Citizens for Tax Justice

For Release on Tuesday, February 6, 1995

A New, "Dynamic" Analysis of the Forbes "Flat Tax"

Malcolm S. Forbes, Jr.'s $1.9 Billion Tax Cut--for Himself

When asked about the $200-billion-a-year increase in the federal budget deficit that his 17% "flat-tax" plan would apparently entail, Malcolm S. ("Steve") Forbes, Jr. usually replies: "I don't want to get stuck in static analysis."

Taking Forbes up on his suggestion, Citizens for Tax Justice, a non-partisan research group, has updated its earlier analysis of Forbes's personal tax savings from his proposed 17% flat tax. CTJ's new, more "dynamic" analysis looks not only at Forbes's current annual savings from his flat tax, but also at his long-term tax savings. Over the long term, CTJ estimates that Forbes's tax savings from his flat tax would total approximately $1.9 billion.

Current tax law allows Forbes to defer taxes on his "unrealized" capital income, mainly accrued capital gains on his huge portfolio of stocks. Although this tax deferral is a very valuable tax break, the deferred taxes are not totally forgiven. Instead, under current law, Forbes will pay tax on his accrued capital gains either when he realizes them or through the estate and gift tax when he passes his holdings on to his heirs. In contrast, under his flat tax, Forbes's can cash in or pass on his accrued gains completely free of income or estate tax.

"Forbes has belittled our earlier, 'static' estimate that his flat tax would cut his own annual income tax bill by more than half--calling that a piddling amount for someone of his vast wealth," noted CTJ director Robert S. McIntyre. "We have now taken account of the flat tax's complete forgiveness of tax on Forbes's deferred and future investment income. Our new, long-term estimate shows that Forbes's flat tax savings would be truly staggering."

"Static" versus long-term estimates

In a previous analysis, released on December 15, 1995, CTJ found that, based on the $1.6 million annual cash income that Forbes reported on his federal disclosure forms, Forbes's proposed flat tax would slash Forbes's own federal income tax bill by more than half from what he pays under current law. Under this "static" analysis, Forbes's annual tax savings under his flat-tax plan were calculated to be $174,000 in 1996.

As CTJ noted in its December 1995 release, however, "Forbes's potential tax savings under his plan are almost certainly far larger than his financial disclosure reports indicate. He stands to enjoy tens of millions of dollars in future tax savings when he cashes in capital gains on his extensive, largely inherited portfolio of corporate stocks. Under Forbes's plan, capital gains would be exempt from tax.".

Forbes's total lifetime tax cut from his plan pegged at $1.9 billion

In its new analysis, CTJ has taken a long-term approach to Forbes's tax situation. As predicted, this shows far, far larger dollar tax savings for Forbes under his proposed flat tax than a simple, annual estimate. Assuming that Forbes earns a 10% compounded annual rate of return on his $412 million in financial holdings (Fortune, Feb. 5, 1996) over his 30-year remaining life expectancy, CTJ estimates that:

Higher taxes on most families--or a huge increase in the budget deficit

Forbes flat tax plan is based on legislation introduced by House Majority Leader Richard K. Armey (R-Tex.). Like Forbes, Armey's plan taxes wages, pensions and fringe benefits, while exempting interest, dividends and capital gains. But Armey has scaled back his proposed exemptions against the wage tax portion of his plan to reduce its projected revenue losses. Armey also proposes a 20% tax rate for the first two years of his plan.

"Maybe there are some other irresponsible people out there who think that adding $200 billion a year to the budget deficit is a small price to pay for any tax cut," noted McIntyre. "But why would anyone--other than Steve Forbes--want a tax cut plan that gives two-thirds of its benefits to those earning more than $200,000 a year?"

ADDENDUM: Other Forbes's Personal Flat Tax Savings (not included above)

Other flat tax provisions that would appear to benefit Steve Forbes personally (not counted in the estimates presented above) include (but are not limited to):

Citizens for Tax Justice is a non-partisan Washington, D.C. tax policy group.

Table: Effects of Flat Tax on S. Forbes.

*Income from capital gains, dividends and interest. Assumes a 10% pretax rate of return on Forbesís financial holdings and a 30-year life expectancy.
**The statutory estate tax rate is currently 55% on huge estates. A 24.9% rate was used here, however, based on IRS data for actual effective estate tax rates on the largest estates (adjusted for marital and debt deductions). See IRS, Statistics of Income, Compendium of Federal Estate Tax and Personal Wealth Studies (1994), pp.69-71.
***The current effective tax rate shown here is discounted to take account of tax deferrals on unrealized capital gains.

NOTES: Two different scenarios reflect (1) continuation of Forbesís current low realization pattern for capital income; and (2) increasing realizations by a factor of 10 to 20 (and spending half the after-tax proceeds). Income taxes increase with higher realizations, but estate tax falls because of assumed higher lifetime spending. Figures do not take account of large apparent tax reductions for the Forbes family corporation, Forbes, Inc.

Source: Citizens for Tax Justice, February 6, 1996.

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