Bush Vows Veto of Plan to Raise Taxes on the Wealthy

President Bush said Thursday night he would veto a Democratic-supported effort to raise taxes for an estimated 600,000 Americans with incomes above $155,000.

“I will veto a rate increase. You heard it for the first time here, but I have sent that signal up to the Hill,” Bush said in a live interview on the ABC-TV show “Prime Time Live.”

Bush responded to reporter Sam Donaldson, who asked what the President would do if Democrats managed to pass their own tax bill to head off Bush’s proposed cut in the capital gains tax.

Earlier Thursday, House Democratic leaders rallied behind their plan to raise tax rates for wealthier Americans to pay for expanded individual retirement accounts that could be tapped for college expenses and first-time home purchases.

Campaign Slogan

Bush, who campaigned on the slogan “Read my lips--no new taxes,” said his planned cut in the capital gains tax, which he has advocated as a spur to economic activity, “is not a tax break for the rich.”

That directly contradicted the comments of House Speaker Thomas S. Foley and his lieutenants who earlier in the day divulged more details of their hastily drawn alternative measure and denounced Bush’s plan as a “giveaway for the rich.”

Besides increasing the top income tax rate to 33% from 28%, the Democratic leadership package includes $22.5 billion in earmarked funds to reduce the deficit over the next five years and restoration of IRA benefits for families with incomes above $50,000 a year.

Under the expanded IRAs, every taxpayer could contribute up to $2,000 a year to the special retirement accounts and claim a tax deduction equal to 50% of that amount, up to $1,000, without regard to total income.

Democratic sponsors said the proposal also would allow IRA contributors to withdraw funds to pay college tuition or buy a first principal residence without being subjected to an existing 10% penalty for withdrawals made before the age of 59 1/2.

Under present law, only those taxpayers who are not covered by an employer-sponsored pension plan or have incomes below $35,000 for singles and $50,000 for married couples are allowed to claim a tax deduction for their IRA contributions.

While Foley and his aides acknowledged they were fighting an uphill battle, they forecast victory in next week’s House showdown over the rival tax proposals despite a split in Democratic ranks over reducing capital gains levies.

Even if they lose, some Democrats said privately, the battle could allow them to portray the party as the champion of the middle-class and to accuse Bush of favoring the very rich at the expense of the typical American.

Rep. Dan Rostenkowski (D-Ill.), the House Ways and Means committee chairman who lost a fight to bottle up the capital gains cut in his panel, threw his support behind the leadership’s alternative plan.

“This is in the interests of the fellow who carries the lunch bucket and the person who carries the briefcase,” Rostenkowski said at a news conference.

House Democratic leader Richard A. Gephardt of Missouri issued a clearly partisan battle cry. “Beginning today, the middle-class fights back,” Gephardt said. “The Bush proposal gives a tax cut to the rich, paid for by the middle-class. Our proposal gives IRAs to the middle-class, paid for by the rich.”

Foley said the Democratic plan would not be a new tax increase but a “tax adjustment” to correct an inequity in the 1986 tax law.

Under the present law, he said, married taxpayers are hit with an effective tax rate of 33% on all income between $75,000 and $155,000 a year, while income above that amount is taxed at only a 28% marginal rate.

‘Utterly Illogical’

“This is utterly illogical,” Foley said, noting that the Democratic plan would apply the 33% rate to an estimated 600,000 people with incomes of $155,000 or more.

Such a change would raise a projected $37.5 billion over a five-year period, of which $15 billion would offset the tax losses caused by broadening eligibility for IRAs.

The remaining $22.5 billion would be earmarked into a new trust fund to be used exclusively for reducing the deficit.

Rep. Leon E. Panetta (D-Monterey) said Democratic leaders are faced with a “tough education problem” since few House members have focused on the long-term increase in the deficit that would occur if the capital gains tax is reduced to 20% as the Ways and Means Committee has proposed.

“If we cut capital gains rates, the middle class is going to pay for it later,” Panetta said.