Reagan Plans Big Tax Reform Push : Hopes to Regain Political Offensive, ‘Remove Dark Cloud of Unfairness’

President Reagan, already under attack by Democrats for backing away from some of the key provisions of the Treasury Department’s original tax proposal, hopes to recapture the political offensive this week when he finally unveils his own long-delayed tax overhaul plan.

“We’ve got all the ammunition,” one White House official said. He added that Reagan “will hit the ground running” on the tax issue by following up his much-heralded Oval Office speech Tuesday with a series of appearances around the country designed to push tax simplification to the forefront of the nation’s agenda.

And in his weekly radio speech Saturday, Reagan zeroed in on tax reform, telling his audience that he would announce a “historic change” to “overhaul the whole rickety, jury-rigged tax code” and “remove the dark cloud of unfairness from the tax system.”

‘An Endangered Species’

Although he disclosed no new details of the plan, he said that if it were approved by Congress, many Americans would no longer have to fill out a tax form, proclaiming Form 1040 “an endangered species.”

Reagan said the “newer, sleeker model” tax system that he will propose “will significantly reduce taxes for the majority of all Americans” and “do away with the inequities and economically unjustifiable tax breaks.”

In its essence, tax reform would lower tax rates and eliminate some of the scores of tax breaks that punctuate the tax code. Although details will not be made public until the morning after Reagan’s speech, the President is expected to propose reducing the top individual tax rate from 50% to 35% and abolishing such tax advantages as the deduction for state and local tax payments and the investment tax credit for businesses.

Republican strategists hope that Reagan’s plan will appeal to middle-class voters who resent the way today’s tax system works to the advantage of the wealthy and the special interests. It carries a Populist appeal, they say, designed to erase the party’s country-club image and cement the diverse coalition that overwhelmingly supported Reagan in the last two presidential elections.

“This Populism is anti-big government, pro-market and pro-fairness,” Secretary of the Treasury James A. Baker III told a business audience last week. “Ronald Reagan built his career on this philosophy; he carried 49 states on it, and he can carry tax reform on it.”

But some of the compromises Reagan has made to soften the impact of the original Treasury plan on business and wealthy investors may undercut its Populist appeal, leaving the Administration’s new tax program open to criticism from Democrats that the White House has not gone far enough in rooting out tax preferences for favored interest groups.

“The clear perception at the moment is that the Administration has fallen prey to certain special interests--like the oil, gas and real estate lobbies, among others,” said Chairman Dan Rostenkowski (D-Ill.) of the House Ways and Means Committee. “No matter how tough the President’s plan actually is, his image as a side-dealer will weaken the quest for reform. And his image as the new Populist will be flawed.”

Indeed, Baker conceded that business will find “Treasury II,” as the forthcoming tax plan has been dubbed, “far less offensive” than the original Treasury proposal.

Few politicians outside the Administration expect a major tax overhaul to pass Congress this year, and that would leave the plan vulnerable to election-year rivalries and uncertain economic trends in 1986. And if tax reform becomes lost in the legislative maze or nibbled to pieces by special interest groups bent on retaining their own tax preferences, it could backfire against Reagan and become a political tool for the Democrats in 1988.

Sen. Bill Bradley (D-N.J.), who introduced his own tax overhaul proposal several years ago, warned: “If the (Republicans) are not willing to take on the special interests, then it becomes the economic growth issue for the Democrats for the next four years or longer--until it’s done.”

Democrats, however, are divided over how to take advantage of any weaknesses in Reagan’s approach to tax simplification, with some urging a tougher stance in closing loopholes and others preferring simply to impose a minimum tax on corporations and wealthy individuals.

Sen. Joseph R. Biden Jr. (D-Del.), who supports major tax revision, doubts that Democrats will go along with it, in part because some of the biggest contributors to the Democratic Party, such as independent entrepreneurs and labor unions, could lose important benefits.

Others worry that the inevitable legislative bargaining ahead could drain the proposal of most of its important features. “The White House is treating this initial process like it’s the (final bill),” Rostenkowski said. “It’s not. It is the beginning of a long voyage with a leaky boat.”

Barber B. Conable Jr., who retired last year as ranking Republican on Ways and Means, the House’s tax-writing committee, said the fate of tax reform “is likely to boil down to a lot of internal politics on the part of the Democrats.” Reagan can present a package, he said, but the Democrats who control the House can take it apart because tax legislation must originate in their chamber.

Yet even though the White House will probably be attacked from all sides--those who want to retain current tax preferences as well as those who want to go further in reducing overall tax rates--the plan to be presented this week is certain to provide the basis for any debate.

A Starting Point

“I can’t support Treasury II in its present form,” Rep. Jack Kemp (R-N.Y.) said, “but it is the starting point for all of us. I’m not going to throw bricks at it.”

And some Washington insiders who initially doubted that tax reform could clear Congress are now hedging their bets, acknowledging that Reagan may again defy the conventional wisdom.

“This is like Richard Nixon going to China,” said John M. Albertine, director of the American Business Conference, a lobbying group here that represents high-growth firms. “You have the most conservative President since Calvin Coolidge pushing a bill that has substantial support in the Democratic Party. That gives it a real chance.”

Reagan, in his radio talk Saturday, said: “The timid, the cynical and the special interests will combine to say what we want--fairness, hope and opportunity--are impossible. Well, they’ll be wrong.”

The main elements of the White House tax plan, which has undergone extensive revisions over the last month, have been disclosed privately by Administration and congressional officials. According to sources, these include:

--For individuals and families, the current system, which has up to 14 tax brackets ranging from 11% to 50%, would be replaced by just three tax rates--15%, 25% and 35%. For married couples filing jointly, the top 35% tax rate would apply to taxable income above about $70,000.

--The personal exemption would be nearly doubled from the current $1,040 to $2,000 and would continue to increase with inflation. For a family of four, which now begins paying taxes on income exceeding about $7,700, the new system would not kick in until its income was more than about $11,600.

--Most employer-paid fringe benefits would continue to be excluded from taxation, but a small portion of health insurance premiums paid by employers would be taxed. Income taxes would be paid on the first $10 a month of employer-paid premiums for single taxpayers and the first $25 a month for families.

Deduction for Taxes

--The deduction for state and local taxes, including property taxes, would be repealed, and the deduction for interest paid for vacation homes and other major loans, such as auto purchases, would be limited to $5,000 above a taxpayers’ investment income. Mortgage interest for primary residences would continue to be fully deductible, and second homes purchased as investments would qualify for full deductions. Charitable deductions for those who itemize would continue to be fully deductible, but taxpayers who do not itemize deductions would lose the limited charitable deduction now available.

--For long-term capital gains, 50% of profits from the sale of stocks and some other assets would be excluded from taxation, yielding an effective top rate of 17.5%. Profits from the sale of assets such as buildings, which qualify for depreciation tax write-offs, are expected to be taxed at ordinary rates with an inflation adjustment. At present, 60% of the profits from all such assets are excluded from taxation, leaving a top tax rate of 20%.

--For business, the top tax rate would be reduced from 46% to 33%, and small business would retain a lower rate structure. Corporations would be permitted to deduct 10% of the dividends they pay shareholders, down from the 50% initially proposed by the Treasury Department last November. Current law provides no deduction for dividend payments.

--The investment tax credit would be repealed, and the accelerated depreciation allowed by Congress in 1981 for business investments would be reduced. To lessen the chances that some profitable corporations and wealthy individuals would escape taxation, the current minimum tax would be stiffened.

--Several industries, such as timber, mining and oil, would lose some of their particular tax preferences, but the new plan would be more generous than first proposed by Treasury. Some tax breaks for oil producers would remain in modified form.