Mike Hihn, Editor Publisher

Dick Armey's revised free lunch

"Armey concedes his critics (including me) were right, by admitting his new bill will increase the deficit by $40 billion per year - despite his now-smaller tax cuts! Armey (and Steve Forbes) dismiss these higher deficits, claiming they'll be offset by faster economic growth.  Can we get real?

"Following the Reagan tax cuts, income tax revenues increased in the 1980s by a scant $4.5 billion per year in real dollars, and that was our best postwar expansion."

"The man is House Majority Leader. If he's serious about this bill, why have there been no committee hearings?"

Correction/Revision

In "Dick Armey's Free Lunch" (11/94 and The Best of Liberty Issues), I calculated $300 billion in new annual deficits. Later analysts, both in and out of government, calculated $200 billion in new annual deficits, which became the consensus estimate.

What I missed was Armey's treatment of business taxes, which is $100 billion in the other direction (a tax increase). In his original op-ed, Armey states that businesses simply deduct expenses from revenues, then pay the same 17% of what's left. Not quite.

His bill (including the revised version) significantly changes 'taxable business income' by excluding any deduction for employee benefits (like group insurance), which is just the biggest change. The net effect is a $100 billion tax increase on business (consensus estimate).

Even at the lower tax rate, many or most businesses spend more on employee benefits than they net in profits, thus their taxable profits would more than double.

The tax increase could be quite severe for many small businesses which now pay the 15% rate, with all current deductions. Several small-business groups oppose Armey's flat tax for this reason.

In other words, Armey would shift $100 billion in taxes to business, to partially offset all those middle-class tax cuts. Look familiar? It should. It's called New Deal economics. FDR must be laughing in his grave.

Also, several people contacted me to question the wisdom of exempting more than half of all voters from the income tax. Good point. When government goodies are totally free to a majority of voters, I shudder to think what they'd be voting for

Herewegoagain.

In a recent letter to the Wall Street Journal, Rep. Dick Armey ridiculed the Treasury Dept. for revising its analysis of his flat tax. Well, Armey revised his flat tax - a lot. Armey's 1994 bill (HR-4585) has been reintroduced as HR-2060.

The original version was trumpeted in a Wall Street Journal op-ed (''Review Merits of Flat Tax'', June 16, 1994). My analysis of Armey's flat tax, the first to document massive new deficits, was submitted to the Journal two weeks later. The Journal declined to publish, so Liberty Issues readers saw the truth first.

This is not rocket science. To analyze the impact on individual income taxes, one needs only to compare current vs. Armey's tax at various income levels. I showed four income levels, from $38,400 per year to $1,000,000, all of which would get tax cuts of 50% or more, but with no real spending reductions.

Treasury's analysis was more precise, but Armey has since changed both key factors -- the size of his tax cut and his proposed spending caps. The Journal again declined to publish the facts, so Liberty Issues readers get another scoop.

In Armey's revised version, his proposed exemptions are cut by $4,800 for married couples, $3,200 for heads of household, $2,400 for individuals, and $300 per dependent child.

For Armey's vaunted family of four, combined exemptions are now $5,400 lower than his original bill. If that family earns more than $36,800, Armey's revised flat tax will initially tax them $1,080 more than his original bill, or 'only' $918 more when the tax rate declines from 20% to 17% .. but Armey now admits his bill will increase deficits.

Armey now concedes that critics of his original bill (including me) were right, by admitting his new bill will increase the deficit by $40 billion per year -despite his now-smaller tax cuts! Armey (and Steve Forbes) dismiss these higher deficits, claiming they'll be offset by faster economic growth.

I'm a tax-cutter myself, but let's get real.

Following the Reagan tax cuts, income tax revenues increased in the 1980s by a scant $4.5 billion per year in real dollars, and that was our best postwar expansion. (See ''Tax Quacks'' also in this issue)

Even worse, Armey's revised bill includes only partial indexing. Exemptions will be increased for changes in the Consumer Price Index (CPI), but only to the extent that CPI increases faster than it did in 1995. In the worst-case scenario (the same prox 3% inflation of 1995), there would be no adjustments at all. Taxpayers would pay 17% on their next dollar (20% initially) - but over 70% of all taxpayers now pay only 15% on their next dollar. That's means guaranteed future tax increases. Whatever tax cut Armey gives you initially, he'd eventually take it all back - and more.

Incredibly, the party of Reagan has forgotten what ''bracket creep'' means!

On spending caps, Armey's 1994 op-ed admitted there would be no reduction in real spending (emphasis added): ''It will guarantee the government will become no larger in real terms than it is today.'' That's all he could guarantee, because his 1994 bill allowed spending to increase at the inflation rate, despite that 50% tax cut in individual income taxes.

Armey's 1995 bill adds fixed-dollar spending caps though 2002, but allows entitlements to increase at both the inflation rate and by the number of participants. Thus, entitlements would be forced into becoming an ever-larger share of total spending. That's a Republican solution?

Even if we accept Armey's deficit estimate (nobody else does), it would take nearly ten years just to offset the new deficits he creates. But he also wants to balance the budget three years before that(??).

Despite Armey's repeated failures to get it right, the Journal is correct to editorialize for lower marginal tax rates. But the marginal-rate argument requires closing loopholes to expand the tax base, not simultaneously reducing both the tax base and tax rates as Armey keeps trying to do.

Since placing my original column on the web site, a few people have asked the same question I heard originally. Was it fair of me to conclude Armey is ''shamelessly pandering for votes''?

Yep. The man is House Majority Leader. If he's serious about this bill, why have there been no committee hearings?

Tossing bills into the hopper, just to impress the folks back home, is one of the oldest tricks in the congressional book.