The final version of President Reagan's tax-simplification plan probably will increase the tax burden on the business sector and reduce it for individuals, Treasury Secretary James A. Baker III said yesterday.
It was the first indication that Baker will recommend that the White House endorse the substantial shift in burdens included in the Treasury Department's simplification proposal. Reagan has voiced doubts about raising taxes on the corporate sector, saying the Treasury plan would only increase taxes for companies that pay very little now.
"I don't think you can get to a 35 percent top individual rate without some increase for corporations," Baker said after the first congressional hearing this year on tax simplification. Reagan has committed to reducing the top personal rate to 35 percent or below.
He also said in response to questioning from members of the House Ways and Means Committee that Reagan would be willing to lobby for the plan and tell companies their tax burden might go up.
Baker revealed little else during the three-hour hearing about how the final plan might be shaped after he and Treasury officials finish their review, make recommendations to Reagan and send a final package to Capitol Hill. He promised only that, "We are willing to reexamine all provision of the Treasury package," except for the retention of the deduction for mortgage interest on a principal home.
Baker's willingness to negotiate tickled some of the committee members and evoked occasional chuckles from the throngs of lobbyists in the hearing room. At one point, Baker said that Reagan has the same position on every portion of the Treasury plan: "We're going to take a close look at it."
That prompted Rep. Fortney (Pete) Stark (D-Calif.) to say, "It's obvious you are one of the most principled members of the executive department to come before this committee in recent years, and it's clear your foremost principle is flexibility."
Baker did elaborate on the timetable for the simplification process. The administration will make a decision about how it will propose its simplification plan in four to six weeks, which means late March or early April.
The choices are a set of general recommendations, a revised version of the Treasury outline -- which is quite detailed -- or an actual bill. "Shortly thereafter," probably around May 1, the actual proposal will be forwarded to Congress, Baker said.
The Ways and Means panel will be moving during that time as well: Committee Chairman Rep. Dan Rostenkowski (D-Ill.) announced yesterday that he would hold hearings in mid-March to hear from congressional sponsors of tax restructuring. Like the Treasury proposal, those bills reduce personal and business tax rates while doing away with a host of deductions, exclusions and credits.
The two congressional plans generally don't change the distribution of taxes between companies and individuals, while the Treasury proposal would raise revenue from corporations by 25 percent in 1986, with the increase rising to 37 percent in 1990.
During the three-hour hearing, Baker expressed sympathy for the argument that reducing such business breaks as accelerated depreciation write-offs and the investment tax credit could make American business less competitive in overseas markets.
"That's as good an example as I can think of of the balancing of equities that's going to be required," Baker said. "It may be that economic neutrality is simply not attainable."
However, he fended off a host of suggestions by committee members that their favorite break be taken off the negotiating table. After they proclaimed that they were in favor of tax reform, congressmen praised the merits of the deduction for charitable contributions, tax-exempt employe fringe benefits, current taxation of life-insurance companies, the lower tax rate on capital gains, oil-exploration and drilling tax breaks, limited partnerships, the deduction for state, local and property taxes, the research and development tax credit and the foreign tax credit.
Baker responded to most of those concerns with the same answer: Everything is negotiable, but every loophole that gets dropped affects how much tax rates can be lowered.
"If you're going to reduce tax rates for individuals to make the system more fair, you're going to have to see some higher taxes from businesses. That's all there is to it," he said.
Baker also announced that Treasury was revising the effective dates and transition rules for its proposal to ward off business uncertainty about making investments. The original proposal, made last November, used the date of enactment as the time when several provisions would go into place.
Instead, nothing would be effective before Jan. 1, 1986, even if a simplification law was enacted before then. The change also stretched out some of the transition periods, although Congress will in all likelihood work out its own transition arrangements if it passes a tax-simplification bill.