‘92 POLITICAL PERSPECTIVE : Republicans Losing Hold on Tax Issue Amid Ailing Economy : With Bush’s credibility as a tax-cutter low and polls showing more concern for jobs, Clinton is succeeding in casting the question as one of fairness.

Under Ronald Reagan, tax policy as a political issue was virtually owned and operated by the Republican Party.

During boom times, Democrats attacked Reagan’s heady mix of tax cuts and stimulative defense spending at their peril. When Democratic presidential nominee Walter F. Mondale proposed higher taxes in 1984, he was buried under a Reagan landslide.

But a combination of recession, record deficits and George Bush’s broken “Read My Lips, No New Taxes” promise have ended the GOP stranglehold on tax policy. In fact, the political dynamics are so different this year that Democrat Bill Clinton can propose significantly higher taxes to pay for new domestic programs and still enjoy a big lead in the polls.

Bush, meanwhile, has found that Reaganomics no longer plays quite so well, especially when espoused by a President who has lost much of his credibility as a tax-cutter. So far, Bush’s promise to propose an across-the-board tax cut if he is reelected has failed to give him much of a political bounce.

“The tax issue is one that the Republicans are supposed to own lock, stock and barrel, but right now George Bush is sucking wind on it,” said Democratic pollster Geoff Garin.

Throughout the year, surveys have shown that voters want Washington to concentrate on creating jobs. Cutting taxes, the polls suggest, is a considerably lower priority. Still suffering the effects of the longest recession in post-World War II history, Americans seem in the mood for a more activist government.

Thus, for perhaps the first time in at least 12 years, talk of new taxes is no longer political taboo.

“Americans are now willing to pay higher taxes if they think they will get something for it,” said David Berenson, director of national tax policy for the accounting firm of Ernst & Young, which is studying voter attitudes toward taxation.

“People are worried about health care, about jobs, about the deficit, and they want the government to do something about it,” noted Ronald Pearlman, a Washington tax expert and former Reagan Administration official. “So Clinton is not suffering the big political costs that Democrats like Mondale did . . . for talking about higher taxes.”

Clinton has managed this in part by targeting most of his proposed tax hikes at the rich. While Mondale called for broad-based tax increases, Clinton says he only wants to raise taxes on families with incomes over $200,000 a year and proposes to actually cut them for the middle class.

That strategy has allowed Clinton to recast the tax debate as an argument about fairness. The Democratic nominee stresses that he will shift the tax burden toward the wealthy, arguing that they did not pay their fair share of taxes in the 1980s.

The formula appears to be politically palatable to most Americans: A recent Wall Street Journal-NBC News poll found that 6 in 10 voters favor Clinton’s proposal for higher taxes on the rich to finance new government programs over Bush’s proposals to cut taxes and reduce the size of government.

“There has been a change in the climate among voters about taxes, because you have had a realization of just who got the money in the 1980s, and that Reaganomics has come a cropper,” said political commentator Kevin Phillips.

“The idea that the 1980s were about inequality has gained widespread acceptance,” added Alan Schick, director of the bureau of government research at the University of Maryland.

Clinton’s proposals, meanwhile, seem downright mild in comparison to those advanced by independent Ross Perot, whose deficit-cutting agenda would rely heavily on painful tax increases to balance the budget. While Perot’s candidacy appears to be struggling at this point, the economic manifesto that forms the heart of his campaign is gaining increasing attention. Perot has called for a combination of steep tax increases and severe spending cuts that far exceed anything advocated by the two major party candidates.

While the apparent shift in public sentiment toward taxation works to Bush’s disadvantage, the President has decided to make the most of the tax issue during the final weeks of the campaign. Bush’s strategy is to characterize himself as a prodigal son who has taxed once and regretted it, while defining Clinton as an old-style, tax-and-spend liberal hiding in moderate’s clothing.

Last week, the Bush campaign unveiled a series of negative campaign commercials attacking Clinton squarely on the issue. Using questionable arithmetic, the Bush ads seek to scare middle-class voters into believing that even if the Arkansas governor promises only to tax the rich, he will surely end up taxing them too.

“To get the money he needs for this plan of his, Gov. Clinton would have to get his money from every individual with taxable income over $36,600, and that’s just for starters,” Bush said in Delaware earlier this week.

Clinton dismisses the attacks as a campaign ploy. “George Bush has been bad-mouthing me personally, misrepresenting my record,” Clinton said in Florida earlier this week. “The poor man even had to make up a television ad to put on television. He literally put a television ad on which said I was going to raise taxes on people I’m trying to lower taxes on. Why are they doing that? I’ll tell you why: because they can’t run on their record.”

Regardless of the flap over the ad, Bush may find it difficult to take advantage of an issue on which he squandered much of his credibility in his first term. Not only did the President agree to a budget deal with Congress that included tax increases, he did so just as the nation was entering a bitter recession.

On the campaign trail, the President continues to promote a modest, seven-point package of tax cuts--highlighted by a reduction in the capital gains tax rate to 15.8% from 28%--that was rejected by Congress last winter. In addition, Bush promised during his acceptance speech at the Republican National Convention in Houston to slash taxes across the board if the nation grants him a second term.

But Bush’s effort to recapture the tax issue may be clouded by his refusal to provide a detailed explanation of how much his across-the-board cut would amount to or how he would pay for it.

Of course, front-runner Clinton, and to a lesser extent Perot, still face serious political risks by advocating higher taxes.

The primary risk for Clinton involves credibility: Can he convince Americans he is really different from old-style Democrats, that he means it when he says he only intends to raise taxes on the rich to pay for new programs to help pull the economy out of the doldrums?

Bush Administration economic policy-makers insist that Clinton’s proposal to boost taxes on the very rich will not generate as much revenue as he says, and that many of his proposed spending cuts are illusory. To pay for his big new federal spending programs, Clinton will have to increase taxes on individuals and families much further down the income ladder than he has proposed, these officials contend.

While economists generally agree that Clinton’s economic plan falls short of its stated goal of cutting the federal deficit in half within four years, most believe that his income tax proposals would raise enough money to pay for many of his new spending initiatives.

Clinton’s plan calls for raising the top marginal income tax rate from 31% to 36% for families earning more than $200,000 annually in adjusted gross income. He also proposes a 10% surtax on individuals with adjusted gross income of more than $1 million, and an increase in the alternative minimum tax rate from 24% to either 26% or 27%.

Over four years, those proposals would generate increased revenues of $82.9 billion, the Clinton campaign projects.

Clinton’s figures are not that far off, economists believe. The Joint Committee on Taxation has found that similar congressional proposals would generate roughly the same amount of money that the Democrat estimates from his plan.

Some of Clinton’s other tax proposals, however, may be less realistic. Clinton estimates he can raise $2 billion a year by closing loopholes that allow the wealthy to avoid taxes on interest, dividends and other unearned income. But economists say the unearned income loophole does not really exist; the Internal Revenue Service has computerized its efforts to match interest and dividend reports from banks and other financial institutions with income tax reports filed by individuals.

Clinton also has asserted that he can raise $45 billion over four years by closing loopholes on taxes paid foreign corporations, but that also is discounted by economists. Studies of similar congressional proposals say that only about $1 billion a year can be raised through stricter tax enforcement on foreign companies.

Perot has gone further on taxes than either of his rivals, calling for broad sacrifice to reduce the deficit. But while his economic agenda has been out for months, Perot only last week actually became a candidate running on that platform. The risk he faces is that many voters may be turned off when they hear him spell out the details of his painful tax hikes.

Perot would raise the top income tax rate from 31% to 33% on couples earning more than $89,250 annually and individuals making more than $55,550. Tax deductions for home mortgages would be limited; the amount of principal eligible for the break would fall to $250,000 from $1 million.

Even more controversial, Perot has proposed increasing the gasoline tax by 50 cents a gallon, in phased increments of 10 cents a year. Excise taxes on cigarettes also would be doubled.

Perot also would raise taxes for 18% of Social Security beneficiaries--individuals whose income exceeds $25,000 and couples above $32,000. Currently, 50% of Social Security benefits are subject to taxation; he proposes raising the figure to 85%.

If Perot stands by his plan, his most significant impact on the race may be on the tax debate between the two major-party candidates.

So far, it is unclear which candidate might benefit the most. By proposing steep tax increases, will Perot make Clinton’s plan seem modest by comparison? Or will it scare voters away from tax increases completely and push them back toward Bush?

“I think Perot will scramble the tax debate, but who it helps I haven’t a clue,” said William Niskanen, a conservative economist at the Cato Institute, a Washington think tank.