. That would result in an estimated net tax savings of $128,980, or about 46.3 percent. Forbes might pay more or less depending on how his finances are structured, and according to Pete Sepp, vice president for communications at the National Taxpayers Union, a group that supports tax reform and a flat-tax proposal made by House Majority Leader Dick Armey (R-TX), from which Forbes' plan copies many details, a more generous assessment of how much Forbes pays in taxes, although "very speculative," would include deductions that Sepp figures could lower Forbes' tax rate to about 25 percent of his annualized income under the current system. Forbes' gross income from January 1994 to September 1995 was about $1,972,924, according to his financial disclosure statement filed at the Federal Election Commission. To arrive at an estimated gross annual income of $1,182,458 (with a deduction of $1,295 in self-employment tax) we divided the $1.9 million by 20 months, then multiplied by 12 months. Forbes has taken an unpaid leave of absence from Forbes magazine while he runs for president. If Forbes were to become president, his salary would be reduced. Some financial experts speculate that under a flat tax, private citizen Forbes could do even better than anticipated if he were able to restructure his compensation package by reducing his salary and taking home more pay in dividends. His company could benefit significantly as well, though because details of his plan are unavailable, it's not precisely clear how.
Forbes' Financial Disclosure	Forbes' income between January 1994 and September 1995 includes $1,355,622 in compensation from Forbes Inc., and $161,140 in honoraria from Samford University, Nissan Motor Corp., Toyota Motor Sales U.S.A., Readers Digest, and Silicon Valley Business & Conference, to name a few. He reported $9,124 from farm income. Forbes, his wife and dependent child received a minimum of $447,038 in dividends, capital gains, interest and rent, according to the FEC disclosure forms. The high range is $1.9 million. Under Forbes' flat tax, all this income would be tax free. Forbes would ultimately pay "taxes that amount to nothing," said Robert McIntyre, executive director at Citizens for Tax Justice. "With a 17 percent flat-tax rate it is clear the rich will pay far less in taxes," McIntyre contended. Not necessarily so, according to James Lucier of Americans for Tax Reform, a group that supports Armey's flat-tax proposal, one similar to Forbes' plan except that Armey's plan would start with a 20 percent flat tax and phase in a 17 percent tax after three years. "Obviously, Forbes will do well as an individual under the flat tax. But he could pay more taxes as a businessman since the tax breaks and loopholes for businesses will be significantly reduced or eliminated. It is effectively a tax on profits," said Lucier. A flat tax would require businesses to pay a 17 percent tax on revenue, minus expenses. Expenses would include payment of salaries, wages and pensions; purchase of goods, services, materials, buildings, land and capital equipment. All business write-offs and loopholes would be eliminated under Forbes' plan. Forbes holds five assets each of which is worth more than $1 million dollars: Forbes Inc.; rental property in New Jersey; investment property in New Jersey; Forbes Inc. Thrift Plan; and a farm in New Jersey. Among Forbes stock holdings, he has between $500,001 and a million in Forbes Inc. Pension Plan, and shares in Telefonos de Mexico, a Mexican telecommunications company, valued between $250,001 and $500,000. Over a 20 month period Forbes reaped between $15,001 and $50,000 in dividends from this holding. He also holds stock in American International Group and Federal Home Loan Mortgage each valued between $100,001 and $250,000. He has stock in Chase Manhattan and Citicorp each valued between $50,001 and $100,000 and stock in Bell Atlantic, AT &T, American Express and Apple Computer each valued between $15,001 and $50,000. He holds various stocks and bonds in international funds in Argentina, Brazil and Taiwan. Forbes is a board member and trustee of several companies and non-profit groups including the Center for Strategic & International Studies, Hudson Institute, Empower America, Freedom House, Memorial Sloan-Kettering, National Endowment for Democracy and Princeton University. When the patriarch of the family, Malcolm Forbes, died of a heart attack in 1990, his empire -- estimated at a value from $600 million to $1 billion -- was divided among his five children. The empire included Forbes magazine, American Heritage magazine, 12 weeklies in New Jersey, a 20-room mansion in New Jersey, a Colorado ranch, offices in Manhattan, a palace in Morocco, a Fiji island, fine art, and a yacht. Steve Forbes, the eldest son of Malcolm Forbes and executor of his estate, inherited 51 percent of the voting stock of Forbes Inc., and became the editor-in-chief of Forbes magazine. His brothers inherited the remaining shares of stock in Forbes Inc.
"The rich will become vastly richer and the poor, poorer"	There is little consensus about the effects of a flat tax on the nation. Even the Forbes for President campaign has not written a formal position paper on the specifics of the plan. The campaign referred the Center for Public Integrity to the flat-tax plan put forth by Rep. Dick Armey (R-TX), the House majority leader for details. The general outline of Forbes' proposal looks like this: A 17 percent flat tax on wages, salary and pension income after subtracting a family allowance. Under the Forbes' plan, deductions like mortgage interest and charitable contributions would be eliminated. His plan also eliminates taxes on capital gains, individual savings, and real estate, as well as the earned-income tax credit. A family of four that earns less than $36,000 a year would pay no taxes. Businesses also would be taxed at a 17 percent rate on their profits. All exemptions, tax breaks, loopholes and graduated rates for businesses would be eliminated. "But Forbes' plan would do little to disabuse taxpayers of the notion that the rich get a better deal from the tax system," Time magazine reported in its December 4, 1995, issue. "Under his proposal, an investor in Boca Raton, Florida, who racks up $500,000 in income from bonds, stock dividends and capital gains would pay no income tax at all, while a teacher in Detroit earning $50,000 would pay $6,290. Because Forbes has yet to release all the details of his proposal, it is impossible to evaluate how it would affect middle-class Americans. However, an analysis of Representative Dick Armey's 17% flat tax done by Citizens for Tax Justice claims that such a system would raise taxes $1,740 to $4,600 on families earning between $45,000 and $85,000. The principal reason, according to the University of Michigan's [tax expert Joel] Slemrod, that Forbes' plan could ultimately weigh down the middle class is his intent not to permit companies to deduct interest or the cost of employee fringe benefits. Somebody will bear the burden of these increased business taxes, probably in higher prices, maybe also in lower wages,' says Slemrod. Without the ability to write off the cost of employee health insurance, companies might pay such benefits in the form of salary, which could conceivably increase a worker's tax bill." A press release from the Forbes campaign complained about Time's story and said the "most appalling" attack was on Forbes' flat-tax proposal. The campaign called Citizens for Tax Justice "an ultra-liberal organization funded by labor unions." "We are to the left of Steve Forbes," said Bob McIntyre of the Citizens for Tax Justice. "But so is most of the world." McIntyre confirmed that most of the group's funding comes from labor unions and added that the group is interested "in responsible tax policy and in fairness not at the expense of intelligent fiscal policy." Not only will a flat-tax system be simpler than the current complicated tax system, some say a flat-tax system will be fairer. "The flat-tax makes rich people like a Ross Perot and Steve Forbes pay taxes like the rest of us. Everybody pays the same [rate] of taxes," said Jim Lucier of Americans for Tax Reform. According to Donald Alexander, who served as commissioner of the Internal Revenue Service for Presidents Richard Nixon, Gerald Ford and Jimmy Carter, the flat-tax is not fair. "It will increase the divide between the rich and poor in America. The rich will become vastly richer and the poor, poorer," Alexander said. Alexander also signaled concern about what a flat tax will do to the national treasury. "This tax will not produce any revenues. I have serious questions about this," he said. Forbes has conceded that the flat tax will cost the treasury in the range of $40 billion a year. Martha Phillips, executive director of the Concord Coalition, a group concerned with balancing the budget agreed with Alexander. "We need to be careful or else a flat-tax will deplete the treasury," Phillips said. A flat-tax would be a hurdle to balancing the budget, according to Alexander. "Since we are already in a budget imbalance, a flat tax makes certain we will never balance the budget," he said. Armey's proposed flat-tax differs from Forbes' plan in that there is an initial two year flat-tax of 20 percent. "After an initial $40 billion [revenue] short fall which is made up with spending cuts, growth in the economy will be there to sustain a balanced budget," said Paul Morrell, an administrative assistant in Armey's office. The economy will grow with a flat-tax, Morrell said, arguing, "The 17 percent flat tax will end double-taxation. It will be a boon to investment savings and there will be a rise in wages."

This article first appeared in The Newsletter of the Center for Public Integrity.

Albion Monitor December 21, 1995 (http://www.monitor.net/monitor)

Contact rights@monitor.net for permission to reproduce.

Steve Forbes and the Flat Tax

by Alex Benes, Center for Public Integrity

Other candidates like the flat tax, but Forbes has cornered the issue

A flat tax would cut Forbes' taxes almost in half

Forbes' Financial Disclosure

"The rich will become vastly richer and the poor, poorer"

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