Democrats OK Plan to Cut Wage Earner Taxes by Up to $200, Paid for by Wealthy : Economy: House leaders endorse proposal by Rostenkowski. It puts pressure on Bush to come up with his own aid for middle-income Americans.

House Democratic leaders endorsed a new plan Thursday to reduce individual income taxes by as much as $200 annually for 90 million wage earners over the next two years and pay for it by raising taxes on the wealthiest 1% of the population.

The proposal unveiled by Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, was expected to be the cornerstone of an economy-stimulating tax bill scheduled for House consideration early next year.

With a presidential election year approaching, House Democrats decided to push a proposed tax reduction for 80% of all taxpayers at the expense of the wealthiest even though President Bush has warned that he will oppose legislation that raises taxes on anyone.

But the latest Democratic move puts new pressure on Bush to come up with his own tax cut plan for middle-income Americans before he faces the voters next November.

“As far as I can figure out, he (Bush) doesn’t have any economic policy at all,” complained House Majority Leader Richard A. Gephardt (D-Mo.).

Rostenkowski’s bill would provide a tax credit equal to 20% of an individual’s Social Security payroll tax, with a $200 cap for a single taxpayer and a maximum $400 credit for a married couple. The credit would be available to all Americans subject to Social Security withholding, regardless of their income.

The proposal also would raise taxes permanently on high-income Americans by creating a new 35% top-bracket rate and imposing a 10% surtax on the wealthiest taxpayers.

The proposed tax reductions would expire after two years, but the new top-bracket rate and surtax would remain in effect.

“It’s simple, it’s fair, and it gets the job done,” Rostenkowski told reporters. “No bells, no whistles, no untested economic theories.”

With Congress expected to end its session by Thanksgiving Day and the President apparently unlikely to submit a new tax cut proposal soon, House Speaker Thomas S. Foley (D-Wash.) and other key Democrats said they were doubtful that legislation would be passed this year.

Rostenkowski, however, said that hearings would be held in December on his bill to clear the way for action by the House when Congress returns in January.

“We’re going to move forward (in 1992),” Foley said. “There’s a very high probability this (Rostenkowski bill) will pass the House.”

“We believe the middle class deserves a tax cut paid for by the rich,” Gephardt added. “Such a reduction is overdue, will increase the purchasing power of hard-pressed families, and will activate the kind of stimulus this economy needs.”

While the new plan differs sharply from a rival Democratic tax-cut bill advanced by Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), both would provide the bulk of benefits to middle-income persons with earnings between $20,000 and $75,000 a year.

Bentsen’s bill, in contrast, would allow a $300 tax credit for each child under 18. It also would provide full tax deductions of up to $2,000 for contributions to individual retirement accounts, regardless of income. Bentsen’s measure also would allow penalty-free withdrawals of IRA funds for first-time home purchases.

In a provision designed to benefit low-income workers, Rostenkowski’s bill would refund the allowable tax credits in cash to those who would owe no taxes or face a tax bill smaller than the credit.

Meantime, Sen. Dale Bumpers (D-Ark.) and 37 other senators from both parties introduced narrowly targeted legislation to reduce the capital gains tax rate on long-term, high-risk investments in small business firms.

Thirty-seven members of the House--including a dozen members of the House Ways and Means Committee, which originates tax legislation--co-sponsored an identical capital gains tax bill in the House. Asked if he could support such an approach, Rostenkowski said he would have to examine the legislation first but would not rule it out.

“If I think we can structure something that’s reasonable, if it would help the school teacher and not the wealthiest in our society, I don’t find that unacceptable,” Rostenkowski said.

Bentsen would finance the cost of his larger tax cut by making reductions in defense spending.