Act II, Scene 1, Form 1040

By Claudia Wallis

Lots of characters in search of a tax cut

Act I of Ronald Reagan's economic program came off without a hitch. In Scene 1, two weeks ago, the President's budget proposal sailed through the Democratic-controlled House of Representatives. In last week's predictable though impressive Scene 2, the Senate passed the budget 78 to 20--a margin so wide that had not a single Republican voted (and 50 out of 52 voted aye), the Democrats alone would have carried the measure.

But even before that scene was over, the impresario was turning his attention to the much trickier second act. At a White House reception for the 253 Representatives who had approved his budget Reagan cautioned: "What we did was only the first step. We have a big job ahead of us putting tax cuts into effect."

Just how big and difficult that job will be was evident during the week, as the players in the tax drama positioned themselves. In the leads are the White House, represented chiefly by Treasury Secretary Donald Regan, and the House of Representatives, whose main negotiator is Ways and Means Committee Chairman Daniel Rostenkowski. Publicly, at least, the White House is standing fast by its original tax-cut program, based on a 1977 proposal by two Republicans, Congressman Jack Kemp of New York and Senator William Roth of Delaware. Its main and most controversial feature is a 10% across-the-board reduction in personal income taxes in each of the next three years. In fiscal 1982, the first year, $44 billion would be slashed from personal taxes. Rostenkowski has countered with a one-year, $28 billion tax-cutting proposal for individuals, more weighted in favor of taxpayers with low and moderate incomes.

There are parts aplenty. In the Senate waits Finance Committee Chairman Robert Dole, who is barely lukewarm to Reagan's tax plan, and Louisiana's Russell Long, the committee's ranking Democrat. Long and his House counterpart, Barber Conable of New York, ranking Republican on the Ways and Means Committee, do not command enough votes to pass a tax bill, but both have the power to grease, or gum up, the works. Long has said, only half in jest, "I think every Senator should have at least one amendment" to the tax measure.

The President's tax proposal, unlike his spending cuts, does not enjoy broad voter support and is widely seen as inflationary. That view is especially virulent on Wall Street, where concern over inflation and high interest rates has rocked the bond and stock markets in the past few weeks. As a result of that skepticism, says one White House aide, "a clever overall strategy" will be needed if the President is to have his way on taxes. That may include a multimillion-dollar advertising campaign, financed in part by the Republican National Committee, to drum up support in conservative congressional districts. The strategy will almost certainly also involve an accommodation.

The shape of a compromise began to emerge last week as the Administration exchanged hints with the other players. An important signal came when Rostenkowski remarked on television that he could see the possibility of a two-year tax package. Another came later in the week, when Dole announced that the President's tax bill lacked support on the Finance Committee. It was a warning to the White House not to take the Senate for granted.

The messages got through. Secretary Regan picked up Rostenkowski's hint and passed word, through Conable, to "tell Danny that I want to talk to him." Dole's signal was also received, and he was brought into the dialogue. These talks laid the basis for what may eventually be a Dole-Rostenkowski tax bill, which, noted one aide, would have the advantage of allowing everyone to take credit for "a statesman-like compromise" while removing the partisan Kemp-Roth label.

The compromise package may in fact be two bills. The first would feature something approaching Reagan's 10-10-10 tax cut plus Rostenkowski's proposed reduction of the maximum tax on unearned income (now 70%). The second would offer some of the other reforms contained in Rostenkowski's proposal. Among them: reduction of the "marriage penalty" for two-earner families (who pay a higher rate than working couples simply living together) and incentives for saving. To finance both plans, it might be necessary to delay the date the first cuts take effect. That move would have the added appeal of reducing the budget deficit for fiscal 1982--a sop to Wall Street and conservative Congressmen.

The success of any Dole-Rostenkowski bill will, of course, depend on the cooperation of Rostenkowski. While the Illinois Democrat seems willing to bargain, he cannot do so effectively until his own committee agrees on a common strategy. Right now, says one member, "they are all over the lot." It was no wonder then that Rostenkowski described his first meeting with Treasury Secretary Regan last week as "inconclusive, but not discouraging." The Secretary did not put all his cards on the table, but neither did the Congressman. "Regan was three years, two years, three years," says Rostenkowski. "I was one year, one year, one year." But, he notes, "it was just the initial talk." Just Scene 1 in what promises to be a very long second act. --By Claudia Wallis. Reported by David Beckwith and Neil MacNeil/Washington

With reporting by David Beckwith, Neil MacNeil

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