President Reagan is likely, as part of next year's budget, to propose moving from the progressive income tax toward a flat-rate tax in which people at all levels of income would pay about the same percentage of tax, David A. Stockman, the director of the president's Office of Management and Budget, predicted yesterday.
"I don't want to minimize the difficulty" of drafting a plan that would abolish progressive tax rates, which rise along with income, and most if not all deductions, Stockman said, "but I would not be surprised if it was part of next year's budget."
"It's very much our intention to move in that direction," he said, adding, "The president is highly sympathetic to the flat-rate, broad-based tax idea."
Stockman's statement, at a luncheon with a group of reporters, was the strongest indication so far from any senior official that the administration is embracing the flat-rate tax idea, which has drawn increasing interest on Capitol Hill, some of it from liberals as well as conservatives. Stockman said it was "under serious study" in the administration, but offered no details of what form it might take.
The flat-rate tax is a proposal to replace the progressive rates, which now range upward to 50 percent of taxable income in high brackets, with a single relatively low rate--perhaps somewhere between 10 and 20 percent--for all taxpayers. In turn, many of the deductions, exemptions and other complicated means that taxpayers use to reduce their obligations would be abolished.
Proponents of the idea say it would simplify filing, end wasteful tax shelters and curb "the underground economy." Critics say it would be a boon to the rich, cutting their taxes much more than those of the poor, and could jeopardize such special enterprises as the housing market and charities, unless exceptions were made to continue the tax deductions for mortgage interest and charitable giving on which they heavily depend.
Stockman acknowledged the difficulty of the issues that would be raised by a flat-rate tax, but said it had priority, along with health and hospital cost-containment proposals, in the early thinking about the fiscal 1984 budget.
While previewing next year's administration program, Stockman also discounted reports that there was a major review under way of current economic policy.
Secretary of the Treasury Donald T. Regan told The Washington Post Friday that current policies were under review, in case the economic recovery now believed to be just starting is aborted by continued high interest rates. Other sources speculated that moves might be initiated to curb the independence of the Federal Reserve Board.
But Stockman said he did not "expect any fundamental change in fiscal or monetary policy," and said most of the exercise was aimed at preparing ammunition to rebut calls for a change in direction from members of Congress.
Arguing that the advent of the mid-term election at a time when the economy is emerging "from a serious disinflation" is certain to bring calls for "quick fixes and panaceas," the budget director said "we've got to be prepared to fight and defeat" such ideas as credit and wage-price controls.
As for the idea that the Fed's independence should be limited by putting it under control of the Treasury, he said that is "a definite minority" view in administration economic circles.
White House spokesmen also minimized the significance of Regan's comments.
Stockman declined to guess about the direction of interest rates, but said that reports the federal government would usurp the credit markets with $90 billion of borrowing in the remainder of this year were "excessive." He said borrowing in the third quarter would be in the $30 billion to $35 billion range and implied that the last quarter's figures would probably be no higher.
Regan told reporters yesterday that Treasury was studying all aspects of economic policy, not just monetary policy.
Tax policy was another area under study, Regan said, and told reporters that something on this would "probably be surfacing later this week."
Regan strongly criticized the erratic movements in the money supply, but he defended the independence of the Federal Reserve.