The Treasury Department and key members of Congress have initiated a debate over the basic structure of taxation in America that has the potential to alter the already fragile balance of power between the Democratic and Republican parties.

Proposals by outgoing Treasury Secretary Donald T. Regan, Sen. Bill Bradley (D-N.J.), Rep. Jack Kemp (R-N.Y.) and Rep. Richard Gephardt (D-Mo.) to radically simplify the tax system -- sharply reducing the number of brackets, deductions and credits -- are being given careful political scrutiny.

What strategists on both sides of the aisle see is a powerful wild card in the high-stakes terrain where partisan allegiance, investment patterns, perceptions of inequity and fairness, and the political use of fiscal policy come together.

"I think it's a superb issue, and I have always been sorry that the Democrats let the Republicans get a foothold," said Peter Hart, Democratic consultant and pollster for the campaign of Walter F. Mondale. Hart, who tried unsuccessfully to persuade Mondale to formally endorse the Bradley-Gephardt proposal, said, "It is a great issue, and I wanted it to become a great Democratic issue."

"We understand that," said Republican pollster Robert Teeter. "You can see public opinion changing. It's an idea whose time is coming." Teeter has regularly included questions exploring public attitudes toward modified flat taxes and tax simplification in national surveys for the Republican National Committee and other clients.

In partisan terms, the issue of taxation is key to the central weaknesses of both parties: the perception of the Democratic Party as the advocate of "big spending, tax and spend" policies, and the perception of the Republican Party as the advocate of business interests and of the wealthy.

To a number of Republican and Democratic strategists, advocacy of major tax simplification could be a vehicle for the GOP to defuse the perception that the party favors the rich.

"We Democrats are going to have to go along if the Reagan administration adopts a modified flat tax proposal ," Robert Squier, a Democratic specialist in Senate and House campaigns, said. "If we are smart, we initiate it."

He argued that Democrats "do well on the fairness issue in general, but we are always lacking specifics. We tend to define ourselves as not being Republicans." Tax simplification, in this context, becomes a concrete proposal open for grabs by either party.

Two central Republican analysts, Lee Atwater, former deputy chief of political affairs at the White House and deputy Reagan campaign manager, and V. Lance Tarrance Jr., a Texas-based pollster and campaign consultant, both contended that modified flat tax proposals give the GOP a mechanism to appeal to critically important voting groups.

Atwater sees a modified flat tax as one of the issues likely to become a high priority for younger voters going to work in increasing numbers in service industries without strong ties to a tax system designed largely for the manufacturing sector.

Tarrance, in turn, sees the issue as a drawing card for what he calls the "conservative populists," largely white, working- and lower middle-class voters who, particularly in the South, have shown a growing willingness to cast Republican ballots.

Tarrance noted, however, that GOP support of tax simplification would require sacrifice by the "economic conservative" wing of the Republican Party, the affluent who have a great deal at stake in the existing tax system.

Or, as Hart, the Democratic consultant, argued, Republican advocacy of tax simplification "certainly splits their givers from the group they are aiming their message at."

But, as a House Democratic aide noted, the problem of coping with campaign contributors firmly wedded to the network of tax deductions, credits and exclusions is bipartisan. "People who have tax benefits of various sorts are carrying the political-financial system," he said.

For the Reagan administration to adopt tax simplification as a major part of its legislative program -- as now appears likely -- would amount to an about-face in fiscal-ideological strategy.

For the first term, the Reagan administration moved in exactly the opposite direction from tax simplification. The tax system was used to achieve a mix of economic investment incentives and conservative social policies.

At the core of the business tax cuts enacted in 1981 was an accelerated depreciation system, known as ACRS, and an expanded investment tax credit. In fact, the legislation was a back-door government industrial policy financed through the tax system.

In the period of industrial revival after the 1981-82 recession, these provisions of the tax code in all likelihood functioned to speed up the shift from labor-intensive manufacturing to more capital-intensive, automated production by sharply reducing the cost of plants and machinery. While doing little or nothing to reduce the cost of hiring new employes, these tax provisions probably have encouraged the decline of union labor in the manufacturing sector.

For a Reagan administration firmly committed to the conservative goal of cutting back domestic federal spending, use of the tax system to finance social goals was attractive because it both reduced federal tax revenue and avoided additional federal spending.

This strategy led, at least until now, to a consistent administration view of the tax system as an ideal target for manipulation. Enterprise zones, tuition tax credits and educational trust funds -- all proposed by the administration but not enacted into law -- would use the tax system to finance urban investment and educational subsidies.

At the same time, it produced a readiness on the part of the administration to accept special interest amendments to the tax bill in 1981 granting credits and deductions for the oil industry, savings and loan firms, unprofitable corporations, the trucking industry and utilities.

The Reagan administration's past tax dealings are just a partial reflection of the extraordinary scope of economic activity directly linked to the tax structure. The increasing momentum behind modified flat tax proposals will force reconsideration of fundamental social and economic policies that have become, consciously and unconsciously, part of the fabric of the way America does business.

The massive expansion of private medical insurance -- and, some would argue, the parallel inflation in medical industry costs -- has, for example, received a huge federal boost through the deductibility of employer-paid health insurance, a subsidy reaching $29 billion in fiscal year 1984 alone.

On a smaller scale, the existing system encourages high-income doctors and dentists to invest in everything from oil wells to suburban shopping malls in deals structured as limited partnerships to shelter income from taxation.

Depending on the scope of deductions and credits eliminated by a proposed tax simplification scheme, all these practices and policies would be eliminated or cut back. It is difficult to convey the potential scope of the consequences of federal tax simplification.

Not only does the tax system color almost all corporate spending decisions, but also it has become an integral part of the financing of such activities -- to mention just a few -- as restoration of historic buildings, the restaurant and theater industries, energy conservation, retirement plans and corporate research and development.

While tax simplification represents a complex, and potentially divisive, issue for the GOP, it is even more convoluted and significant for the Democratic Party.

For the Democratic Party, one of the underlying tensions over the past two decades has been a conflict between the party's traditional commitment to a progressive income tax and the unanticipated consequences of that system as the marginal tax rate brackets began to impinge on the core of Democratic voters: the working and lower middle classes.

At the start of the Democratic renaissance in the early 1960s, when the administrations of John F. Kennedy and Lyndon B. Johnson were able to enact a major expansion of domestic government spending for the Great Society poverty programs, the individual income tax system was not, in fact, progressive.

Instead, for the vast majority of taxpayers, particularly the blue-collar workers and small businessmen upon whom the Democratic Party depended every election day, the tax system was essentially flat.

In 1961, 87.8 percent of all those filing tax returns paid marginal rates of either 20 percent or 22 percent, according to a study in the National Tax Journal by Eugene Steuerle and Michael Hartzmark. The "progressivity" of the system existed only among the most affluent of taxpayers, as just 10.04 percent paid at marginal rates of 23 percent to 31 percent, another 2.15 percent paid at rates of 32 percent to 72 percent and an infinitesimally small 0.01 percent paid at the then-top marginal rates of 73 percent to 91 percent.

What this meant was that the loyal Democratic voter could move up the economic ladder from apprentice, to carpenter, to foreman to construction project supervisor and, at most, his marginal tax rate would rise just two percentage points, from 20 percent to 22 percent.

By the end of that decade, however, inflation and legislated changes in the system together pushed the multiple brackets of the progressive tax down into the middle and working classes.

By 1969, 64 percent of taxpayers faced marginal rates above 22 percent; and by the end of the 1970s, the bracketed-marginal tax rate system had begun to impinge directly on the financial calculations of every worker.

While the loyal Democrat of 1961 faced no significant marginal rate increase moving from apprentice to project supervisor, his son or daughter entering the work force in 1979 faced (and continues to face) a tax system almost guaranteeing a marginal rate increase with every promotion, or when a spouse enters the marketplace.

Rising from an apprentice to supervisor could easily mean a more than doubling of marginal rates from 14 percent to 30 percent.

Although there is no direct evidence of cause and effect, it was during this period -- when the marginal rate system began to spread across all income groups -- that the conservative, anti-government movement gained momentum, culminating in the election of Ronald Reagan to the presidency. A part of the conservative movement was based on deepening anger at the tax system, and a growing belief that special deductions and credits are in fact loopholes benefiting the politically influential, according to some pollsters.

In this context, tax simplification has the potential of becoming a double-edged sword, cutting to the advantage of both Republicans, if it can be used to diffuse the "favor the rich" perception, and Democrats, if the legislation were to increase public support of the tax system and to reduce the belief that it is unfair.

"If, as most people seem to think, the Democrats are seen as the party of government and the Republicans as the anti-government party," then restoring public support for the basic method of financing government -- the income tax -- should work to the long-range advantage of the Democratic Party, argued Robert S. McIntyre, of Citizens for Tax Justice, a labor-financed group.

Martin Franks, director of the Democratic Congressional Campaign Committee, was, however, less inclined to speculate in such long-range terms, acknowledging instead that "for the moment, they the Republicans and the Reagan administration are fairly well positioned on tax reform."