GOP Leaders Vow Quick Drive to Cut Capital Gains Tax : Congress: Key Republican lawmaker also wants to explore elimination of federal income tax. Tough welfare reform is another part of the agenda.

The new Republican leadership of Congress vowed Thursday to push for an immediate cut in the capital gains tax early next year, and the GOP chairman-designate of the House Ways and Means Committee said he plans to explore the possibility of eliminating the federal income tax altogether.

In addition, congressional Republicans must enact welfare reform legislation that strips most recipients of benefits after two years with no government safety net--even if that forces indigent parents to give up their children, said Rep. Bill Archer (R-Tex.), who is in line to take over the Ways and Means panel.

“If we’re going to be serious about having a program that requires work, then you’ve got to be in the position to say: ‘You lose your welfare benefits and if the children cannot be supported by you, they have to be put into foster homes,’ ” Archer said in an interview.

The Texas conservative is the first Republican committee chairman to begin spelling out details of his legislative priorities in the wake of Tuesday’s electoral landslide. But the likely Republican chairmen of several key House and Senate committees served notice that they will seek to reverse some of the changes enacted since President Clinton took office and steer the nation into a sharp, Reaganesque right turn.

Many of the proposed tax cuts are perennial GOP priorities, including the reduction of taxes paid on capital gains--the profits from selling stocks, bonds and other investment assets. And even before the election, the Republicans’ “contract with America” had called for a two-year limit on welfare with no guarantee of a fallback government job.

But weighing the eventual elimination of the income tax, the primary source of federal revenues, represents a radical departure from mainstream tax policy. And enforcing a two-year limit on welfare, including food stamps, so strictly that poor families could be forced to place their children in foster homes would be Draconian even by conservative standards.

Some analysts had expected the Republicans to moderate their more controversial positions once they take control of Congress. Archer said that, on the contrary, their electoral victories if anything will make their positions even “tougher.”

“We have a responsibility now to roll up our sleeves . . . and deliver,” he said.

Rep. E. Clay Shaw Jr. (R-Fla.), likely chairman of the Ways and Means subcommittee on human resources, which will handle welfare reform, said the bill he plans to draft will follow Archer’s prescription.

While it seems improbable that Congress will vote to scrap the federal income tax any time soon, the conservative wave produced by this week’s midterm elections appears to have made some kind of tax reduction almost a certainty next year.

Senior Clinton Administration officials conceded Thursday that the White House is likely to propose its own broad, middle-class tax cut in an effort to blunt Republican initiatives. “I think the chances may be going up that we will do a tax cut,” said one senior official who requested anonymity.

Archer and other senior Republicans made it clear that the Democrats face wrenching changes inside Congress as well as in policy initiatives, including reductions in committee assignments and staff sizes, as they slip into minority-party status after losing control of Congress for the first time in 40 years.

Preparing to replace Rep. Sam Gibbons (D-Fla.) as chairman of the pivotal Ways and Means panel, Archer said his first order of business will be a major revision of the nation’s tax laws to promote savings and investment. The changes are designed to carry out provisions of the GOP “contract,” which was signed by more than 300 Republican candidates.

Among the immediate priorities: cutting the capital gains tax rate, phasing out the “marriage penalty” that taxes married couples at higher rates than two single people living together and raising the earnings limit on outside income for Social Security recipients.

In addition, Archer said that within the first 100 days of the new Republican Congress, he will seek to restore tax-sheltered individual retirement accounts for upper-income earners and approve a $500-per-child tax credit for families.

The incoming Ways and Means chairman said a longer-term goal is the “complete replacement” of the current system of income taxation in favor of a “national consumption tax,” or sales tax, that could serve as an “engine to drive job creation . . . and economic activity.”

Asked how the proposed tax cuts could be enacted without violating congressional budget rules and running up the federal budget deficit, Archer said the GOP contract had identified “innumerable” ways to cut spending and achieve savings in other areas.

One immediate target is Congress itself. The Republicans plan to cut committee staffs by about a third and reduce the number of seats on many committees. Archer said he hopes to pare the Ways and Means panel from 38 to 29 seats and “return millions of dollars to the taxpayers” through staff reductions.

“We are going to truly change this Congress and the way it operates,” he said.

Administration officials, while still shocked by the prospect of conservatives like Archer seizing control of national economic policy, said they realize it will be politically difficult to draft a new budget that does not contain some kind of tax-cut proposal.

Cautioning that final budget decisions are still weeks away, White House officials said any tax cuts must be offset by cuts elsewhere in the budget to comply with the President’s deficit-reduction plan.

“The election doesn’t change the basic economic considerations that we would have to make in our budget deliberations before we can do a tax cut,” said Gene Sperling, deputy director of the White House National Economic Council.

Sperling said Administration officials, who savaged the “contract with America” and other GOP campaign proposals before the election, are eager to see whether the Republican congressional majority can make the budgetary math behind their plans add up.

“They now have the same responsibility that we do for showing the American people how they will pay for their tax cuts,” Sperling said. “And one thing that both parties should agree to is not to go back to the days of magic asterisks and rosy scenarios . . . to make the math work.”

But it appears likely that the Clinton “investment agenda” of new domestic spending will languish in the new Congress. And the Administration may find itself forced to spend its political resources in a renewal of its battle against a balanced-budget amendment, a key element of the Republican contract.

At the same time they trumpeted the changes they want to make, the new barons of Capitol Hill sought to soften their post-election rhetoric by pledging to work with the Democrats wherever possible after taking control of the House and Senate in January.

A senior aide to incoming House Speaker Newt Gingrich of Georgia said Republicans will try to focus initially on issues “where we think we can cooperate and reach some agreement with the President.”

The first priorities are likely to be welfare reform and a line-item veto, both of which have been endorsed in concept by Clinton, the aide said.

The conciliatory tone contrasted sharply with the pointed critique offered the previous day by Gingrich, who characterized the President and First Lady Hillary Rodham Clinton as “counterculture McGovernicks,” and the White House staff as “left-wing elitists.”

As they begin the transition from opposition to governing party, the Republicans are realizing that “to get things done, we are going to have to start working with the White House,” a senior GOP aide said. Remaining at loggerheads, the aide said, would foster “the kind of gridlock that hamstrung the institution when (George) Bush was President” and the government was divided between a Democratic Congress and a Republican White House.

Archer acknowledged that the Republicans will have to cooperate with the White House because their majorities in the House and Senate will not be large enough to override a presidential veto.

In a speech at Georgetown University on Thursday, Clinton cited welfare reform as the kind of major issue on which he and the GOP leadership clearly “can work together” and find common ground in the new political world created by this week’s election.

And vetoing a reform bill could open Clinton to criticism of reneging on his own popular campaign pledge to “end the welfare system as we know it.”

Yet key Republican and Democratic lawmakers said in interviews Thursday that the stark legislative package that House Republicans plan to force quickly through Congress bears little resemblance to the carrot-and-stick approach to overhauling the welfare system that Clinton and his allies envisioned.

In addition to cutting off all benefits--including food stamps and health insurance--to most recipients after two years on welfare, the GOP proposal would deny benefits to teen-agers who have babies and make illegal immigrants ineligible for all federal assistance programs, including food stamps and Aid for Families With Dependent Children, the main cash assistance program for families.

These provisions, along with others in the GOP initiative, are far harsher than changes sought by Clinton, who has proposed making the government the employer of last resort for welfare recipients.

“At least in the President’s version, a job has to be available,” said Rep. Robert T. Matsui (D-Sacramento). “If welfare becomes just a two-year program with no provisions for jobs . . , that would have the impact of creating a massive amount of homelessness throughout the United States.”

The potential collision over welfare policy could become one of the defining political issues of the next two years.

And with Tuesday’s election returns widely interpreted as a public rejection of big government, Democrats may find it difficult to muster enthusiasm for a Clinton-style reform plan that would require significant increases in federal spending.

Archer and Shaw said Americans had spoken clearly Tuesday in favor of welfare reform that seriously combats the problems of out-of-wedlock births and dependence on entitlements such as welfare.

“Ultimately if they cannot support their children, the children will be taken care of through loving families through foster care and adoption,” Archer said. “It’s better for their children.”

The Clinton plan, Archer charged, is “anemic” because it exempts all but the welfare recipients between 18 and 25 years old from the work requirement and allows states to exempt a sizable portion of welfare recipients in that age group, so only about 250,000 would have to work by the year 2000.

The Republican bill, in contrast would require work for 1.5 million welfare recipients by the year 2000.

Shaw said he believes that political considerations will make it difficult for the President to reject the welfare reform proposal presented to him by the Republican Congress.

“The President’s own party was unwilling to carry it forward last session. I think that’s part of the reason so many Republicans were elected around the country,” Shaw said. “Now the Republicans carry the ball.”

Shaw said he does not believe that Clinton could veto a welfare reform bill.

“He would regret that the rest of his political life,” Shaw said.

Meanwhile, other key Republicans began serving notice that they will seek major changes in their areas as well.

Sen. Jesse Helms, the conservative North Carolina Republican who is in line to take over the Senate Foreign Relations Committee, said he plans major cuts in foreign aid to keep “taxpayer money . . . from going down foreign rat holes.”

Sen. Strom Thurmond (R-S.C.), who will replace Georgia Democrat Sam Nunn as chairman of the Senate Armed Services Committee, said through a spokeswoman that his main priority will be to increase defense spending significantly.

Rep. Thomas J. Bliley Jr. (R-Va.), the most likely candidate to succeed Rep. Henry A. Waxman (D-Los Angeles) as chairman of the House Energy and Commerce subcommittee on health and the environment, said he will snuff out an ongoing congressional investigation of the tobacco industry.

“I don’t think we need any more legislation regulating tobacco,” said Bliley, who represents a district in which Philip Morris Inc. is the largest private employer and who received substantial contributions from the tobacco industry for his campaign.

A transition team composed of senior aides to Gingrich and Rep. Dick Armey of Texas, the probable new majority leader, worked behind closed doors on plans to cut hundreds of congressional staff positions and replace Democratic appointees in scores of patronage posts. The looming reduction in force is expected to put several thousand Democratic staff members and other officials out of work.

An atmosphere of resignation and gloom pervaded Democratic offices on both sides of the Capitol as anxious and dejected aides began cleaning out their desks and writing their resumes.

“I don’t know what I am going to do,” said one House aide, who asked not to be identified as she broke down in tears.

“There are so many of us who are going to be out of work, and there’s not much of a market out there for losers.”

Times staff writers Melissa Healy, James Risen and Thomas B. Rosenstiel contributed to this story.

* BUSINESS IMPACT: What investors should look for in a capital gains tax cut. D1

Contract With America

The welfare reform initiative is part of a “contract with America” that Republican candidates for the House signed in September. It promises that within the first 100 days of 1995, the House will vote on:

THE BUDGET: A balanced-budget amendment to the Constitution and a presidential line-item veto.

CRIME: An anti-crime package that would include limits on death penalty appeals and more money for prisons and law enforcement.

WELFARE: Welfare reform limiting recipients to two years of eligibility.

CHILD SUPPORT: Enforcement of child-support laws, tax incentives for adoption and an elderly dependent care tax credit.

TAX: A $500-per-child tax credit.

TROOP DEPLOYMENT: A prohibition on U.S. troops being placed under United Nations command and “restoration of the essential parts of our national security funding.”

SOCIAL SECURITY: Allowing Social Security recipients between 65 and 70 to earn $30,000 a year, up from the present $11,000 limit -- before any retirement benefits are lost.

TAX CUTS: Cutting the tax rate on capital gains; regulatory relief for business.

LAWSUITS: A limit on punitive damages in lawsuits, and letting judges order losers to pay both sides’ litigation costs.