potentially troublesome law lurks in the flat tax plan of House Majority Leader Richard Armey. The Armey flat tax plans to eliminate business exemption for most fringe benefits, especially employer paid health care. Flat tax enthusiasts like Harvard University economist Dale Jorgenson argue that employers, who look at the total cost of compensation, would simply increase their employees’ cash compensation, leaving them free to purchase their own health insurance. In theory, the workers then become more price-conscious consumers of medical services than they are under today’s employer paid system. (Dishman 40)What if workers, particularly those modestly paid folks who would face no tax under the Armey plan, choose to pocket the cash instead of paying health insurance premiums? Dallas Salisbury, president of the Employee benefits Research institute in Washington, worries that they might expect the government to pay for their care when they need it. Presumably, a system to avoid the problem could be created, but it is clearly going to b a thorny issue. (Dishman 40) The flat tax eliminates deductions for home mortgages. In addition to getting hit on their stock holdings, homeowners will likely suffer a 10 to 15 percent drop in the value of their homes. (Darell)Another negative effect of the flat tax is that of the decreased market value of tax-free bonds. Under the most popular flat tax proposals, market value of tax-free bonds could easily drop by 20 percent. High on the list is the blow that investors take when they trade the securities. Because there are so many thousands of small issuers, the market for municipals would have wide spreads between the bid and asking prices. That increases transaction costs. Also, getting good and timely financial information on many issuers is difficult. When Orange County filed for bankruptcy in December of 1995, for example, the most recent financial statements available to the public were f...
