Clinton Weighing Broad Tax Hikes : Economy: He is likely to seek higher levies on fuel and other items that would affect the middle class. Caps on Social Security and Medicare are also under study.

In his inaugural address, President Clinton told America that it should be prepared to make sacrifices if it hoped to get the nation’s economic house back in order. “We know we have to face hard truths and take strong steps,” Clinton said. “But we have not done so.”

Now, it is becoming clear just what he has in mind: higher taxes for the middle class as well as the wealthy, future caps on such politically sacred entitlement programs as Social Security and Medicare and a scaled-back public-works and job-creation package that was a hallmark of his campaign agenda.

Among the controversial tax proposals that Clinton’s advisers have under consideration: some type of national sales or consumption tax, known as a value-added tax; higher levies on gasoline and other fuels; an oil import fee; higher “sin” taxes on alcohol and cigarettes, and a new capital gains tax at death for estate purposes.

All would increase the tax burden on middle-income Americans, and the estate-tax plan would hit farmers and small-business owners especially hard. The proposals appear to contradict Clinton’s campaign pledge not to increase taxes on the middle class to pay for his new programs.

White House sources say that final decisions have not yet been made by the President or his advisers, who have been engaged in what one participant called “furious debates” over economic policy in meetings chaired by Clinton’s new national economic adviser, Robert E. Rubin.

But as Clinton and his aides scramble to develop an overarching economic strategy they can unveil sometime next month, they find to their chagrin that they must contend with a worsening outlook for the federal deficit, including new predictions of continuing annual shortfalls of more than $300 billion through the end of Clinton’s first term.

Clinton and his aides complain that the Bush Administration’s budget forecasts understated the extent of the deficit crisis they now confront. “Now that we run OMB (the Office of Management and Budget) we want to go back in and run the numbers ourselves,” said one White House official.

While White House sources say they are beginning to narrow the list of options they are considering, Clinton and his advisers have been studying a wide range of ideas, including one radical proposal to slash the deficit by as much as $200 billion a year by the end of his term. That would require more aggressive tax increases or spending cuts than Clinton ever anticipated during the campaign.

As a result, Clinton and his advisers have made it clear they have put their campaign promise of a middle-class tax cut on the back burner. What’s more, aides say, they are discussing tax increases and benefit caps as part of an effort to curb the deficit while still making room for at least some of Clinton’s promised investments in public works, education and job training.

A year ago, talk of higher taxes would have been heresy in the Clinton camp. During the New Hampshire primary, a Clinton television advertisement said that Clinton’s plan “starts with a tax cut for the middle class.” It stated that his program would “put government back on the side of the forgotten middle class and restore the American dream.”

Political analyst Kevin Phillips said that Clinton risks being a one-term President if he reneges on his central promises to what Phillips calls “the people in the supermarkets and the subdivisions.”

“What Clinton said as he was buttering up the middle class was he knew they had real problems. So if he comes back now and says, ‘Guess what folks, we’re going to have broad-based taxes on energy, gasoline, health benefits, national sales taxes’--then he’s in trouble,” Phillips said. “These are basically regressive to somewhat regressive taxes that will have negligible impact in Beverly Hills and considerable impact in San Bernardino, and that is not going to fly.”

On the spending side, the Clinton team is considering limits on future benefits provided by entitlement programs to both high-income and working-class Americans. The President is studying whether to increase the retirement age for Social Security recipients to 67, for example, and whether to expand taxation of Social Security and Medicare benefits received by affluent Americans.

“They are going to do entitlement cuts, I’m convinced,” said Robert Greenstein, executive director of the Washington-based Center for Budget and Policy Priorities and an adviser on budget issues for the Clinton transition team.

Greenstein predicted that the President’s final economic program will place more emphasis on deficit reduction than his campaign agenda suggested. “I think people will be surprised when the Clinton budget comes out,” he said.

In effect, the new Clinton focus on deficit reduction parallels the kind of austerity program pushed by independent Ross Perot, and represents a significant shift in the new President’s economic priorities.

Clinton has selected well-known deficit hawks for senior economic policy posts, and the President and many of his aides have even adopted the language of pain and sacrifice voiced throughout the campaign by Perot.

Echoing Perot’s call for “fair, shared sacrifice,” Alice Rivlin, the new Administration’s deputy budget director, said at her confirmation hearing last week: “In the end, everybody will have to give up something. We’ll have to have shared sacrifice to solve this problem.”

Clinton’s increasing emphasis on pain and sacrifice contrasts sharply with the rhetoric of his campaign, during which he stressed the need for new government spending to create good, high-wage jobs and to “reinvent America.”

Now, under pressure from international crises, the intractable budget deficit and the questionable arithmetic of his original economic plan, Clinton clearly appears to be reordering his priorities.

As a result, Clinton seems poised to ask Congress to consider radical budgetary surgery on the federal government’s most popular entitlement programs--which is just the sort of tough medicine that the political Establishment avoided throughout the last decade.

“We are going to have to ask for things that have failed in the past,” said one White House official. “It is going to require tough choices.”

If Washington is to avoid a return to policy gridlock, Congress--and especially congressional Democrats--will have to swallow hard and accept their new President’s tax and spending proposals. But entitlement cuts--which most observers believe are absolutely necessary to achieve meaningful deficit reduction--are anathema on Capitol Hill. Sen. John D. (Jay) Rockefeller IV (D-W.Va.) observes that passage of such Clinton proposals will require legislators to take the “vote of a lifetime.”

Fearful of broad political resistance, the Clinton team is crafting its package with one eye on what can get through Congress, sources say. The White House is relying heavily on Treasury Secretary Lloyd Bentsen, previously chairman of the tax-writing Senate Finance Committee, to provide a sophisticated understanding of which proposals stand the best chance on Capitol Hill.

Clinton defenders insist the President still believes in the principles he espoused during the campaign, but has been forced to scale them back in response to the worsening deficit outlook.

In fact, while economists disagree over the danger posed by $300-billion deficits, many believe deficit reduction will do more to ensure long-term economic growth than any “investment” program that Washington can ever devise. In any case, Clinton already has learned the hard way that if he is too cavalier about the deficit, the bond market has the ability to run up long-term interest rates and undermine his entire economic agenda.

Critics worry that too much emphasis on Draconian deficit reduction could jeopardize a fragile recovery and foreclose an opportunity to address long-neglected infrastructure and human resources needs. They are puzzled by Clinton’s willingness to walk away from what once seemed like fundamental campaign promises, and wonder whether Clinton’s economic textbook is subject to being rewritten from one day to the next.

Clearly, Clinton’s economic views changed significantly during the transition period as he gradually backed away from a middle-class tax cut and other campaign pledges on economic affairs. Just one day after Clinton’s inauguration, his chief White House economist said it was unlikely that the Administration could fulfill Clinton’s promise to create 8 million jobs over four years. Earlier, the new President and his advisers warned that they couldn’t live up to Clinton’s promise to cut the deficit in half during his first term.

Clinton still advocates increased government investment in infrastructure, job training, education and health and nutrition programs. But his Administration now seems likely to make more modest proposals--and ask for less money--in those areas than was originally anticipated.

Advisers say, for instance, that Clinton’s campaign proposal to spend $20 billion a year to upgrade the nation’s public works system has to be cut back, not only because of budget constraints but because experts have persuaded them they can’t spend that much money efficiently on new bridges, highways and other projects.

Another signal of the rethinking on infrastructure came in congressional testimony last week from high-tech industry executives with close ties to Clinton. They argued that a new national fiber-optic data network, one of Vice President Al Gore’s favorite infrastructure proposals, would be too costly and that the nation should instead focus on upgrading the existing telephone and data communications network.

Clearly, Clinton and his advisers have become increasingly hawkish about the deficit, viewing ideas and programs through a pessimistic budgetary lens.

“This deficit cannot be solved by moving any piece of the budget alone,” Rivlin said in testimony last week. Taxes will have to rise, benefits will be capped, spending will be cut, she said. “There’s no other way to get there.”

UC economist Laura D’Andrea Tyson, the new chairman of the White House Council of Economic Advisers, picked up this theme in her confirmation hearing Thursday.

“The conclusion is there’s no simple, easy, silver-bullet way out of our deficit problem. A serious approach is probably going to require that all items be on the table,” Tyson said.

But in his eagerness to reassure the bond markets and court the 19 million Perot voters, some political observers believe that Clinton risks losing his core constituency, the “forgotten” middle class that rallied to his banner and cheered his bus tours.

“How can he persuade the general public that things are so much worse than they were in August?” asked Phillips. “If you have such a gloomy view of the economy, how does that square with all the promises you made to all those folks in the subdivisions?”