NEWS ANALYSIS : Bush, Democrats Target Upscale Suburbanites : Politics: Both are aiming their economic proposals at the upper middle class, a key group of voters.

The Democratic critique of President Bush’s new tax package has focused almost entirely on his proposals to cut the capital gains tax and repeal the luxury tax on private yachts and aircraft--changes that clearly would bestow most of their benefits on the wealthy.

But on other elements of the President’s plan, the opposition has been uncharacteristically silent.

The muted Democratic response to many of the President’s proposals reflects a recognition that the political battle of 1992 may well be won or lost not in America’s vast working-class neighborhoods or most exclusive silk-stocking districts, but in the nation’s upscale suburbs. And that’s where many of the Bush tax breaks are squarely aimed.

“Absolutely, that is where the war is going to be waged,” said Steve Bell, a Washington lobbyist and former Senate budget expert. “You’ve got 40% of the voters who will always vote Democratic, 40% who will always vote Republican, and another 20% that both sides have to go after. And most of those undecided people are slightly above average in income and education.”

Bush has been promising all winter that he would devise an economic recovery and growth plan that would rescue middle-class America from its current economic doldrums.

But the package of tax cuts he finally unveiled last week suggests that when Bush says middle class, he is not talking about the broad swath of working Americans whose annual incomes fall in the $30,000 to $50,000 range.

Even those proposals that appear to provide broad-based relief to the entire middle class--a bigger tax exemption for children, a deduction for losses on home sales and more generous individual retirement accounts--actually target their benefits at a much narrower group: the suburban professional class.

Generally speaking, the biggest beneficiaries of these proposals are relatively comfortable families who earn $50,000 to $120,000 a year, own their own homes, have extra money to save and invest--and tend to vote in greater proportions than almost any other segment of the population.

Analysts believe the Democrats have held their fire on those measures because they hope to target the same affluent group with many of their own tax proposals. Indeed, some leading Democrats have long advocated the kind of IRA expansion that Bush is now proposing.

“The Democrats are shooting at capital gains,” said Robert Greenstein, director of the Center on Budget and Policy Priorities, a liberal Washington think tank. “But we don’t hear that kind of thing about other aspects of the plan.”

The nation’s median household income--the level at which half of all Americans make more and half make less--stands at $35,353. But that kind of income no longer represents the middle class as it is defined by political Washington.

Instead, both Republicans and Democrats are targeting a newer, more upscale middle class, one that is more closely reflected by the two-career urban professional family that lives in a suburb outside a major city, has one or two children, owns a home worth $200,000 or more and earns close to a combined $100,000.

Bush’s election-year budget plan, with expanded exemptions for children, a generous tax break for homeowners and a new savings vehicle for people with above-average incomes, goes right after that kind of voter, analysts say.

“The Republicans’ approach to boosting the economy is to provide incentives to save and invest to people with disposable income,” one congressional tax analyst noted. “And when you do that, the impact of the plan, in terms of its effect on the core middle class and the poor, will never look good.”

To be sure, several of the President’s proposals would provide some tax relief for virtually all working Americans. One provision, a $3,750 tax credit for people who buy their own health insurance, is targeted specifically at the poor. And a proposed $5,000 tax credit for first-time home buyers would tend to help younger, less-affluent taxpayers who have not yet achieved the suburban dream.

Yet on balance, it appears that most elements of the Bush tax package, aside from the tax cut for capital gains, benefit the top end of the middle class instead of the ultra-rich or the average wage-earner.

Take, for example, the President’s proposal to expand the personal exemption for children by $500.

Although the bigger exemption would be claimed by all families who owe income taxes, it provides greater benefits to people who earn more than $50,000 than it does those in lower income categories, analysts say.

That’s because an exemption, which operates in the same way as a deduction by reducing the amount of taxable income, is worth more to people in higher tax brackets.

Married taxpayers with less than $35,801 in taxable income are in the 15% tax bracket. Although their actual gross income will vary depending on the kind of exclusions, exemptions and deductions they can claim, the break point tends to be about $50,000, analysts say.

For taxpayers in the 15% bracket, the extra $500 exemption proposed by Bush would reduce their annual tax bill by $75 per child. For taxpayers who make more than $50,000 or so and therefore fall in the 28% or 31% tax brackets, the expanded exemption would be worth $140 and $155 per child, respectively.

Advocates for the poor and the working class say a more equitable way to provide tax relief would be to enact a tax credit of approximately $300 per child. Since a credit reduces the tax bill dollar-for-dollar, all families would benefit equally.

Another provision of the Bush package has the potential of offering significant tax advantages to upper-middle-class Americans who are forced to sell expensive homes at a loss because of the recession-induced housing slump.

The White House is proposing to allow homeowners to deduct losses from the sale of a principal residence that exceed 10% of their income--minus a one-time $100 exclusion. While the new tax break would be available to all homeowners, its biggest benefits would flow to those who unload expensive homes in the Northeast or the West, where prices of luxury homes have tended to decline more than for entry-level homes.

For example, if a family with $100,000 in income sells a home it bought for $350,000 at a $50,000 loss, the Bush proposal would allow a deduction of $39,900. For those in the 28% tax bracket, the deduction would be worth $11,172 in tax savings. The deductions also could be saved for two years to be used to offset future gains on homes.

By contrast, a family making just $50,000 a year that loses $10,000 on a $100,000 home would be eligible for a tax deduction of just $4,900. If the family is in the 15% tax bracket, the deduction would be worth only $735.

Another example of the disproportionate impact of the Bush plan is his proposal to create a new type of “flexible” individual retirement account.

In 1986, Congress restricted the full deductibility of IRA contributions to those individuals who made less than $25,000, couples with incomes under $40,000 and others not covered by corporate pension plans. Bush’s plan, in effect, would create a new kind of IRA for families who have incomes up to $120,000 and who have had limited IRA benefits for the last six years.

Under Bush’s IRA plan, individuals could contribute up to $2,500 per year, and families up to $5,000. Although the initial contribution would not be deductible, the money could be withdrawn after seven years with no taxes due or penalties imposed--even if the account had doubled or tripled in value. The President’s proposal also would allow affluent families with substantial savings locked up in old IRAs--primarily those who lost their IRA deductibility in 1986--to roll over those funds into the new accounts.

While Bush’s IRA proposal seems clearly aimed at the upper middle class, many Democrats want to go even further to curry favor with affluent families by making all Americans eligible for IRA deductions once again. Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), one of the leading supporters of IRAs in Congress, wants to revive the traditional IRA that allows immediate tax deductions for IRA deposits, regardless of income.

Democrats in Congress argue that they have focused their attacks on Bush’s proposal to cut the tax on capital gains--profits from sales of stocks, bonds, real estate and other investment assets--because of the magnitude of the benefits it would bestow on the very rich.

House Budget Committee Chairman Leon E. Panetta (D-Carmel Valley) notes that the capital gains measure would give wealthy Americans with income from capital gains an estimated tax break of some $19,000 a year, while a family with two children and less than $50,000 in income would save only $150 from the expanded personal exemption.

“Clearly, capital gains swamps everything else in the Bush plan, so much that it skews the impact of his program toward the rich,” said one Democratic tax specialist in Congress.

In one of the leading Democratic tax plans proposed this year, middle-class tax cuts would be offset by higher taxes on the wealthy. But the higher taxes only target those families earning more than $145,000 a year, not the $50,000-to-$120,000 professional families who tend to populate the nation’s suburbs.