COLUMN ONE : Whose Turn Is It to Pick Up ‘90s Tax Tab? : Many feel the internal revenue changes of the 1980s shorted the middle class. Interest is reviving in a progressive system to raise the rates of the more affluent.

No issue will be more politically charged in the budget negotiations now underway than the most basic one: who pays.

In the 1980s, progressive taxation--the idea of exacting an increasingly greater share of taxes from the more affluent--retreated as Washington slashed income tax rates and substantially increased the payroll tax to fund Social Security. Following Washington’s lead, many states cut their top brackets and made other changes that left their tax rates less progressive too.

But as the decade turns, interest in progressive taxation is reviving. It’s not that politicians suddenly have more enthusiasm for redistributing income to the poor, but that to many Democrats and even some conservatives a case is building that the enormous tax changes in the 1980s shorted the middle-class, the great battleground in American politics.

Because of the sharpening payroll-tax bite, at least 9 of every 10 Americans face a larger tax burden this year than they would have if the tax rates had remained unchanged since before 1978, according to recent calculations by the Congressional Budget Office. That is when the first supply-side tax cut--aimed at capital gains--went into effect.

Families around the median income are paying about $400 more today than they would if the 1977 tax code had been left in place and indexed for inflation, the budget office estimates.

By contrast, the top 1% of families had their tax rate cut by one-fourth relative to 1977--and are paying on average almost $40,000 less than they would have under the old law, according to the study.

This shift in the tax burden has occurred within the context of widening income inequality and stagnant growth in living standards for average families. Today, the richest 1% of families claims a larger share of national income than the poorest 40%.

In the near term, awareness of these trends is bound to influence the current search for revenue by federal budget negotiators. And over the long run, some analysts believe, it also raises the possibility of a fundamental shift in the politics of taxation.

After a decade in which both parties slashed taxes on the wealthiest Americans, liberals at the state and national levels are once again agitating to strengthen tax progressivity as a way of achieving both relief for the middle-class and--more controversially--greater domestic spending.

“The question is who pays,” said House Majority Leader Richard A. Gephardt (D-Mo.). “The rightful burden of people at the top is not being borne.”

Some political analysts believe this is an issue on which the Democrats could base their case in the presidential election of 1992. “It has the potential to be the building block of a new Democratic message going into the next century,” said Bob Beckel, former campaign manager for Walter F. Mondale.

A number of Republicans nervously agree. “The Democrats have not capitalized enough” on the issue, says Republican pollster Bill McInturff, “but we are much more potentially exposed on this than is now apparent.”

Still, the Democrats seeking to develop a clear tax equity message face formidable obstacles--in this budget negotiation and beyond. And some Republicans would like to hijack the rumbling concern about the middle-class tax burden for the supply-side cause. “To me, it is quite logically the next supply-side issue,” said conservative economic consultant Jeffrey Bell.

Over the past few months, the impulse for progressivity has animated a growing list of Democratic initiatives, including:

--Resistance to a cut in the tax on capital gains.

--Sen. Daniel Patrick Moynihan’s (D-N.Y.) plan to cut payroll taxes.

--Widespread calls to close the “bubble” in the tax code that reduces marginal income tax rates on the wealthiest families to 28% while some middle-income taxpayers pay a top marginal rate of 33%.

--And the recent legislation approved in the House of Representatives that finances a new low-income child-care program in part by withdrawing existing tax breaks that help the more affluent.

Both economic and political currents are reviving the issue of progressive taxation only a few years after the protracted tax reform struggle of 1986.

Most powerful is the accumulating evidence that the tax policy changes during the 1980s have slightly increased the total federal tax burden on low- and middle-income families, while dramatically lightening the load for the wealthiest Americans.

Even though it slashed income tax rates, the 1986 tax reform bill arrested this trend somewhat by closing loopholes. But its impact has been offset by the relentless rise in the regressive payroll tax.

At the same time, the widening gap between rich and poor in American society, though driven by forces far larger than the tax code, provide a backdrop against which the tax shifts take on the political attributes of a bull’s-eye.

The White House sees all this as a solution in search of a problem. The actual increase in the total federal tax take on the middle-income bracket--from 19.6% of income in 1977 to 20.3% today--is too “minute” to cause concern said one White House aide. At the same time, he observed, despite the reduction in their effective tax rates, the richest Americans are providing a larger share of federal tax receipts than a decade ago. Liberals maintain that this is so only because the income of the wealthiest Americans increased so rapidly during the 1980s.

Given the White House’s perspective, some Democrats believe their party should stress tax progressivity to highlight Democratic differences with the Administration during the budget negotiations. “Any tax you look at should be put into the framework of what (it) does to progressivity,” said Gephardt, the leader of the House delegation in the talks. That analysis will underline Democratic calls to eliminate the bubble.

But many observers consider it just as likely that the current budget talks will blunt the development of a sharp fairness message. For one thing, it appears probable that even if the package includes any progressive income-tax hikes they will be balanced by regressive excise taxes.

Moreover, though Democrats may show increased sensitivity to the fairness of gasoline or other excise taxes, the debate over those levies is still certain to be dominated by their regional effects, not whether they fall excessively on middle- and lower-income people.

Most important, if the budget talks become serious, they will further dim the already-flickering prospects for consideration of the Moynihan payroll tax cut plan, which many Democratic strategists consider the most dramatic means of highlighting the shifting tax burden. At a time when the negotiators are desperately seeking savings, few on either side of the table may feel they can politically or economically afford the estimated $114-billion three-year cost of Moynihan’s proposal to reduce payroll tax rates from the current 7.65 to 6.55.

Those politicians attracted to the tax fairness theme face complications beyond those introduced by the immediate budget negotiations. One problem is that the most effective way of raising new revenue more progressively--hiking income-tax rates in the top brackets--terrifies many Democrats.

Another barrier is the electorate’s enormous skepticism that any tax reform will ultimately reduce their bill. “When a politician says tax reform,” said Democratic pollster Mark Mellman, “voters hear tax increase.”

That cynicism is one reason why Moynihan’s proposal, in particular, has not taken off, political observers say. Only a handful of candidates have endorsed the proposal. Many more have been scared off by the public concern that any cut in Social Security taxes could endanger benefits.

Adding to the difficulty of developing a tax fairness appeal is a phenomenon that might be called the political theory of relativity: the idea that the rich should pay more taxes is always popular, but the question of who is rich varies with the beholder.

Congress bitterly relearned this lesson in 1988 when it taxed relatively affluent retirees to pay for a new catastrophic health care program; when seniors outraged at the new tax revolted, the legislators meekly rescinded the program last year. That dynamic could be less volubly replicated on the day-care legislation now in a House-Senate conference, which funds its new assistance for low-income parents in part by phasing out existing day care tax credits for families earning $70,000 or more.

A textbook example of this problem is unfolding in New Jersey, where James J. Florio, the recently elected Democratic governor, on Thursday proposed a tax program far more progressive than anything congressional Democrats are even contemplating.

To fund middle-class property tax relief and generate new revenue for education, Florio is asking the state Legislature to raise the state income tax bill by $1.25 billion in 1992 and double the top rate from 3.5% to 7%--this on top of $1.3 billion in sales tax and other increases to cover a budget shortfall next year. Only 17% of state residents would pay higher taxes under Florio’s plan--but some upper-income couples could see hikes of almost 40%.

“The governor believes the wealthiest citizens in the state can afford to pay a little more,” said state Treasurer Douglas C. Berman.

Deciding exactly who belongs in that rarefied company will be the most difficult question for the Legislature as it tackles the plan over the next month. Originally Florio proposed that families earning more than $55,000 pay more; when legislators complained that group was hardly affluent, he revised the proposal so that taxes would rise only for families above $70,000.

But some legislative leaders would like the figure raised higher yet. And Republicans--who are aligning against the plan with exuberant unanimity--believe the Democrats are just buying themselves enemies in the middle-class.

Florio’s success will hinge on whether the voters’ hostility to new income taxes can be softened by the promise that the burden is being more equitably distributed--a question of great interest to many Democrats in Washington. But however Florio fares, many analysts argue that the forces propelling the tax progressivity issue are strong enough to guarantee it a growing place on the political agenda.

At the state level, the most important of these is a deepening need for revenue. Like New Jersey, many states face relentlessly rising education, health and prison costs--and growing resistance to the regressive sales, excise and property taxes on which most have relied in recent years.

At the federal level, the need for revenue is no less pressing. And for those Democrats attracted to the issue, political calculations reinforce the fiscal ones.

For years, Democrats have been searching for ways to both coalesce and respond to the persistent sense of economic squeeze among middle-class voters. Even if the Democrats do not ultimately embrace the Moynihan plan, many believe they will find it more attractive to lighten the tax burden on its core constituents than to launch new programs aimed at them.

Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), although an opponent of the Moynihan proposal, said that the shift in the relative tax burdens of the wealthy and middle-class “ultimately has to be dealt with. You can’t let that continue to happen.”

New ideas for redressing the imbalance are already appearing. As an alternative to the Moynihan plan, for example, Robert J. Shapiro, vice president for economic studies at the centrist Progressive Policy Institute, has proposed to apply the payroll tax to all salary income, not just the first $51,300 taxed under current law.

With the revenue raised by eliminating the ceiling, Shapiro calculates, the rates for all taxpayers could be reduced from 7.65 to 6.71, cutting taxes on 96.5% of the public and raising it only on the 3.5% who earn more than $60,600 in wages annually. Gephardt has inquired about the idea, but otherwise Shapiro has been unable to stir much interest on Capitol Hill.

What frightens some Democrats about such passivity is the possibility that conservative tax-cutters may embrace the idea of helping the middle-class by slashing payroll taxes and simply jettison the offsetting tax hikes on the wealthy that most Democrats believe would be necessary to pay for such a cut. Although President Bush steadfastly opposes a rollback in payroll taxes, Sen. Robert W. Kasten Jr., (R-Wis.) and then-Rep. Jack Kemp actually proposed such a step in 1987, long before Moynihan.

Kasten intends to offer a payroll tax cut smaller than Moynihan’s on the Senate floor later this year. And if the budget negotiators remove the growing surplus in the Social Security trust fund from the deficit calculations, as most analysts here expect, conservative interest in cutting the payroll tax is likely to rise.

Many analysts, in fact, can imagine a debate 12 or 18 months from now in which liberals are pressing to spend the surplus on greater retirement or health care benefits and it is the Republicans demanding a reduction in payroll taxes.

“If we take Social Security off-budget, that is a very distinct possibility,” said Rep. Robert T. Matsui, (D-Sacramento) a member of the House Ways and Means Committee.

It would be enormously ironic if conservatives captured the issue originally illuminated by Moynihan. But major shifts in tax policy, such as the supply-side marginal rate cuts imposed in 1981 or the rate-flattening tax reform passed five years later, typically take several years to gestate--and often take surprising shifts.

“This is not going to go away,” said Sen. J. James Exon (D-Neb.), one of Moynihan’s few co-sponsors. “These are issues that are going to burn more brightly as we move forward.”