In recent weeks, voices in the business community have criticized President Reagan's budget, calling for additional cuts in defense spending as well as in domestic programs to help reduce the deficit.

Organized labor, meanwhile, has been exploring, with its allies in Congress, other approaches to solving the nation's economic problems. Last week Washington Post staff writer Thomas B. Edsall interviewed Lane Kirkland, president of the AFL-CIO, on labor's position. Following are excerpts from that interview:

Question: Has labor worked out its own plan for the federal budget?

Answer: Well, we have each year since the administration came into office, we've had an alternative budget and an alternative revenue plan.

Q: Can you describe it?

A: It's essentially a combination of several measures--community development grants to the cities; public works; low- and middle-income housing; some public service employment; extended unemployment insurance; coverage of lost health insurance during periods of unemployment.

Q: What would you do with military spending?

A: We have proposed that whatever the prudent levels of increases in the defense budget might be after careful examination, they should be subject to the same critical review as domestic programs are, whatever the result might be. And any such increases are to be paid for by everyone in accordance with their ability to pay and the extent to which they've enjoyed the benefits of a free society. So we called for, in effect, an earmarked defense tax that would be a surtax on incomes.

Q: What else would you do with taxes?

A: We would keep the third year of the 1981 tax bill [the cut that takes effect July 1] at $700 per family, which I believe works out at capping it at an income level of about $50,000.

Q: On Social Security, what position will you take on the proposals of the special advisory commission to rescue the system?

A: We'll be supporting the commission report with one exception, and that is the coverage of federal employes. I dissented on that right away.

Q: Isn't this a difficult issue for you in a way, because the Social Security tax is one of the more regressive of taxes?

A: No, we have historically supported Social Security and the methods of funding it. We have advocated in recent years an element of general revenue contributions, and the package that was recommended by the commission does contain an element of general revenue contributions.

Q: Do you think it's a tax that's collected fairly?

A: Yes. We favor taxing the whole payroll on the employers' side. That was our alternative for funding in lieu of the federal employe coverage: that the employer side of the tax be based upon the entire payroll, without the ceiling that applies to the tax paid by the individual employe.

Q: The reason I ask is that it's a flat-rate tax.

A: It is a flat percentage tax, but the benefit formula is loaded to the low-income group, so in a sense it is not as regressive as it would appear.

Q: Have you looked at the various other broad tax-reform proposals, ranging from the flat tax to the Bradley-Gephardt bill?

A: Yeah, we would oppose a flat tax that was not progressive. I think we would be receptive to elimination of some deductions and loopholes which would make possible some recaptured revenue.

Q: What do you think of the Bradley-Gephardt proposal? That plan would eliminate most special tax breaks and would use the added revenue to reduce rates across the board, while keeping them progressive.

A: We think it makes a lot more sense than the other proposals that don't graduate. And I think it will be under discussion for a good while . . . .

Q: Some Democrats, loosely described as Atari Democrats, are advocating high-tech and saying that some of the smokestack industries like steel are no longer able to compete, and there's too much of what they can try to produce on the market.

A: Two, three years ago--people have short spans of attention and memory--our steel industry was operating at something in excess of 80 percent of capacity and was hard pressed to deliver in response to demand. There may be basic shifts going on in the relative importance of different sectors of the economy, but they don't happen to that degree in two years to warrant writing off such an industry. There isn't any other country in the world that I know of that thinks it's compatible with their national interests to write off such an industry. Most Third World countries--it's the first one they want.

But there are certain factors that have to be addressed. I think we have problems, certainly, in this industry, and any sound industrial policy would have to address those problems.

One is that we have a relatively high proportion of over-age facilities in our steel industry. The Japanese, for example, have a much, much higher proportion of oxygen process continuous flow modern mills. We are still burdened with a lot of high-cost open hearth facilities that go back many, many years.

One of the most difficult things for a free-market economy to do unguided by a national policy is to write off old capital. I think some old capital will have to be written off, and there will have to be a deliberate process of channeling investment into those industries following a commitment to do that, to write it off and replace it with modern or advanced technology.

Q: With government subsidies, or how?

A: Tax incentives are one of the tools to use to try to get capital into a particular area of investment. I think it's appropriate on a targeted basis. I don't think tax incentives or tax subsidies or tax expenditures ought to be just broadcast out irrespective of any design. I think that's wasteful of finite resources.

Q: How would you change what we would do?

A: What we have publicly urged . . . in fact, what we had worked with the previous administration on, was a program that called for the creation of a national industrial revitalization board which would design a few financial institutions along the lines of the old Reconstruction Finance Corporation whose purpose would be to facilitate the revitalization of the industrial sectors that are targeted for it. And to do this by raising capital.

And you design, sector by sector, a set of tools that would be adapted to the requirements of that particular industry and then you sit down and bargain or negotiate with the leaders of that industry what they are prepared to do with the money. That is to say, U.S. Steel should not use its billions of dollars to buy an oil company, but would agree to rehabilitate, to scrap some obsolete capital and replace that plant with a more modern one.

Q: Well would you take away their existing tax breaks and then have this in the form of a subsidy?

A: Oh, I think we opposed those tax breaks in the first place, so I would have no compunction about taking them away.

Q: You opposed 10-5-3 the Accelerated Cost Recovery System in the 1981 business tax cut .

A: Yes. I'll be prepared to use accelerated depreciation where that's appropriate. Now it isn't appropriate for all industries. It doesn't meet the needs of all industries. It's not useful to all industries in the same degree. But on a targeted basis and on a basis that we have commitments from those industries that they'll use them for the purpose for which they were designed, which was to modernize and put into place more efficient equipment, that was the theory behind 10-5-3 and accelerated depreciation and safe harbor leasing.

But nothing happened. We had a net decline in that investment. Coupled with massive outpourings of capital funds used in corporate mergers and acquisitions.