MISSOURI COMMENTARY: FLAT TAX: HERE COME SUPPLY SIDERS

In the early Reagan years, Sen. Patrick Moynihan, D-N.Y., gave a speech in the Senate describing the difference between the ostensible purpose of supply-side economics and the real purpose.

The ostensible purpose was to reduce taxes to a point where money saved by the taxpayer would engender an avalanche of investment, creating tens of thousands of new jobs and generating a flood of additional tax revenues even at the reduced tax rates. The spurious notion was: the lower the tax rates, the greater the tax revenue -- the ultimate fairyland free lunch.

The real purpose, Moynihan pointed out, was to reduce taxes to the point where the federal budget deficits would become so staggering as to force Congress to cut back or discontinue large portion of the Roosevelt-Truman-Kennedy-Johnson domestic programs.

Moynihan was a prophet. Much of today's budget dilemma can be traced to those early Reagan years when taxes were slashed, defense spending skyrocketed and hundreds of billions of dollars of ever-escalating debt was incurred each year.

Old Supply Siders never die. They don't even fade away. They know that they cannot trot out the same old myths of the early Reagan years. It's hard to hail the second-coming of a proven catastrophe. You need a new spin. This year's spin is the flat tax. It may well become the watershed issue of the 1996 campaign.

Here's how the flat tax presumably would work, according to presidential candidate Steve Forbes and House Majority Leader Dick Armey, R-Texas. Instead of the current tax system of five different tax rates, you would have a zero tax rate for a family of four earning up to $36,800 and a 17 percent rate on earned income after that. Simple as that -- no deductions or credits. There would be no tax on dividends, interest or capital gains.

In addition to its simplicity, the flat tax is touted, just like good old Reaganomics, as an "investment boom" that will create thousands of jobs, raise income and increase future tax receipts -- another fairyland free lunch.

Conservative economists unconnected with Forbes and Armey estimate that, at the very least, the zero rate would have to be reduced to incomes of $28,000 or less and the rate on income above that level would have to be increased to 19 percent. The Federal Reserve estimates that the rate would have to be 21 percent and would escalate to 24 percent if home mortgage and charitable deductions were included. Last week, the Kemp Commission came out in favor of the flat tax, but only as a general concept. The important specifics -- such as the rate and the deductibility of home mortgage interest and charitable donations -- were finessed.

The flat tax, stripped of its rhetoric, will shift much of the tax burden from the wealthy to the middle class. When the middle class realizes that the price of a simplified tax form results in higher taxes, they will opt for complexity. The elderly won't benefit from a flat tax since it is, in practical effect, a consumption tax and the elderly tend to consume more of their income than other segments of the economy.

Although the flat tax proponents don't trumpet it, the fundamental premise of the flat taxers is to shift a larger share of the tax burden to the middle class, the elderly and the poor (with the repeal of the earned income tax credit). Why? According to The Economist magazine, the flat tax's "greatest advantage" is that increasing taxes on the middle class and elderly will force these vast constituencies to think twice about expanding the services of the federal government.

Under a new guise, we are once again dealing with those never-say-die Supply Siders. They want to design a tax system that puts a permanent brake on the federal government. By shifting a significant measure of the tax burden from the rich to the middle class and the elderly, they would insure a vast political upheaval and an even heightened antipathy towards the functioning of the federal government.

In 1994, President Bill Clinton tried to persuade the American people that he had figured out a better health care system for one and all. The people were suspicious. It was deceptively complex. Somehow the people perceived that, for the most part, they were probably better off with what they had than gambling on something they couldn't completely fathom. Clinton failed.

In 1996, the flat taxers will try to persuade the American people that they have figured out a better tax system for one and all. The people will once again be suspicious. It is deceptively simple. Somehow the people will perceive that they are probably better off with what they have than gamble on something that seems so beguilingly simple. The flat taxers will fail.

~Tom Eagleton of St. Louis is a former U.S. senator from Missouri.