The Impact, in Dollars and Cents

By Susan Tifft

As soon as Treasury Secretary Donald Regan and White House Chief of Staff James Baker finished their pas de deux in the West Wing press room, Congressmen tried to put a cautiously upbeat spin on the news. "It seems logical once you get over the first surprise," ventured Indiana Republican Richard Lugar, chairman of the Senate Foreign Relations Committee. "It's something I wouldn't have thought of," said Senate Majority Leader Robert Dole of Kansas. "But it turns out it's a good switch."

That will mainly be determined on Capitol Hill, where the success or failure of the President's economic initiatives will be decided. Uppermost on Congress's agenda are two related yet distinct issues: the Treasury's proposed tax-simplification plan and the budgetary decisions that will have to be made to reduce the projected $210 billion deficit for fiscal 1986.

The tax-reform plan, devised by Regan at the President's request, is a modified version of various public proposals for a "flat tax" that eliminates most deductions. It calls for three income brackets for individuals (15%, 25% and 35%) instead of the current 15 (ranging from 11% to 50%), and just one tax rate (33%) for corporations. Most middle-class tax breaks, including charitable gifts, mortgage interest on vacation homes, and the fabled three-martini lunch, would be eliminated or severely limited. In fiscal 1986, individual taxes would go down 5.9%, and business taxes would jump 25%. Consistent with Reagan's insistence on a "revenue-neutral" plan, the Treasury's total take would stay about the same.

When it was released in late November, the President was coolly noncommittal to the details of the Treasury plan. Regan himself said the proposal was "written on a word processor." Translation: it could be easily altered. The plan elicited screams from every conceivable interest group, from charities to homebuilders. Lobbyists are already pressuring the Administration to reject provisions that would eliminate accelerated depreciation, which permits companies to write off plant and equipment faster than they actually wear out, and also oppose abolishing the tax preference for capital gains.

Even before the Regan-Baker move, White House aides acknowledge, the President was warming to the Treasury plan, with a few modifications. Reagan will make it a major theme of his State of the Union address Feb. 6. But he is expected to paint the issue in the broadest of brush strokes. Says one White House aide: "I don't think he'll have a definitive plan."

Last week's personnel changes may enhance the possibility that some sort of tax reform will eventually be enacted into law. As its chief architect, Regan is likely to keep tax reform high on the White House agenda. Baker also seems eager to tackle this issue. But with his finely tuned political sensibilities, the pragmatic Baker appears to be more capable than Regan of working out a compromise package. "The odds are now greater for a tax bill, but a less sweeping one than otherwise," says Wyoming's Dick Cheney, chairman of the House Republican Steering and Policy Committee.

Baker's job may be made easier by the mood in Congress, which seems receptive to some sort of flat tax. Each party has introduced its variant: a Republican version sponsored by Congressman Jack Kemp of New York and Senator Robert Kasten of Wisconsin, and a Democratic one by Senator Bill Bradley of New Jersey and Congressman Richard Gephardt of Missouri. The Baker-Regan duo may be able to provide the critical missing ingredient: enough muscle to persuade the President to provide personal, up-front leadership on the issue. "It will be a treeless plain with every special-interest group in the country coming out unless Ronald Reagan stands behind us and gives us political cover," says John Sherman, spokesman for Illinois Democrat Daniel Rostenkowski, chairman of the tax-writing House Ways and Means Committee.

The biggest obstacle to tax reform is that Congress may not want to take on ( entrenched special interests unless the plan is related to the more pressing problem: those looming deficits. So far, Reagan has remained adamantly committed to a revenue-neutral plan. He made it clear at his press conference last week that he intends the Treasury measure and the Administration's fiscal 1986 budget proposal to be considered separately on Capitol Hill-- first the budget, then tax reform. A major reason: entangling the two might result in a tax increase, which Reagan staunchly opposes. "It is a two-track approach," said Reagan of the tax and budget issues. "We're not sending them up there as a package that somehow people can begin trading between one and the other."

For now, that suits the Senate Republican leadership. "It's a good idea," said Dole of the tax plan. "It would be a great legacy for Reagan to leave the country. But it's a big, big undertaking." More urgent to the G.O.P. Senators is deficit reduction, an issue that Reagan has blithely walked away from. Apart from Agriculture Secretary John Block's successful appeal to win back part of the $1.2 billion in farm-subsidy cuts, the President's fiscal 1986 budget proposal has changed little since before Christmas. Boxed in by his campaign pledge to leave Social Security untouched and his refusal to raise taxes or make more than cosmetic trims in the Pentagon's increases, Reagan cannot meet his goal of shrinking the deficit to $100 billion by 1988.

Since Reagan has flunked the deficit-trimming test, and House Democratic leaders are equally loath to cut Social Security, the Senate Republican leaders have been left to salvage the situation. They decided to offer their own deficit-cutting plan two weeks ago after a meeting with Administration officials, including Baker, Richard Darman and Budget Director David Stockman.

Majority Leader Dole began grappling with specifics last week in an extraordinary meeting with Budget Committee Chairman Pete Domenici, the chairmen of the other 14 major Senate committees and the rest of the Senate G.O.P. leadership. After two hours they adjourned, having sketched out just the bare-bones outline of a plan. The centerpiece of their proposal, Dole announced, would probably be a one-year across-the-board budget freeze at fiscal-1985 levels on almost all Government spending, including defense funding and entitlement programs like Social Security. The only exemption would be means-tested programs for the poor, such as food stamps and disability benefits.

< House Democrats object to any freeze on Social Security. Retorted Domenici: "If that's not in the mix, I'd be very interested to see what the Democrats have in mind." On the other side, conservative Senate Stalwarts Barry Goldwater and Ted Stevens argue that a blanket spending freeze would jeopardize national security. But even if passed, the freeze alone would be insufficient to meet the Senators' goal of reducing the deficit to $98 billion in 1988; to do that, a total of $86 billion more in savings would have to be wrung out of the budget over the next three years.

The White House says it endorses Dole's initiative but denies it has turned the budget process over to him. Indeed, officials carefully portray their recent talks with the Senate leadership as "briefings," not negotiations. Nevertheless, there is no question Reagan has suffered on the Hill, mostly for the sluggish manner in which his staff has put the budget together. Admits an aide: "I think Congress is frustrated that we have not given more to the process."

At his press conference, held six hours after the Senators' meeting, the President hinted that he might go along with a freeze on the 1986 cost of living adjustment (COLA) in Social Security payments if forced to do so by "an overwhelming bipartisan majority in both houses." The tactic would save only $6 billion a year. But it would save face for Reagan: by waiting for Congress to demand a COLA freeze, he can claim, rightfully enough, that he did not violate a campaign promise by initiating a Social Security cut. Privately, aides have suggested that Reagan might eventually give ground on defense spending as well. But, again, the momentum would have to come from the Hill.

If Baker demonstrates that he is able to keep control of the White House budget strategy, then his move to the Treasury might improve the chances for deficit reductions. Both he and Regan argued for deeper defense cuts before the President said no. But Baker has long been more fretful than Regan about uncontrolled deficits; as White House chief of staff he worked with Dole in 1981 and 1983 to craft three tax-boosting bills. Perhaps the critical question is whether Baker's vaunted ability to engineer compromises on Capitol Hill will be matched by his ability to persuade the President and his new chief of staff that compromise is the only way to go.

With reporting by Sam Allis and Barrett Seaman/Washington