Bush Plan May Include Middle-Class Tax Cuts : Economy: Disclosure is first public sign White House is considering reductions beyond just capital-gains levies.

For the first time, the White House officially acknowledged Monday that its proposal to accelerate economic growth--like the one unveiled by congressional Democrats--could include a plan to reduce taxes on middle-income Americans.

The disclosure that President Bush was considering such a move marked the strongest public indication so far that the economic growth package under discussion could go beyond a capital-gains tax cut and other previously proposed programs.

White House spokesman Marlin Fitzwater said that consideration of a middle-income tax cut, which had been the centerpiece of a plan announced over the weekend by Sen. Lloyd Bentsen (D-Tex.), was motivated by a desire to find “a way of generating economic recovery.” But the apparent change of heart, coming at a time when polls show a large majority of Americans to be discontented with Bush’s handling of economic issues, appeared also to reflect pre-election White House concerns about being outmaneuvered on a sensitive issue.

The pressure on Bush has been building in recent weeks as signs of a struggling economy have caused even his supporters to advocate a change of approach. But they took on a new political edge Sunday as Bentsen, the powerful chairman of the Senate Finance Committee, released a proposal calling for a $72.5-billion tax cut for middle-income Americans.

Bentsen said that he would pay for the program through a 5% cut in military spending, an approach the White House has resisted. But rather than reject the program out of hand, Fitzwater told reporters at his daily briefing that Bush too is weighing a “middle-class, middle-income tax cut.”

And Sen. Phil Gramm (R-Tex.), a central figure among Republican lawmakers on economic policy, gave qualified support to the Democratic plan and suggested that there is room for accommodation between what have until now been incompatible approaches.

“This was the wink and the smile,” Gramm said. “There’s plenty to do in the romance.”

Administration officials have said previously that a White House growth package to be made public by the end of this month would have as its centerpiece a capital-gains tax cut, which generally benefits only the wealthiest of taxpayers.

In private conversations, however, some also conceded a need to counter Democratic claims that the Administration sought tax breaks only for the wealthy and said that the package could include an expansion of IRA benefits, along with reductions in Social Security tax payments for the middle class.

But the warm reception by the White House spokesman to a middle-income tax-cut provision--that previously had not been on the Bush agenda--appeared to reflect a new reality in which unwelcome economic news has compelled both parties to take drastic action.

In his comments about such a tax cut, Fitzwater stopped short of an unequivocal embrace and did not make clear what form such a measure might take. Asked whether it might mirror the Bentsen proposal to offer a new $300 tax credit for every child in a family, Fitzwater said that no conclusion had been reached.

“Nothing’s decided,” he said of the efforts by Bush and his advisers to reach agreement on an economic growth package to help jolt the economy along a more rapid path to recovery.

It was also unclear how the White House proposed to fund a new tax cut. The Bentsen plan calls for the government to make up the shortfall through a 5% cut in defense spending, a move that would break an agreement adopted a year ago by the Administration and Congress.

But, for the first time, Fitzwater appeared to leave open the possibility of using savings from defense to help pay for such a tax-cut package. “We don’t intend to or want to break the budget agreement,” Fitzwater said. “But everything’s under review.”

A recent New York Times-CBS poll found that 78% of Americans believe that Bush should spend more time on economic issues. And while public opinion polls continue to show that the President enjoys an approval rating of more than 60%, a full 50% of those surveyed in the most recent Los Angeles Times Poll disapproved of his handling of the economy.

At the same time, polls show, the percentage of Americans who describe the state of the economy as very unhealthy has increased significantly over the last six months, underscoring the prospect of a backlash against incumbents, even as government statistics indicate that conditions have begun to improve.

According to Republican sources, Bush’s advisers have warned that the White House must now act quickly to put forward its own proposal or risk the prospect that the Democratic alternative would become the focus of public discussion.

As both sides continued maneuvering Monday to draw attention to their own plans, a senior Democratic aide said that the depth of public concern makes it increasingly likely that Congress will take action on the issue this year.

But the aide said the fact that Rep. Dan Rostenkowski (D-Ill.), the powerful chairman of the Ways and Means Committee, has yet to put forward his own tax-cut proposal could force lawmakers to seek a shortcut that might bring about an earlier vote.

In a separate sign of political jockeying, Sen. Tom Harkin of Iowa, a Democratic presidential candidate, in what was billed as his first major economic address, belittled Bush’s recovery program as “something that can be summed up in three words: cut capital gains.”

Times Staff Writer William J. Eaton contributed to this story.