White House Opposes Payroll-Tax Cut Plan : Social Security: Sen. Moynihan’s proposal aims at trimming reserves. The Administration favors using funds to pare deficit.

The White House Thursday attacked a proposal by Sen. Daniel Patrick Moynihan (D-N.Y.) to provide a $55-billion cut in Social Security payroll taxes.

“Democrats seem to want to fool around with the Social Security system,” charged White House spokesman Marlin Fitzwater. “We don’t.”

Despite appeals from conservatives and business groups to endorse the politically appealing tax reduction, the Bush Administration decided that supporting Moynihan’s plan might invite proposals to raise income tax rates to make up the lost revenue, officials said.

Moynihan’s payroll tax cut is designed to eliminate the large reserves accumulating in the Social Security system. The White House favors using the reserves to help eliminate the federal budget deficit.

The White House decision to oppose Moynihan’s proposal marks a victory for budget director Richard G. Darman over several other Administration officials, including Jack Kemp, Bush’s secretary of housing and urban development and a long-time advocate of tax cuts.

Moynihan’s proposal would roll back the payroll tax hike that went into effect Jan. 1, returning the rate to 7.51% from the current 7.65%. It would cut the tax rate next year to 6.55% and save taxpayers about $55 billion in that year.

The plan would save the average employee roughly $300 a year in 1991 Social Security taxes and would provide a maximum tax cut of about $600 for those earning more than $55,000.

Moynihan, who serves on the tax-writing Senate Finance Committee, said his approach is designed to end the practice of relying on escalating Social Security taxes--which fall heaviest on lower- and middle-income taxpayers--to pay indirectly for government programs other than Social Security.

It would return the Social Security system to the pay-as-you-go approach followed before 1983. Congress then endorsed the recommendations of a panel headed by Federal Reserve Chairman Alan Greenspan to impose higher taxes now on the baby boom generation in order to avoid sharp tax increases on future generations when the baby boomers retire in the early decades of the 21st Century.

“The Administration is content to see the budget deficit gradually eliminated by the growing Social Security tax revenue,” Moynihan told a news conference last month. “This . . . perverts the original purpose for the surpluses--to provide for the retirement of the baby boom (generation) in the next century.”

In attacking Moynihan’s proposal, White House spokesman Fitzwater suggested that Republicans could be hurt politically by any effort to tamper with the retirement program.

“The Social Security system is sound,” Fitzwater said. “Let the Democrats fiddle with it; not us.”

But both conservative and liberal groups outside the Administration said the White House is running the risk of losing political support by opposing cuts in payroll taxes. More than three-quarters of all taxpayers are required to pay more in Social Security taxes than they do in income taxes.

“The White House is making a big mistake,” said David Boaz, executive vice president of the Cato Institute, a conservative think tank here. “Bush is giving the Democrats the tax cut issue, the position that has been most successful in winning the presidency over the last three elections.”

On the other side of the political fence, Democratic activist Robert Shapiro, director of economic studies for the Progressive Policy Institute, crowed that Moynihan has pushed the White House into a no-win situation.

“This makes Bush not only the President of no new taxes, but of no new tax cuts as well,” said Shapiro. “After six years of budget stalemate, it’s time to shake the cobwebs out of our heads. If Bush wants to run as the President of the status quo, Democrats will benefit.”

On Capitol Hill, a well-placed Democratic lawmaker who asked not to be named said the Moynihan proposal is popular among House Democrats because it would let them seize the “political high ground” rather than continue to suffer from GOP attacks that they support only tax increases.

“We’re attracting widespread support from both Republicans and Democrats for our tax proposal,” added Brian Connolly, a Moynihan aide. “But the Administration is bent on continuing the practice of using regressive Social Security payroll taxes to finance our budget deficits. That’s a fraud.”

Some Democratic and Republican lawmakers, however, fear the consequences to fiscal stability if tax-cut fever runs rampant through Congress. The $150-billion federal deficit would widen considerably unless the Social Security tax reduction were offset by higher taxes elsewhere or drastic spending cuts.