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First Mediaworks


Steve Forbes: Leading The Flat Tax Revolution (12/05/05)

By Reed Bunzel, Editor-in-Chief

It's all about taxes.

That's the basic tenet of Steve Forbes' economic philosophy, and the primary reason he has committed so much of his time and energy during the past few years to promoting his proposal for instituting a flat income tax.

“The political culture never understands that taxes are a price and a burden,” Forbes explains. “Tax on income is the price you pay for working. Tax on profits is the price you pay for being successful.”

Success is something Forbes - in fact, the entire Forbes family - knows a lot about. The son of Malcolm Forbes, Malcolm Stevenson “Steve” Forbes Jr. was named president of Forbes Inc. in 1980 at age 33. He became editor-in-chief of Forbes following the death of his father in 1990. Under Steve Forbes' leadership, the company has launched a variety of new publications and businesses, including the lifestyle supplement Forbes FYI, Forbes Asia, as well as Chinese, Korean, Japanese, Russian, Arabic, Hebrew, and Polish editions of the magazine. Forbes also publishes the Gilder Technology Report, plus a number of financial and investment newsletters.

In 1996 Forbes entered the online world with the launch of Forbes.com, which receives more than 10 million unique visitors per month. The venture is a leading destination site for executive business decision-makers, analysts, financial advisers, and investors. Other divisions of the company include the Forbes Conference Group and Forbes Custom Media. Additionally, Forbes is the author of the recently published Flat Tax Revolution: Using a Postcard to Abolish the IRS, as well as A New Birth of Freedom.

Forbes also is contributing editor and commentator for Forbes On Radio, a three-hour weekend program distributed by Talk Radio Network. The show provides in-depth analysis on current events, markets trends, stocks, as well as segments on luxury housing, cars, boats, entertainment, and the latest high-tech gadgets coming out of Silicon Valley.

A strong proponent of a flat tax, Forbes campaigned for the Republican nomination for the U.S. presidency in both 1996 and 2000. Key elements of his political platform were medical savings accounts, an overhauled Social Security system, term limits, parental choice of schools, and a strong national defense. While he recently has backed away from the active political arena, Forbes still works to promote a conservative economic and social agenda.

In 1985, President Reagan named Forbes chairman of the bi-partisan Board for International Broadcasting, where he oversaw the operation of Radio Free Europe and Radio Liberty. He was re-appointed to the post by President George H. W. Bush and served until 1993. A widely respected economic forecaster, Forbes is the only writer to have won the prestigious Crystal Owl Award four times. He serves on the boards of The Ronald Reagan Presidential Foundation, the Heritage Foundation, and The Foundation for the Defense of Democracies. Additionally, he is on the Board of Overseers of the Memorial Sloan-Kettering Cancer Center and the Board of Visitors for the School of Public Policy of Pepperdine University.

The recipient of honorary degrees from some 25 colleges and universities, Forbes received a BA in history from Princeton, where he was the founding editor of Business Today, which still is published today by Princeton undergraduates.

As a keynote speaker at Radio Ink's Forecast 2006 this week (Dec. 6), Forbes agreed to sit down for a frank discussion on all things financial: U.S. consumer buying power, corporate spending, the price of oil, China's emerging economy, health care, new technologies, and - of course - his proposal for instituting a flat income tax.

INK: What is your overall impression of the U.S. economy today? Is it relatively robust, moderately healthy, or sluggish?
SF: There's a gap between reality and what people perceive as reality. Polls have demonstrated this. If you ask individuals how they're doing, most say, “Pretty good.” If you then ask how the economy is doing, they'll say, “Oh, not so good. It's about to go off a cliff. Gas costs too much.” The fact is, the economy is in much better shape than people think, and this is one reason why the Bush administration is in political trouble. People have made no connection between how they're doing and how the economy is doing.

Despite the public perception, what is leading this economic growth?
The critical reason we're doing fairly well - despite hurricanes, the flu scares, and high gasoline prices - is the tax cuts that were passed in May 2003. One thing I love to point out, which the political culture never understands, is that taxes are a price and a burden. Tax on income is the price you pay for working. Tax on profits is the price you pay for being successful. When you reduce tax rates, you increase incentives, which means that tax cuts stimulate economic growth. The government ends up with more money, but more important, the American economy does far better and people end up with more money.

Is this economic theory, or is there an historic basis for this?
History demonstrates it time and time again. The tax cuts made in 2003 stimulated the economy. The Reagan cuts of the 1980s brought us a booming economy. So did the Kennedy cuts of the '60s. Look at the 10 countries that have enacted a flat tax in recent years. Even Russian - the past four years they've had a flat 13 percent tax rate, and their revenues have doubled in real terms. The bottom line is that the economy does well when you reduce taxes. In May 2003, the government cut the dividend rate from 38 percent to 15 percent. More important, they cut capital gains from 20 to 15 percent, so you had more risk-taking. Greater dividends created more capital. Incentives for small business investment also worked very well. Small businesses could expense up to $100,000 right away, and did so. Plus, there were cuts on personal income tax rates. Add this all together, and it's no surprise that the economy went from dead in the water to today, where among large economies, the U.S. is the fastest growing in the world.

How is all this affecting corporate America?
Companies are flush with cash. If you look at corporate balance sheets, American corporations are plus nearly $2 trillion in cash. And despite what we're being told, the American consumer is in very good shape. We keep reading that we're a nation of spendthrifts, that we're about to go broke, that we're living from credit card to credit card, that the housing boom is a house of cards. Yet if you look at what people own in stocks, bonds, bank CDs, money market funds, 401Ks, and life insurance policies, then take out what they owe on debts, including mortgages, American households are now plus more than $25 trillion. In other words, nobody knows that American households are now the biggest suppliers of credit to the global credit markets.

Are there shortcomings to counter these strengths?
Sure. The Federal Reserve is still printing too much money. They're raising interest rates, but printing too much money at the same time. And there's a problem with the tax cuts that passed two and a half years ago, which are set to expire; the two biggest will expire at the end of 2008. We also have a real challenge with health care. The new health care savings accounts have been the salvation of health care. The key is putting consumers in charge of their dollars, which provides more incentive for people to get more value for their money than when third parties pay. We don't have to tell them to buy generics instead of brand names - they figure out that it means money in their pocket. We've done a variation on this at our company; this year we gave people $2,000 for medical expenses. What they don't spend they get to keep, or roll over tax free. If they go above $2,000, their deductible kicks in. If they go above the deductible, they have catastrophic insurance. We have found that it's cheaper to buy high-deductible health insurance and give most of the deductible to our people.

When measuring the health of the economy, what metric do you consider the most important?
The obvious one is Gross Domestic Product. But it's also important to look at capital spending, which is now fairly decent, and the availability of capital, which is abundant. Also - and there's not a very good measure of this - it's good to look at innovation. How many iPods are coming along? How many new Internet services are emerging? In the '80s and early '90s, we saw the rise of microchips as companies like Intel made big breakthroughs on advanced architecture. Then, look for innovations in mundane areas, like Whole Foods. High margin, but people love it. And we all know about Starbucks - talk about the ultimate commodity: coffee. That's one of the most successful companies around.

You're a strong advocate of a flat tax. What are the benefits, other than reducing paperwork?
It reduces tax rates for everyone, which is critical if you remember that a tax is a price. I designed this so that everyone receives a tax cut, which avoids the sterile debates about who's helped by it and who's hurt. The fact is, everyone is helped. Essentially, it provides simplicity, as well as lower rates, which means more incentives. And there's no tax on savings, which is great for investment in capital creation and job creations. The income tax rate is 17 percent, and it doesn't apply until after generous deductions for adults and children. For example, a family of four would pay no federal income tax on its first $46,000 of income. If you have four kids, it's $65,000 tax-free. And there's no death tax.

Is there a corresponding flat business tax?
Yes. On the business side, the profits tax goes from 35 percent to 17, with instant expensing of your capital investment. So, if you buy a truck, a PC, or a desk, instead of having to write it off over the “useful life” of the asset, you expense it immediately. If you have a loss, you carry it forward as long as you need it against future profits. It's simple, and it's eminently fair.

How do you justify the flat tax to critics who claim it's too regressive for the poor segment of taxpayers?
It especially helps lower-income people because they don't pay tax, nor do they have to pay for a tax preparer. Today, even if you don't owe income tax, you have to hire someone to fill out your bloody return. And with a more vibrant economy, job prospects improve.

Can your flat tax fund the national debt at its current level?
Easily. Not only is the economy more prosperous, but your balance sheet becomes healthier. Your assets are worth more.

How much of a deficit can the U.S. government stand before it becomes a liability on current and future taxpayers?
First, we have to stop increasing the deficit, which requires a bit of spending restraint. You don't have to cut it; just slow the growth. USA Today had a recent story that says states are gushing with revenues, and this past fiscal year Washington revenues went up 15 percent. A little spending restraint would go a long, long way in reducing the deficit. Ultimately, it's not a revenue problem, it's a spending problem. Revenues are doing fine, and with a flat tax they'd do even better.

Has the war in Iraq added more burden to the deficit than the country can bear long-term?
The real cost of Iraq obviously is not the money, but the blood. In terms of money, yes, it is a real bill - but keep in mind that, proportionately, what we spend yearly in Iraq is what we spent every two weeks in World War II. If you look at Iraq and Homeland Security, we could easily bear those financial burdens if we weren't spending so much in Washington. We don't need $500 million bridges to nowhere. Iraq should be seen as a strategic challenge, and a commitment of our people.

How critical is the aging of the baby boom generation? Will boomers become a drain on society over the next 10-15 years?
The two critical issues are Social Security and health care. The economy can pay Social Security benefits for people above the age of 50 or 55. The real crunch comes when people in their 20s and 30s begin retiring. That's when the whole thing becomes unsustainable. Rep. Paul Ryan (R-WI) and Sen. John Sununu (R-NH) proposed some sensible ideas, in which younger people allocate a part of their payroll tax to personal accounts. There obviously would be restrictions on diversification and safety, but the bottom line is turning what is now a liability into an asset. That money gets invested, which makes for a stronger economy.

How close is this to what the Bush administration was pushing earlier this year?
The Bush administration took up the Social Security issue a year ago, but didn't put a specific proposal on the table. They had ideas, but by not making a specific proposal, people got the impression that Grandma was going to be thrown in the snow. Benefits would get slashed, taxes would quadruple - all sorts of lurid things were floating around. If the president had proposed something specific, we could have discussed specific things. Not coming up with a reform proposal was a big tactical error. They confused the financial challenge with the principle of ownership. Who should own the money - the politicians, or you? Right now, the politicians own it, but I believe you should own it.

You mentioned that health care is another potentially explosive issue.
Right. Baby boomers will be directly hit by health care costs. The concept of health savings accounts, where you control the money, is the only way to go. For example, Medicare spends $7,000-$8,000 per person per year, and $14,000-16,000 for a married couple. We could devise a system with a very high deductible, which makes the insurance more affordable and provides better coverage than Medicare provides now with A and B, plus an additional $5,000 or $6,000 a year to cover that deductible.

Some politicians and economists - liberals and conservatives alike - are concerned about the snowballing national debt hitting $11 billion by 2010. Are they right to be concerned, or are they overreacting?
They're overreacting on the tax side. They always want to use their inability to control spending as an excuse to raise taxes. Instead, the emphasis should be on tax policies that help the economy. On the spending side, you don't have to cut spending, just control it. Bill Clinton showed more restraint in this area than George Bush, so - as much as I hate to say it - go back to Clinton!

So much of our economy seems to hinge on the price of oil. What can we do to reduce our dependency on fossil fuels, which are not a renewable resource?
We have a bubble in oil right now; there's a lot of speculation. In the next year or so oil will go down $15 or $20 per barrel. In terms of supply, we can do far more drilling and exploration on the outer continental shelf. Eighty-five percent of it is off bounds right now. We have a lot of sophisticated technology and globs of natural gas out there. As we saw during the hurricanes this year, in spite of oil rigs getting battered around and thrown half way around the world, we didn't have an oil spill. In terms of alternatives, about 85 percent of Japan's power is now nuclear. And one interesting factoid: If every nuclear power plant that was on the drawing boards 25 years ago had been brought online, we would have even met the Kyoto protocol.

How critical is the stability of the Chinese economy both in maintaining the global economy and maintaining U.S. financial health?
In principle, we should be very happy that others want to throw off the shackles of constraint and be more capitalistic, more free-enterprise oriented. As a country, if we get our act together in terms of taxes, reforming our crazy legal system, and revamping health care and social security, we can compete very well. The key to economic growth is not just producing something cheaply, but with innovation. For instance, look at microchips: Anyone can make a microchip very cheaply. It's the architecture that makes it valuable. That kind of innovation and architecture - staying one step ahead in terms of advances - is where the money is made, and where the margins come from.

From your perspective as editor-in-chief of Forbes - an advertising company - what challenges do you see ahead for traditional advertising-supported media?
The real challenge on the print side is for large daily newspapers and weekly magazines. Amazingly, small newspapers are doing fine. They provide local information that you can't easily get on the web. Because more people go online in the morning instead of looking at the daily paper, those companies have real challenges. We're fortunate - Forbes comes out every two weeks. We assume our readers have knowledge of the daily news, so we take it a step further. We've gone heavy into our online services, but we maintain a huge commitment to print. By doing cross-platform selling - combining packages of various platforms for customers - print can do just fine. Marketers may not realize it, but people still read, even if it's online.

What fundamental lessons did you take with you from your two runs at the presidency in 1996 and 2000?
It's more fun to win than to lose! Seriously, the most important thing I learned is that the state of this nation is stronger than the popular culture would lead you to believe. We saw this blatant strength in the nation's reaction to 9-11. Politically speaking, I do think there's a need to reform our primary process. Having 15 primaries in one day is ridiculous; they should be spread out so more people can participate in the process. On the funding side, a lot of the rules should just be removed. If you want to give somebody a lot of money, go ahead - as long as it's posted each night on the Internet. That way, people can see where the money comes from and where it's going. Right now, we have rules and regulations and so-called independent committees, so nobody knows who's giving and what's happening.

What leadership qualities are most important in business today?
A strong leader has a sense of direction, a sense of right and wrong, a sense of trust, and a belief in the product and service he or she is offering. Of course, it's important to realize that a leader can't be everything and do everything, so delegating wisely is critical. That doesn't mean abdicating responsibility, but delegating so others can do things that they do better than you.

It seems as if a number of corporate leaders lost sight of that sense of right and wrong during the past few years. Did the exposure of Enron, Tyco, and other companies serve as a wake-up call?
Sarbanes-Oxley - the idea that if you do more paperwork people will be more honest - is preposterous. All it does is add cost and become a burden on everyone. The best incentive for not breaking the law was Bernie Ebbers going to jail for 25 years. Fraud has always been illegal, but if someone gets real time for it, that sends out a real message.

What do you consider the greatest challenge facing the U.S. today - and what would you do to help solve it?
One of the great challenges is having faith in our model. We do things here at home and then give the opposite advice to other countries. We must have faith in liberty, and in people. It takes time to set up institutions such as we have developed in this country, but we should have taken heart from what Europe did after WWII, and what Asia has done in recent years. Hey - it works.




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