Parties at Odds on Use of Taxes to Fight Deficit

Times Washington Bureau Chief

With taxes looming as a major factor in the 1988 presidential race, Republican National Committee Chairman Frank J. Fahrenkopf Jr. predicts that the GOP will adopt a no-tax-increase pledge. But Democratic National Committee Chairman Paul G. Kirk Jr. says the next President must seriously consider a tax increase as a means of reducing the federal budget deficit.

Although some Republicans as well as most Democrats say pressures for a tax increase next year will be enormous and three GOP presidential candidates have not ruled out new taxes, Fahrenkopf said most Republicans agree with President Reagan's view that taxes are not the answer to the budget deficit.

Sees Anti-Tax Plank

Fahrenkopf said he expects the GOP nominating convention in New Orleans, Aug. 15-18, to adopt a platform plank opposing any new taxes.

Vice President George Bush, the leading candidate for the Republican nomination, flatly rules out any tax increase but Senate Minority Leader Bob Dole of Kansas, who is running a strong second in national polls, has left the door open to the possibility of new taxes.

Kirk said the Democrats are not likely to "lead on taxes" when they adopt a platform at their July 18-21 convention in Atlanta, but "taxes will have to be seriously considered as a recognition of the problems that will be left by the debt and deficit of eight years of the Reagan Administration."

None of the seven Democratic candidates have ruled out a tax increase, and four of them have proposed specific new taxes. Former Arizona Gov. Bruce Babbitt is the most outspoken of the contenders in asserting the need for additional revenues to reduce the deficit and finance needed government services. He favors a phased-in 5% national consumption tax that would raise $220 billion over five years.

Fahrenkopf and Kirk, interviewed by The Times, indicated that they expect tax policy to become an increasingly important and controversial factor in the two parties' presidential campaigns.

"But taxes are not the answer to the deficit problem," Fahrenkopf said. "In fact, every time we've raised taxes over the last 20 years, spending has gone up. For every dollar in tax revenue raised, Congress has appropriated $1.57."

There might be "some appetite among Republicans for new taxes if the revenue could be directly linked to reducing the deficit but not with this Democratic-controlled Congress," he said.

GOP Candidates Accused

Kirk accused the Republican presidential candidates of "not being open enough about the problems this Administration will be leaving behind" and said that "each and every one of the Democrats has come to grips with the problems one way or the other, some more forthrightly than others."

"If the Republicans are going to say we'll never raise taxes," Kirk said, "then what's the future of this country? What's our future if we don't have adequate economic strength?"

Charls Walker, a leading Republican tax lobbyist who served as deputy Treasury secretary in the Richard M. Nixon Administration, agrees with Kirk. The next President, regardless of party, says Walker, "will have to be one tough son of a gun and will have to be willing to raise taxes--otherwise we'll be in danger of becoming a second-rate nation."

And former Democratic National Committee Chairman John C. White, also a Washington lobbyist, says he is advising his clients to prepare for tax increases next year because they are inevitable.

'Like a Pressure Cooker'

"After eight years of deficits and cutbacks on all domestic programs," White said, "this tax issue will be like a pressure cooker with the lid about to fly off. The White House theory has been that you could continue to cut such things as education and housing and medical care, but you can't without building up great pressure to finance additional services."

Along with Dole, two other Republican candidates--former Secretary of State Alexander M. Haig Jr. and former television evangelist Pat Robertson--have left the door open for new taxes and Robertson says he would consider increasing excise taxes on liquor and cigarettes, the so-called sin taxes. Former Delaware Gov. Pierre S. (Pete) du Pont IV and Rep. Jack Kemp of New York oppose any new taxes.

Bush and Kemp both propose a tax reduction that would benefit middle- and upper-income taxpayers who can afford investments. They favor cutting the capital gains tax rate from 28% to 15%. And Kemp also supports a freeze on imposition of a Social Security tax increase scheduled for 1989. Du Pont would consider additional tax cuts to stimulate the economy but declines specifics.

Oil Import Fees Favored

At least four of the Democrats--the Rev. Jesse Jackson, Rep. Richard A. Gephardt of Missouri, Sen. Paul Simon of Illinois and former Sen. Gary Hart of Colorado--favor import fees on oil, a move that polls show Americans support not only as a means of reducing the trade deficit, but also as a way of decreasing U.S. reliance on imported oil.

Seventy-one percent of Americans favor steps to decrease oil imports and 67% would be willing to pay more than five cents more per gallon of gas to bring that about, says a new national poll conducted by Hamilton, Fredericks and Schneiders for the National Energy Policy Council, a group formed by a coalition of middle-sized energy companies.

Imported oil is the largest single commodity component of the U.S. trade deficit, accounting for about 30% of the deficit, contrasted with 15.8% a year ago.

Hart has proposed a $10-a-barrel oil import fee that would raise approximately $18 billion a year, whereas both Gephardt and Simon advocate $5-a-barrel fees. Jackson has been less specific but says he favors an oil import fee.

Two Might Accept Increase

Sen. Albert Gore Jr. of Tennessee says he does not advocate new taxes but will not rule them out if other efforts to cut the budget deficit are not adequate. Gov. Michael S. Dukakis of Massachusetts also does not bar a tax increase but declines to provide details.

Simon recently has been more specific than the other Democratic candidates in saying which new taxes he would consider if elected President.

Although he maintains that new taxes would not be required to meet his goal of a balanced budget by his third year as President, Simon says that, if it becomes necessary, in addition to an oil-import fee he would consider:

--An income tax increase on the wealthiest 1% of taxpayers--individuals making more than $100,000 per year or a family of four getting more than $193,000 a year.

--A cigarette tax increase of 10 cents a pack, raising $2.5 billion.

--A tax on income earned in the United Sates by citizens and firms of other nations, raising $5 billion.

Although little support has been expressed so far for Babbitt's proposal of a national consumption tax, tax experts in Washington say there is a budding constituency for that kind of tax that cuts across party lines.

Walker, who represents business interests, has been advocating an across-the-board value-added tax that would raise an estimated $20 billion for each percentage point imposed. As Walker points out, a rate of 3% to 5% would go a long way toward slashing the budget deficit.

Democrats traditionally have opposed such taxation because it is regressive, falling proportionately more heavily on lower-income people than on the affluent. But several factors have made a value-added tax more palatable to them today:

--The argument that the tax can be made more progressive by a system of income tax credits and/or exemptions for such necessities as food and shelter.

--A strong sentiment for spending more on social problems, especially the crises in housing and welfare, and the increasing problem of the homeless. (Since 1981, Congress has slashed 76% of funds available for low-income housing, 40% of the money for job training and 71% of funds for retraining welfare recipients.)

Privately, even some liberals in Washington are beginning to concede that such a tax may be necessary and perhaps inevitable if the nation is to escape the dire consequences of ever-greater long-term debt.

At least one liberal congressman--Rep. Robert T. Matsui (D-Sacramento), a key member of the House Ways and Means Committee--has gone on record favoring a consumption tax. Matsui thinks that Congress ultimately is more likely to pass a national sales tax, which is imposed at the retail level, than a value-added tax imposed at each level of production.

Although a national consumption tax has not yet gained strong support in either party, Matsui says that, when members of Congress "focus on where the revenues are coming from in the post-Reagan era, they will have to look at such alternatives."

Joe Minarik, a tax expert at the Urban Institute here, doubts that Congress will pass such a tax anytime in the near future. But he expresses little doubt that the lawmakers will pass some kind of tax increase next year. "That's pretty much a given," he said. "Otherwise we'll just be ignoring the problem and God help us if we do that."

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