Rescue the Nation's Capital With a Flat Tax

After years of mismanagement, Washington, D.C.'s Financial Control Board has finally begun to bring some sanity back to the management of our nation's capital.

While President Clinton's proposal for a radical restructuring of the federal relationship with the city has problems, it does raise the important question of what can the federal government do to facilitate Washington's revival.

One element of the president's plan makes a lot of sense. Privatization of some city services will mean more efficient delivery. From prisons to schools, city residents will get more bang for the buck if private management selected on the basis of efficiency considerations can play a larger role. In fact, the District of Columbia could provide a valuable national showcase for education reform by providing all D.C. parents a wide choice among public and private education options for their children.

Further, it makes sense for the federal government to assume responsibilities in exchange for reducing or eliminating the annual $660 million federal payment. Just as there may be appropriate changes in the relationship between the federal government and the states, we should closely examine whether it makes sense to pursue alterations in the relationship between the federal government and the capital city's government.

More money, wrong signal

But I reject the idea of a net increase in federal money to the district's government. That takes momentum away from the progress that the control board has made in taming the city's bureaucracy. More federal money would be the wrong signal at the wrong time.

But that doesn't mean that all help should be withheld. Rather than giving more money to Washington's bureaucracy, it would be appropriate to use the tax code to make Washington a city of great economic opportunity.

Delegate Eleanor Holmes Norton has proposed - and I have endorsed - replacing the current graduated federal income tax structure for district residents with a flat 15 percent rate. Personal exemptions would be raised so that single residents earning up to $15,000, single heads of households earning up to $25,000, and couples earning up to $30,000 would be removed from the tax rolls. District residents would have to pay no capital gains taxes on the sale of city investments.

Clearly, the flattening of tax rates represents the most dramatic aspect of the plan. The current steeply graduated local income tax (with a top rate of 9.5 percent) on top of the highly graduated federal income tax (with rates reaching 39.6 percent) means that D.C. residents face some of the most punishing marginal income tax rates in the country. Is it any wonder that successful entrepreneurs have been fleeing the city?

A way to higher growth

Flat tax rate structures in the states have been found to lead to higher economic growth. A recent study for the Joint Economic Committee by Dr. Richard Vedder of Ohio University found that over the period 1962 through 1994, real personal income growth was one-fourth higher in states with flat income tax rates than in states with progressive rates.

The Norton-Kemp flat tax proposal amounts to a sizable tax cut for city residents. The average resident would see a 44.3 percent cut in tax liability. Because of the large personal exemption, lower-income taxpayers would see a larger percentage cut on average.

Exodus of the middle class

It is clear that the city needs a change from the tax-and-spend policies of the past. A bloated city government has led to taxes driving the middle class and businesses out of the city. Population has fallen to 554,000, with the middle class leading the exodus.

Since 1970, Washington has lost 25 percent of its population and has already lost more people in the 1990s (52,900) than it did in the 1980s. While crime probably plays the most important role in driving out residents, high taxes coupled with mediocre city services and a deplorable public education system are also significant.

Why business flees

Businesses, too, have fled the city, and taxes are again a critical reason. A 1994 study conducted by the George Washington University Center for the Advancement of Small Business found that the No. 1 reason for businesses to leave Washington was taxes of all types controlled by the city.

President Clinton has recognized this issue and proposed some limited credits for business, but he has yet to embrace any changes on taxation of individuals.

I believe that the Norton-Kemp flat tax proposal moves forward both the tax reform debate and the debate over what to do to revive the city of Washington.

The president and Speaker Gingrich have spurred interest in Congress to do something to make Washington a shining city on the hill. Now we just have to make sure we focus first and foremost on economic growth.

* Jack Kemp, a former United States representative and the Republican vice presidential candidate in last year's election, is co-chairman of the Alexis de Tocqueville Institution in Arlington, Va.