Reagan Settles on Cutting Tax Brackets to 3

President Reagan has settled on major elements of a tax overhaul plan that would mean three rates of taxation--15%, 25% and 35%--a higher personal exemption and fewer deductions for most Americans.

Reagan, however, will delay the proposal a week while the House struggles with the 1986 budget. (Story, Page 5.) The President plans to launch a speaking blitz on behalf of the plan with a televised speech from the Oval Office on May 28, White House spokesman Larry Speakes said.

According to an Administration official, who asked not to be quoted by name, the President’s proposals will include:

--Reduced individual tax rates. Present law has 15 tax brackets for couples and 16 for single people, ranging from 11% to 50%. Reagan wants to compress those brackets into three.

--Boosting the personal exemption. Present law permits a taxpayer to avoid taxes on $1,040 for himself or herself, the spouse and each dependent. Inflation is expected to put the exemption to $1,090 in 1986. The President’s plan would raise it to $2,000.

--Eliminating many deductions and limiting others. The plan would continue to allow deduction of home mortgage interest, for example, but seeks to repeal the write-off for state and local taxes paid. People who itemize deductions would be allowed to continue deducting most charitable contributions, but the special write-off for those who do not itemize would be repealed.

--Most employer-paid fringe benefits would continue tax-free. The major exception would be to tax the first $300 per year of health insurance premiums that employers pay for workers.

--A tougher minimum tax on corporations, which--like the present minimum tax--is designed to assure that profitable firms pay some federal income tax no matter how many deductions and credits they use. This goal has considerable support in Congress.

Administration sources indicated the campaign for the tax plan will focus on the theme struck by Secretary of the Treasury James A. Baker III in a speech in Houston this week, in which he said sentiment for overhauling the tax code is “deeply rooted in populism.”

“Roughly defined, this populism is opposed to elitism, opposed to excessive concentrations of power, and oriented toward fairness,” Baker told the Houston Chamber of Commerce.