Humbling House Democrats for the third time in a row, President Reagan yesterday won easy approval of his three-year tax-cut bill, virtually assuring enactment of his entire economic program.
The House vote, 238 to 195, came as the Republican-controlled Senate also approved a nearly identical bill easily, 89 to 11. The bills now must go to conference, but few problems are likely. Reagan thus should win his tax cuts, just as he did his proposed spending cuts earlier this year.
The bills would cut rates 25 percent in all tax brackets over the next three years, then index the tax code to provide automatic cuts each year to offset inflation.
They also would reduce the "marriage penalty," the estate tax, the maximum taxes on interest and dividend income and capital gains; cut taxes on income put into new savings certificates and retirement accounts and cut business taxes 40 percent within five years by letting companies write off plant and equipment costs much faster.
The few remaining differences are over tax breaks for oil producers and royalty holders, a provision in current law that benefits commodity dealers and the child-care credit, which both hourse voted to increase but in different ways.
The bills represent the abandonment by Congress of past Democratic practice, which has been to tilt tax cuts toward the poor and middle-class wage-earners. Instead, Congress this time granted, the larger cuts to the better-off and to business, on the Republican theory that this will stimulate savings, investment and growth, and ultimately work to benefit all.
This shift in philosophy was accentuated by a bidding war that developed as Democrats and Republicans vied for votes, a competition that led to the near elimination of the estate tax and the large oil tax breaks still to be resolved.
A jubilant Reagan said after the vote that he believes the first six months of 1981 "will mark the beginning of a new renaissance in America."
"What we need is a tax cut that creates wealth, not one that redistributes wealth," Rep. Phil Gramm (D-Tex.), the leading Democratic defector to the Reagan administration, told the House in yesterday's debate.
In futile rebuttal, House Majority Leader James C. Wright Jr. (D-Tex.) told Republicans: "You may call it 'supply side.' Its real name is 'trickle down.' It believes with George Gilder that 'regressive taxes help the poor,' that only the rich have sense enough to invest in things that are good for America."
But Democratic rhetoric against the Reagan bill had a partly hollow ring, because the Democrats in their bids for votes had salted their own bill with many of the same provisions.
A total of 48 House Democrats, mostly conservative southerners, bolted from the Democratic side in a new blow to the authority of House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.). Fully aware that the vote was lost, O'Neill, 69, and his 29-year-old protege, Rep. James M. Shannon (D-Mass.), who wrote his honors thesis in college on O'Neill, together watched the start of the day-long debate slumped and tired in chairs six rows back on the House floor.
The scope of the tax-cut bill, the largest in history, is reflected in the fact that it would reduce federal receipts through fiscal year 1986 by a total of $732.9 billion, more than the budget for the current year. In the first three years through 1984, individual cuts would amount to $223 billion and business cuts $64.9 billion.
Together with the $35 billion in mainly domestic program cuts approved yesterday by a conference committee and Reagan's so-far successful proposal to lift defense spending $1.5 trillion over the next five years, the tax bill is one of the main elements of the president's program so far put to Congress.
Numbed by the steady erosion of what had been a majority behind the Democratic bill before Reagan's Monday night televised speech on taxes, the Democratic side of the House floor lost all the vitality it had shown over the past few weeks as the frantic bargaining and negotiating for votes came to a dead halt.
"Once you get over that 30-vote mark and they [Democrats] know it, it begins to hemorrhage on their side," Rep. Robert H. Michel (R-Ill.), the minority leader, commented after the vote.
The scent of victory belonged to the Republican side of the House floor, where members rose in standing ovation when their leader, Michel, and Rep. Jack Kemp (R-N.Y.), the original sponsor of the Kemp-Roth tax cut bill on which the Reagan bill is partially based, went to the well of the House to speak.
Earlier in the day, House liberals and moderates, including 62 Republicans largely from the Northeast and Midwest, known as gypsy moths, lost a bid to strip the special interest amendments, particularly the oil industry breaks, from the bill.
"I don't mind the eyes of Texas being upon us. I object to the hands of Texas being in my pockets," Rep. Barney Frank (D-Mass.) said before he and other liberals went down to defeat on the oil issue, 282 to 148. A liberal substitute bill calling for a one-year tax cut with no special-interest provisions was rejected, 288 to 144.
In the key House vote, the only area members of Congress to go against the president were Maryland Democrats Michael D. Barnes and Steny H. Hoyer. The lone vote against Reagan among area senators was cast by Charles McC. Mathias Jr. (R-Md.), an opponent of indexing.
The major provisions that are in both the House and Senate bills, and thus virtually certain of enactment:
Rate Cuts. Rates in each bracket would be reduced 25 percent over 33 months: 5 percent on Oct. 1 of this year, 10 percent on July 1, 1982, and 10 percent July 1, 1983. The administration said these cuts were essential to offset already scheduled increases in Social Security taxes plus "bracket creep," the tax increases that occur when wages rise with inflation and taxpayers are automatically lifted into higher brackets.
Democrats said it was dangerous to cut taxes three years in advance and that the Reagan cuts would not be enough to offset Social Security increases and bracket creep in the lower tax brackets, just in the higher. They wanted the rate cuts skewed toward those with incomes below $50,000, plus an increase in the zero-bracket amoung of tax threshold, which would mainly help the less well-off. Their proposals lost.
Indexing. After the 25 percent tax cut over the next three years, permanent tax cuts out into the future to offset bracket creep. In what is in some ways the most fundamental departure from current law in the bills, these would be achieved through indexing; starting in 1985, three key parts of the tax code would be tired to inflation.
Republicans favored this as a way to keep government revenues and goverment from growing; many Democrats opposed it as a threat to continued financing of social programs. Under terms of the provision, tax brackets, the $1,000 personal exemption and the zero-bracket amount (now $2,300 for a single return, $3,400 for a joint return) would all be adjusted each year according to the percentage increase in the consumer price index.
Marriage Penalty. The so-called marriage penalty under which two workers often pay more if married than they would if single would be reduced by a new exclusion. Next year 5 percent of the lower earning spouse's income would be tax free, up to a maximum amount, $1,500. In 1983, this would rise to 10 percent and a $3,000 maximum.
Maximum Tax. The maximum tax on so-called unearned income, dividends and interest, would be cut from the present 70 percent to 50 percent next year. The maximum tax on earned income, wages, is already 50 percent. On capital gains, the maximum tax would drop even faster: retroactively from 28 percent to 20 percent as of last July 9. These cuts would overwhelmingly benefit the 4.8 percent of all taxpayers with incomes above $50,000 a year.
Estate Tax. This provision, too, would benefit mainly the wealthy; by 1986 the estate tax would be eliminated for all but the largest 7,000 or so estates each year. The first $175,000 of an estate is now exempt from tax; this would rise to $600,000 over the next five years, and unlimited amounts could be left without tax to a surviving spouse. In addition, the House bill would lower the maximum rate on the largest estates from 70 to 50 percent. The Senate is expected to concur in this readily.
Charitable Deductions. Both bills would let those using the short form take deductions for charitable gifts, just as those who itemize already can. The maximum deduction off the short form would be $100 in the initial years, but this limitation would be phased out by 1986. In that year this deduction would cost the Treasury $4 billion.
IRAs. Beginning next year the amount a person could exclude from taxable income and set aside in an individuald retirement account would be increased from $1,500 to $2,000. The IRA system also would be panded so those covered by pension plans could take part for the first time. The House would permit such people a $2,000 contribution, the Senate $1,500.
Tax-free Interest. In a provision eagerly sought by the savings and loan industry, lending institutions would be allowed to issue a new kind of savings certificate providing up to $1,000 a year in tax-exempt interest to a single taxpayer, and up to $2,000 on a joint return.
The new certificates would be available only for a 15-month period, from Oct. 1 of this year through December 31, 1982. After that, tax-payers would be allowed to exclude up to 15 percent of interest income, up to a maximum of $450 for a single taxpayer and $900 on a joint return.
Depreciation. Effective Jan. 1, 1981, the complex "useful life" system under which businesses now write off plant and equipment costs will be retroactively replaced with a simplified system known as 10-5-3, under which most such costs would be written off in 10, 5 or 3 years. Highlights of Bill
Major provisions of the tax-cut bill approved yesterday:
25 percent rate cuts in all brackets over next 33 months, starting with 5 percent Oct. 1.
Automatic cuts each year thereafter, under an indexing system to keep tax burdens from rising with inflation.
New deductions for couples who both work, to reduce "marriage penalty."
New charitable deduction for those who do not itemize.
New tax-exempt savings certificate; increase in amounts that can be put in IRAs; new system to let those covered by pension plans use IRAs.
Estate tax cuts, cuts in maximum taxes on interest, dividends and capital gains.
Business tax cuts, by speeding up depreciation write-offs.