A Less Than Perfect "10-10-10"

By WALTER ISAACSON

Congress and the White House try to forge a tax compromise

On one side was President Reagan, eager to hold to his campaign pledge to cut personal income taxes across the board by 10% in each of the next three years, the so-called "10-10-10" proposal. On the other was House Ways and Means Committee Chairman Dan Rostenkowski and his fellow congressional Democrats, who favor a smaller tax cut offered for one year at a time. Like proud and coquettish students at a prom, each has been eyeing the other, hoping for an invitation to dance. Last week, with congressional Republicans acting as chaperons, they began edging toward one another in a series of private meetings--at the White House, the Treasury Department, in a Capitol hideaway--that laid the groundwork for a possible compromise tax bill.

Reagan came to the cotillion with an aura of invincibility from his decisive, and uncompromising, victory in paring $36 billion from the fiscal 1982 budget, which was formally approved by Congress last week. His extensive three-year tax cut program, however, enjoys far less support both in Congress and throughout the country, mainly because it threatens further to bloat the federal debt and aggravate inflation. As if to dramatize such fears, the nation's leading banks last week raised their prime lending rate to 20.5%, up 3 1/2 percentage points in one month. Moreover, last week's report that the gross national product had surged 8.4% in the first quarter seemed to weaken the case for the economic stimulus that the Administration argues a tax cut would bring.

The Administration has somewhat slowed the momentum of its budget victory by pushing a hastily conceived plan to bolster the troubled Social Security system by trimming benefits--especially for those who retire at age 62. The Senate last week issued Reagan a stinging rebuke by passing, on a 96-to-0 vote, a "sense of Congress" resolution opposing any "precipitous and unfair" reductions in benefits for early retirees and any package of cuts that is more severe than necessary to keep the system solvent in the short run. Congressman Claude Pepper of Florida, chairman of the House Select Committee on Aging, told Health and Human Services Secretary Richard Schweiker, "You have chosen a solution that violates the sacred word of our President and our Government and our Congress to the people." The White House backtracked quickly, releasing a letter from Reagan assuring congressional leaders that "this Administration is not wedded to any single solution." Reagan called for a bipartisan effort to find a way to save the system.

Reagan has been much less willing to back off from his "10-10-10" tax cut plan. First proposed by Congressman Jack Kemp of New York and Senator William Roth of Delaware, that scheme would reduce taxes by 30% over three years. Says one top White House aide: "I can't stress enough that the President is adamant in his belief that he was elected on the basis of a certain program. If he has to, he will make a fight out of it. He will go to the country." Still, most White House aides, including Chief of Staff James Baker, feel that winning "10-10-10" would be extremely tough, and acknowledge that politics is the art of the possible. They hope that Rostenkowski will produce a plan close enough to what the White House wants so that everyone can declare victory and avoid a battle that could damage both sides.

The Illinois Democrat, however, has been slow to accept the invitation to dance, particularly if he has to take the lead. He has had trouble forging a consensus among divided Democrats, who are reluctant to support higher deficits or place their faith in the Reaganites' theory of supply-side economics. Should no compromise be reached, the Democrats could simply allow a straight up-or-down vote on Kemp-Roth, a roll call that the Administration would probably lose. Speaker Tip O'Neill and other liberal Democrats said that putting the Republicans on the spot with Kemp-Roth might be better than talking compromise. But Rostenkowski was well aware of the President's popularity and the possibility that some conservative Democrats might break party ranks. He and Majority Leader Jim Wright of Texas felt there was little to be gained by a bitter congressional struggle over Kemp-Roth and that even a victory might come back to haunt them in 1982, when voters decide how to assess credit and blame for the economic situation. The stakes were high, and each side knew that a short-term victory could turn out to be a defeat in the long run.

Last Monday, Senator Robert Dole of Kansas, chairman of the Senate Finance Committee, began to play matchmaker. He invited the three other top congressional tax writers--Rostenkowski, Senate Finance Committee Ranking Democrat Russell Long of Louisiana and House Ways and Means Committee Ranking Republican Barber Conable of New York--to an intimate luncheon in an ornate hideaway office next to the Senate chamber long favored for bourbon and branch-water sessions. Democrats and Republicans often meet to iron out differences in legislation already passed. Rarely, however, do they assemble to work out joint legislation in advance of any vote, as they did last week.

Over broiled steak for three, and a hamburger for Dole, the quartet got down to business. Dole ran down the items that must be decided: size of the overall revenue cut, number of years over which the cuts should be spread, proposals for more rapid depreciation of plant and equipment for business, reduction of the "marriage penalty" against working couples. Long, a master of backroom consensus on tax bills, noted that there was already a general agreement on many of these items in the Senate committee. "Bob Dole and I are on the same track," he said to the House pair. Then he turned to Dole and said: "You and Danny ought to get together." Conable, too, has dreamed of a Dole-Rostenkowski tax bill to resolve the heated issue in a bipartisan manner. Said he to Rostenkowski: "The ball is in your court." Rostenkowski smiled and said: "I have to talk to Jim Wright." Dole picked up the $20 tab. Next time, he said, it would be the Democratic chairman's turn to play host.

The White House, meanwhile, was pursuing another approach, one that had been successful in the budget battle. On Wednesday, Baker and Treasury Secretary Donald Regan held a well-publicized meeting with four members of the Conservative Democratic Forum, also known as the Boll Weevils because it comprises mainly Southern Democrats. This group had undercut Democratic Budget Committee Chairman Jim Jones by supporting the President's spending cuts. The Administration hoped that their visit might at least lead Rostenkowski to suspect that he too might be sandbagged.

But the Boll Weevils refused to make any commitments. They told Baker and Regan that there was no consensus among Democratic conservatives and that they were hoping to support any compromise their party leadership could devise. So the Administration used Boll Weevil leaders to relay to Rostenkowski a "shopping list" of negotiable items. Among possible concessions: the first year cut could be reduced to 5% and delayed until October. Regan called Conable to say the meeting seemed a success. He had high hopes for the four Democrats. Said he: "They'll go for '5-10-10' and a couple of other little things."

Rostenkowski was also pleased, both by the expressions of loyalty from his party conservatives and by the negotiating points they relayed. He met Thursday morning with Secretary Regan to begin the complex task of discussing details. Meanwhile, Majority Leader Wright had lunch with Presidential Counsellor Edwin Meese at the White House and also talked to Senate Majority Leader Howard Baker and Republican Paul Laxalt of Nevada.

By the end of the week, a consensus was beginning to form around a multi-year reduction in personal income taxes, perhaps even as sweeping as the "5-10-10" proposal Secretary Regan was pushing. Any deal would probably also include changes in the inheritance tax to benefit farmers, faster depreciation write-offs for business, reduction of the maximum tax on unearned income from 70% to 50%, and an increased exclusion for dividend and interest income. The Republicans agreed to alter the personal income tax cuts to give greater relief to middle-income Americans. Explained Wright: "The President, in order to protect his own image, has to have some kind of multiyear approach. We're going to have to yield on that. But we're going to insist on more help for the middle class. The Administration is going to have to yield some."

The emerging deal still faces many obstacles, and Dole and Rostenkowski will meet privately this week in the Capitol to tackle them. If a final bargain is reached, the Democrats will insist that Reagan give it unqualified public support before it is brought to a vote. Says Wright: "If Congress is going to give birth to his child, then Reagan must own up to its paternity." --By Walter Isaacson. Reported by Douglas Brew and Neil MacNeil/Washington

With reporting by Douglas Brew, Neil MacNeil

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