Tax Hike Plan Greeted Warmly by Bush Aides : Budget: Reaction to Rostenkowski's deficit-cutting ideas may signal a deal with the Democrats. Or it could just be a courtesy to a close friend of the President.

TIMES STAFF WRITER

The Bush Administration Monday offered a surprisingly supportive response to a proposal from a leading Democrat to wipe out the federal deficit in part by raising taxes and freezing Social Security benefits.

"Serious . . . thoughtful . . . comprehensive" were the adjectives White House spokesman Marlin Fitzwater chose, after talking with President Bush, to describe the plan offered over the weekend by Democratic Rep. Dan Rostenkowski of Illinois, the chairman of the House Ways and Means Committee. "Courageous" and "conscientious," Budget Director Richard G. Darman added in a televised interview.

The White House may differ with some of Rostenkowski's specifics, Fitzwater said, but "we don't want to pour too much cold water on a plan we might want to swim around in for a while."

Even in general outline, Rostenkowski's plan would be a major switch from the Administration's current creed. He would freeze Social Security's cost-of-living increases for a year and increase the gasoline tax and cigarette and alcohol excise taxes.

The plan would also raise taxes on family income of more than $185,000, which currently is taxed at a lower rate than income between $78,000 and $185,000. Bush has been firm in his "read my lips; no new taxes" pledge and has avoided any talk of Social Security cuts.

The encouraging comments could, in the end, turn out to be nothing more than White House aides trying to be friendly to Rostenkowski, a powerful Democrat and a close friend of Bush.

But, as the reaction continued during the day, indications mounted that Bush's initial warmth toward Rostenkowski's proposal, after more than a year of no progress, could be the opening moves toward a comprehensive deal on the deficit, a deal that would require the President to at least bend his anti-tax pledge.

Darman, interviewed along with Rostenkowski on the PBS "MacNeil-Lehrer News Hour," avoided several opportunities to restate the no-tax promise. The Administration has "something of a difference" with Rostenkowski on taxes, he said. But, when asked what those differences were, he objected to details of timing and to the absence of measures designed to "increase economic growth," a phrase White House officials use when referring to Bush's plan to cut taxes on capital gains.

"The President has said it's better to (achieve deficit reduction) without (increasing) taxes," Darman said, "but we've also said we're prepared to discuss any reasonable proposal on the merits."

And, as Administration officials praised Rostenkowski to reporters, Republican leaders complimented his proposal on Capitol Hill. Senate Republican leader Bob Dole of Kansas, for example, called it a "good step."

"I think it makes a great deal of sense," Dole said. "His proposal could be the wake-up call we've been waiting for. We'll see who answers it."

Rostenkowski said he was "pleased" by the response he has been getting. "There are some political mine fields" in his proposal, Rostenkowski said; but, he predicted, both Democrats and Republicans could accept the political risk as long as everyone was "in it together."

The response to Rostenkowski's idea comes against a background of continued deadlock over budget and economic policy in which the annual budget deficit has been virtually frozen at more than $100 billion and Congress has been unable to pass any substantial legislation on domestic economic policy since the Tax Reform Act of 1986.

Since Bush was elected, there has been speculation about a "grand compromise" that would end the deadlock, but, so far, none has emerged, and Bush has given some indications that he was no longer interested in a deal.

At least some of Bush's advisers believe a deal would be politically unwise because it would blur the voters' image of the GOP as the low-tax party. The deficit is "a real problem" but not "a problem with voters" so long as the economy remains healthy, Republican National Chairman Lee Atwater has argued. By contrast, "I firmly believe the single best issue our party has going for it is taxes," Atwater said recently.

Bush has been counting on steady economic growth, coupled with tight restrictions on spending, to eventually eliminate the deficit. But many economists say that Bush's projections are too optimistic and warn that, if a recession occurs, the deficit will once again swell. In the meantime, the size of the deficit is helping keep interest rates in the United States higher than they otherwise would be, slowing economic growth.

Rostenkowski's plan is designed to break the deadlock by forcing both Democrats and Republicans to compromise. At the center of the plan is a trade-off of Social Security and taxes. Democrats would agree to eliminate the next scheduled Social Security cost-of-living increase. Republicans, in exchange, would agree to ease their opposition to tax hikes.

The plan would also bar any tax cuts for the next five years, would freeze overall government spending, except for programs aimed at the poor, and would cut the military by 3% more than the annual inflation rate--slightly more than Bush already has proposed doing.

In addition, Rostenkowski would temporarily end income tax indexing, which adjusts the tax code to inflation. The effect of that would be to provide a hidden tax increase as inflation pushes some taxpayers into higher tax brackets.

Rostenkowski's Democratic colleagues were generally cautious about the plan. But the proposal did receive some support from Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, who said it was "a bold proposal that marks a good starting point on deficit reduction."

Rep. Pete Stark (D-Oakland), who serves on Ways and Means, said his chairman's proposal is "a challenge to all of us in government . . . to abandon the blue smoke and mirrors."

THE ROSTENKOWSKI PLAN

Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, has offered a package of budget and revenue proposals that he says could wipe out the federal deficit within four years. The package includes these elements: Proposal: Cut military budget 3% a year below inflation. Effect over five years: Savings: $150 billion. Proposal: Freeze domestic spending, except programs serving the poor, for one year. Effect over five years: Savings: $26.4 billion. Proposal: Eliminate cost-of-living increases for one year, including Social Security. Effect over five years: Savings: $58.7 billion. Proposal: Eliminate the "tax bubble," raising tax rate for very wealthy from 28% to 33%, the same paid by families earning between $78,000 and about $185,000. Effect over five years: Revenue: $44.3 billion. Proposal: Eliminate inflation adjustments in the tax code for one year. Effect over five years: Revenue: $50 billion. Proposal: Increase taxes on gasoline (by 15 cents a gallon) and other pollutants, and double the tax on cigarettes, wine and beer. Effect over five years: Revenue: $101 billion. Effect over five years: Spend less for interest on borrowing to finance the deficit. Proposal: Savings: $62 billion.

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