Reagan Offers His Tax Overhaul Plan : Calls Current System Un-American, Vows to End Grip of Special Interests

President Reagan proposed a “radical, historic” overhaul of what he called “the un-American” federal income tax system Tuesday, promising to free common citizens “from the grip of special interests” and to provide “a ladder of opportunity” for all.

“America, go for it!” the President exhorted in a long-heralded nationally televised address from the Oval Office.

Reagan--exhibiting a special fervor when he talked of family values--described his ambitious project as “a great historic effort to give the words freedom, fairness and hope new meaning and power for every man and woman in America.”

This is “America’s tax plan,” he said.

Although full details of Reagan’s plan will not be disclosed until today, he spelled out enough specifics Tuesday to basically confirm most of the leaks about the long-awaited proposal that have been dribbling out of the Administration recently.

‘Revenue Neutral’

In a nutshell, the plan would lower tax rates while eliminating many popular deductions and wind up “revenue neutral,” neither increasing nor reducing the federal government’s tax take. Generally, individual taxpayers would pay less and businesses would pay more.

Some highlights:

--There would be three personal income tax brackets, 15%, 25% and 35%. The lower rate would apply to taxable income up to $29,000; the middle rate to taxable income between $29,000 and $70,000, and the highest rate to taxable income above $70,000. Currently, there are as many as 15 tax brackets ranging from 11% to 50%.

--The personal tax exemption would be increased to $2,000 from the current $1,040. The standard deduction for a joint tax return also would be boosted to $4,000 from $3,670.

--Families with one working spouse, which may now contribute $2,250 a year to a tax-deferred Individual Retirement Account, could contribute $4,000--the same amount as families with two earners.

Reagan called it “the strongest pro-family initiative in postwar history.”

--But federal taxpayers no longer could deduct state and local income, property and sales taxes. Reagan said that these deductions “actually provide a special subsidy for high-income individuals, especially in a few high-tax states,” and he noted that “two-thirds of Americans don’t even itemize.”

--Still, he said, “deductions central to American values will be maintained,” such as the home mortgage interest deduction. There basically would be a $5,000 cap on other interest deductions, however.

--The maximum corporate tax rate would be lowered to 33% from 46%.

“A great national debate now begins,” Reagan said, urging: “It should not be a partisan debate, for the authors of tax reform come from both parties and all of us want greater fairness, incentives and simplicity in taxation.”

Democratic Response

In keeping with this spirit, the official Democratic response to Reagan’s speech also took a basically nonpartisan tone, while not conceding to the Republican Party the popular issue of tax fairness.

The Democratic reply, immediately following Reagan’s telecast, was offered by Rep. Dan Rostenkowski (D-Ill.), the congressman acknowledged to be the most influential on tax reform because he is chairman of the tax-writing House Ways and Means Committee. By law, tax legislation must originate in the House.

“If the President’s plan is everything he says it is, he’ll have a great deal of Democratic support,” Rostenkowski said. But he added, in a preview of the congressional battle in store, that “Democrats will not, however, give the President’s reform plan a rubber stamp. If anything, it’s a starting point. We will make some changes, correct some imbalances, seek to make it fairer.”

Biggest in 72 Years

Reagan’s plan would represent the most sweeping overhaul of the income tax system since it was enacted 72 years ago. The tax code was thoroughly rewritten in 1954, and Congress later approved major changes in 1969, 1976 and 1981. But never has there been such an extensive revamping as is now proposed.

Referring to tax tinkerings of the past, Reagan said: “Most of these changes didn’t improve the system, they made it more like Washington itself--complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers.”

Tax simplification clearly is the most ambitious initiative of Reagan’s second term. And, if he should turn out to be successful in a thorny field where other Presidents have failed, Reagan certainly would carve a bigger notch for himself in American history.

Seen as Opportunity

Beyond that, the President and his political strategists look upon this uphill endeavor as an opportunity to shuck off the country club image that long has afflicted the Republican Party, in the eyes of many voters, and to win the permanent support of working class Americans through enactment of a “Populist,” fairer tax system.

“How many times,” Reagan asked his viewers, “have we heard people brag about clever schemes to avoid paying taxes or watched luxuries casually written off to be paid by somebody else--that somebody being you? I believe that, in both spirit and substance, our tax system has come to be un-American.”

He added: “The power to tax is the power to destroy. For three decades, families have paid the freight for the special interests.”

But Rostenkowski, in his reply, portrayed tax “fairness” as a traditional Democratic issue resisted by Republicans. “Our (party) roots lie with working families all across the country, like the Polish neighborhood where I grew up on the North Side of Chicago,” the veteran congressman said.

System Called Unfair

A Los Angeles Times Poll in January found that 56% of the nation’s taxpayers regard the federal tax system as unfair. And 60% believed that tax reform should be the Administration’s top priority.

But Reagan is embarking on this project, and bucking heavy opposition from many special interests that stand to lose tax breaks, at a time when his influence on Congress has been in significant decline. Despite his landslide reelection victory last November, Reagan has suffered a series of major setbacks on Capitol Hill--in part because of the tough issues involved, but also, some Administration advisers concede privately, because of faulty White House strategy and lack of presidential focus.

Reagan viewed his national television address, and the tax speeches that he will be making around the nation in the next few days, as an opportunity to regain the political offensive and to recapture some of his first-term magic.

First Details

Reagan prominently has featured tax simplification in two State of the Union messages and promoted the concept continually for 16 months. But this was the first time that the President has offered the public any substantial details of what he had in mind.

Even so, Reagan and his strategists decided to withhold the complete package of details until today. Their aim was to try to assure that controversial aspects of the plan certain to be viewed negatively by many persons did not initially compete for attention with the President’s sales pitch.

Reagan simply told viewers early in his speech that “I’ll start by answering one question on your minds--will our proposal help you? You bet it will. We call it America’s tax plan. . . .”

Color Graphics

Using color graphics, the President said his proposal would bring taxes “way down” for those earning less than $15,000 and “down” for persons in all ascending tax brackets up to “more than $50,000.” As he spoke, a succession of four downward-pointing arrows appeared on the screen.

He asserted: “There is one group of losers in our tax plan--those individuals and corporations who are not paying their fair share, or, for that matter, any share. These abuses cannot be tolerated. From now on, they shall pay a minimum tax. The free rides are over.”

The President told viewers that he wants “a tax code that no longer runs roughshod over Main Street America but ensures your families and firms incentives and rewards for hard work and risk taking.”

“For the sake of fairness, simplicity and growth, we must radically change the structure of a tax system that still treats our earnings as the personal property of the Internal Revenue Service,” he said. “The proposal . . . will free us from the grip of special interests and create a binding commitment to the only special interest that counts--you, the people who pay America’s bills. . . .

‘Ladder of Opportunity’

“We are offering a ladder of opportunity for every family that feels trapped--a ladder of opportunity to grab hold of and to climb out of poverty forever.”

Reagan “guaranteed” that under his plan a family of four with $12,000 in earnings would pay no federal income tax. A couple earning $40,000 would pay “an effective tax rate of barely 10%,” he said.

And a novel feature of his plan, Reagan reported, is that many taxpayers--”more than half of us,” he contended--would not even have to fill out a return and could merely volunteer to receive either a bill or a refund.

Rostenkowski noted that the Administration already has felt forced by pressure from business interests to back down from its original plan to eliminate many business tax breaks. The President’s final plan generally was more favorable to business than a proposal originally unveiled last November by the Treasury Department but never fully accepted by Reagan.

‘Taken Some Lumps’

“The President has taken some lumps for giving way to special interests,” the Democratic congressman said. “He now knows how very difficult it is to tamper with tax benefits that people and corporations have come to count on as their own private subsidy. . . .

“In the end,” he told viewers, “tax reform comes down to a struggle between the narrow interests of the few and the broad interests of working American families. Today, the only voices we in Congress hear are those determined to stop reform. We need to hear your voices.”

Reagan, calling his campaign “a second American revolution,” concluded in the same vein: “Let’s not let this magnificent moment slip away. Tax relief is in sight. Let’s make it a reality. Let’s not let prisoners of mediocrity wear us down.”

Reagan, evoking patriotism, family values and economic growth virtually all in one breath, summed up his concept of tax reform this way:

“It must promote opportunity, lift up the weak, strengthen the family, and perhaps most importantly, it must be rooted in that unique American quality--our special commitment to fairness. It must be an expression of both America’s eternal frontier spirit and all the virtues from the heart and soul of a good and decent people--those virtues held high by the Statue of Liberty standing proudly in New York Harbor.”