Earlier Tax Cut Sought by Reagan : Lag After Curbing of Deductions Seen Hurting Economy

The Reagan Administration will press congressional tax writers to make tax rate reductions effective earlier than the middle of next year, a senior Administration official said Tuesday.

The tax overhaul bills approved by both the Senate and the House would make the lower rates effective next July 1 but eliminate or reduce a host of tax breaks on Jan. 1. That would have the effect of raising taxes next year by more than $20 billion, with most of the burden falling on business. Administration officials are worried that such a tax increase would retard the economy as it enters its third year of weak growth.

‘Slug to the Economy’

“Where growth is more sluggish than we had originally anticipated, you don’t want to see a $22-billion slug to the economy in that first year,” the senior official said.

And, unless the rate cuts are moved up to Jan. 1 or close to it, some individual taxpayers who can look forward to tax decreases in later years actually would face a small overall tax hike in 1987.

Some in Congress share the concern. A Senate and House conference committee is scheduled to begin Thursday to write a final version of the tax legislation, and some key participants are beginning to call for earlier rate cuts to avoid hitting millions of taxpayers with higher taxes during the first year that the new tax code is in effect.

“The timing of tax cuts should coincide with the repeal of deductions,” Sen. Bill Bradley (D-N.J.) told a tax seminar Tuesday. His view was echoed by Bill Diefenderfer, chief aide to Senate Finance Committee Chairman Bob Packwood (R-Ore.).

‘Who Would Lose?’

The Reagan Administration official, who spoke only on the condition that he not be identified, cautioned that he would not endorse putting the tax cut into effect as early as next Jan. 1 until it was clear “who would lose and how you pay for it.” He said it was the only major change sought by the Administration that would cost substantial revenue, which would have to be raised from other sources to prevent the bill from costing the government money.

“We don’t want people thinking during the first year the tax reform bill is operative that they are facing an increase,” he said.

The comments appeared to put the Reagan Administration more firmly on the side of those seeking to move up the date of the tax cuts. Last week, White House Chief of Staff Donald T. Regan told a small group of reporters that the Administration would merely “hope the conferees would look at getting . . . the effective dates of the new rates (to) coincide or (be) fairly close to the dates of the new increases.”

On another key tax issue, the Administration official suggested that any effort to salvage most of the tax deduction for contributions to individual retirement accounts be carefully “targeted to the middle class.” The Senate bill would disallow the deduction for workers covered by company pension plans, and the House bill would reduce or eliminate it for workers who participate in company-sponsored 401(k) retirement savings plans.

“We recognize there is going to be some restoration of IRAs,” the Administration official said. But he said the Administration fears that keeping the entire deduction, which would cost as much as $25 billion over five years, would have to be offset by an excessively large corporate tax increase.

27% Top Tax Rate

The two leaders of the tax conference--Packwood and House Ways and Means Chairman Dan Rostenkowski (D-Ill.)--have publicly agreed on the broad outlines of a final bill that would keep the top tax rate close to the low 27% rate in the Senate bill.

At the same time, they have agreed to aim for the larger tax cuts for middle-income taxpayers called for in the House bill. That would require a steeper tax hike on corporations than the $100 billion over five years called for by the Senate.

The Administration continued also to oppose any effort to make the Senate tax bill’s increase in the capital gains tax effective earlier than the beginning of 1987.

Wall Street has been swirling with rumors for more than a week that tax writers might push up the top capital gains rate to 27% from 20% as early as the first day of the tax conference this week to avoid a potential stock market sell-off at the end of the year.

Fears Played Down

But the senior Administration official played down such fears. Even though there may be “quite a bit of activity toward the end of the year,” he said, “I’m not sure that’s all bad. . . . We don’t see a problem with the capital gains date.”

Meanwhile, Senate leaders named an 11-member delegation to the tax overhaul conference in preparation for the first bargaining session between House and Senate lawmakers Thursday.

The Senate delegation will be led by Packwood, who will preside over a group of six Republicans and five Democrats. The other conferees, all from the Finance Committee, will be GOP leader Bob Dole of Kansas and Sens. William V. Roth Jr. (R-Del.), John C. Danforth (R-Mo.), John H. Chafee (R-R.I.), Malcolm Wallop (R-Wyo.), Russell B. Long (D-La.), Lloyd Bentsen (D-Tex.), Spark M. Matsunaga (D-Hawaii), Daniel Patrick Moynihan (D-N.Y.) and Bradley.

Bradley, one of the earliest congressional advocates of tax revision, was chosen over two more senior Democrats--Max Baucus of Montana and David L. Boren of Oklahoma--and Sen. John Heinz of Pennsylvania was skipped over on the Republican side.

The House is expected to name its conferees today.

Tax writers hope to complete action on all issues in the conference by Aug. 15, when Congress is scheduled to recess for three weeks, but there is little likelihood that both houses of Congress will be able to approve a final package in time to send it to President Reagan by Labor Day.