Democrats Weigh Tax Hike for Wealthy : Congress: Plan is seen as helping to pay for a rollback of Social Security increase. Fairness issue could aid party in this year’s election campaign.

Congressional Democratic leaders said Friday they are considering a proposal to raise income taxes on the wealthy, which could be used to help pay for a small reduction in Social Security taxes for middle-income Americans.

The idea, suggested by House Speaker Thomas S. Foley of Washington and Senate Majority Leader George J. Mitchell of Maine, would be to require upper-income taxpayers who now face a tax burden of 28% to pay at the higher 33% rate imposed on part of the income of many less affluent Americans.

“The highest income people should be paying the highest tax rate,” Foley told reporters, “and not the people who are a step below.”

Although House Democrats last year failed with a similar proposal that was aimed at blocking President Bush’s capital gains tax cut, reviving such an approach could help Democrats focus attention in this year’s election campaign on the issue of tax fairness.

The upper-income tax hike would only hit about 600,000 families with incomes above $200,000 a year.

Such a tax could theoretically help pay for a rollback of this year’s $6-billion Social Security tax hike, which increased payroll taxes from 7.51% to 7.6%.

Democrats are considering a rollback as a less expensive alternative to the politically appealing proposal offered by Sen. Daniel Patrick Moynihan (D-N. Y.) to slash Social Security payroll taxes by $62 billion over the next two years.

Not only would the Moynihan plan sharply widen the federal deficit, Democrats worry even more that it would also generate a political backlash among elderly voters who fear it as a threat to their Social Security benefits.

Democrats say that extending the 33% marginal tax rate paid by some upper-middle-class taxpayers so that it hits the top 1% of all Americans would be eliminating the “bubble” in today’s tax code. Under current law, a family of four with a taxable income above roughly $210,000 pays a flat 28% rate, while those with incomes from about $75,000 to $210,000 pay 33% on each dollar earned between those levels.

Tax analysts estimate that by bursting this bubble, the federal government would initially raise $3.8 billion and then generate an extra $7.6 billion in the first year it was fully effective. Over five years, the plan would raise taxes on the wealthy by $41.9 billion.

“The bubble seems to be kind of our crutch--use it for child care, capital gains,” said Rep. Robert T. Matsui (D-Sacramento). “And now (Democrats) are talking of it as a way to pay for rolling back the Social Security tax increase.”

But Democratic leaders conceded that President Bush has the power to thwart any proposed tax hike and Mitchell cautioned against mounting a futile attack in the face of White House opposition.

“There’s not going to be a Democratic light cavalry charge on that (tax) issue,” the Senate leader said.

Foley, however, said that trying to raise tax rates on the wealthy to 33% would not qualify as the kind of “quixotic activities” he also wants to avoid.

And Mitchell suggested that Democrats need to find some way to challenge Bush on taxes. Former President Ronald Reagan “proposed and supported and signed into law 13 tax increases and in the process convinced everyone in America that he was against all of them,” Mitchell said. “President Bush has got the (anti-tax) words down right but it remains to be seen whether he has the political skill to (accomplish) the same result.”

The Democratic leaders said that a House-Senate task force led by House Majority Leader Richard A. Gephart of Missouri is continuing to look at a number of alternatives to the Moynihan payroll tax cut. But both Mitchell and Foley hinted that Democratic lawmakers are backing away from a trial balloon floated earlier this week of providing an income tax credit to middle-income taxpayers for part of their Social Security tax payment.