Treasury Secretary James A. Baker III took his case for President Reagan's tax plan to the Senate Finance Committee for the first time yesterday, encountering optimism from the committee leadership and considerable skepticism from the members.
Committee Chairman Robert Packwood (R-Ore.) predicted that the Senate could complete passage by the end of the year if the House could send it a bill by Oct. 15 -- a schedule faster than that outlined by House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.).
Senate Majority Leader Robert J. Dole (R-Kan.) sounded positive about tax revision, calling the Reagan plan "a courageous and historic initiative" and promising that, "We are prepared to do everything we can in the Senate to achieve a satisfactory result."
Dole sounded more pessimistic about timing. He told an American Stock Exchange conference yesterday that if the House did not pass a revision bill before Thanksgiving, "I very much doubt we can do anything on tax reform this year." A tax overhaul bill would take between four and six weeks on the Senate floor, Dole estimated.
Baker told the Finance panel, however, that Treasury and the Internal Revenue Service would need only a month to implement the plan and rewrite the tax forms once it was signed into law. If Congress produced a bill by early December, it could thus go into effect for calendar 1986.
First, though, it has to get through the Senate Finance Committee, whose members yesterday praised Baker's demeanor but avoided even general support for overhauling the tax code. Unlike members of the Ways and Means panel, who prefaced their concerns with pro-revision rhetoric, Senate tax-writers got right down to business.
They worried about the impact of the tax restructuring on capital formation, international trade, state and local governments, the middle class, the budget deficit, timber companies, insurance companies, employe fringe benefits and farmers.
"It's like rearranging the deck chairs on a ship instead of addressing the question of what direction the American economic ship is going," said Sen. Max Baucus (D-Mont.) in a comment directed specifically at the impact on U.S. exports.
Baker responded that the tax code was not the best way to solve problems caused principally by the strong dollar, and that the tax-revision plan would help the United States to compete internationally by reducing the overall cost of capital.
As he has since the idea surfaced in the Ways and Means Committee last week, Baker stood firmly against the creation of a fourth tax bracket with a higher top rate.
When Sen. George J. Mitchell (D-Maine) suggested a 40 percent top rate, Baker said, "That's not something we could agree to. To the extent you start inching it up, you really defeat the purpose of tax reform" as taxpayers continue to invest in shelters. Conversely, reducing the top rate even further, as Packwood wants to do, skews the change too much to high-income brackets, Baker said.
Baker tried to show some flexibility on taxation of fringe benefits, promising to consider changes similar to the administration's original plan to tax employer-paid health-insurance premiums above a certain level, or cap. The current proposal instead would tax the bottom $10 per month of premiums for single workers and $25 per month for a family.
But he was quickly rebuffed by Packwood, a strong supporter of tax-free fringe benefits.
He called the current health-insurance proposal "a carefully worked out compromise" involving the administration, organized labor and himself that has gained support from "many of those affected."
"If we return to the cap, the whole program, and perhaps the whole tax bill, will become unraveled," Packwood said.
Sen. Bill Bradley (D-N.J.), one of several committee members to press Baker on grounds that the plan would give upper-income taxpayers too large a cut compared with the reduction for middle-income earners, pointed out that two big changes from the original tax plan, called Treasury I, to the new plan benefited the well-off disproportionately.
Taxing capital gains at lower rates and preserving fast write-offs for oil and gas drilling tend to benefit those earning more than $100,000 per year, Bradley said.
Also yesterday, the Democratic Study Group blasted the Reagan plan for being more generous to well-off taxpayers than to middle-income taxpayers, therefore making the system less progressive. Under the plan, those earning more than $200,000 per year would get a tax cut of 10.7 percent on average, while those earning between $30,000 per year and $50,000 per year would get a 6.6 percent cut. The poorest taxpayers would get the largest cut of all in percentage terms.
"The Reagan plan is far tougher on tax provisions used by the middle class than on exotic tax shelters and loopholes used by those who are not paying their fair share of taxes," the DSG report said.
Staff writer Helen Dewar contributed to this report.