President Reagan was presented with a tax simplification plan yesterday that would reduce the current 16 individual income tax brackets to three, producing a cut, or no increase in taxes for 80 percent of U.S. households, administration officials said.
The modified "flat-tax" plan, given to Reagan by Treasury Secretary Donald T. Regan, would create three new individual tax brackets of 15 percent, 25 percent and 35 percent. The current top rate is 50 percent. In return for the rate cuts, many present deductions, exemptions and other special provisions would be dropped from the code. But the mortgage interest deduction would remain intact, White House spokesman Larry Speakes said yesterday.
The Regan plan, drawn up to be "revenue-neutral" and neither raise nor reduce total government revenues, also envisions a 33 percent corporate tax rate, down from the current 46 percent.
This, too, would be offset by elimination or modification of various special tax breaks currently in the code, including the accelerated depreciation provision that was the centerpiece of Reagan's big 1981 business tax cut. Because of these special provisions, the effective corporate tax rate now is much lower than 46 percent; one congressional study of large companies two years ago put the effective rate at 16 percent.
Regan's plan, prepared at the president's orders and scheduled to be made public today, ran into instant resistance inside the White House, and the president carefully refrained yesterday from embracing it as his own, officials said. White House aides said it would be controversial and difficult to move through Congress.
Reagan may now look instead at major tax simplification proposals already pending in Congress, according to officials, who spoke on the condition they not be identified. "The Treasury proposal will not be Reagan's proposal," one informed official said.
Meanwhile, officials said Reagan's advisers are also planning to show him this week a list of the extraordinary domestic spending cuts that would be required to cut the deficit in half over three years without raising taxes, cutting Social Security or seriously disturbing his defense buildup. He has put all three of these major alternatives off limits.
Administration officials said the list is not a set of recommendations but rather "illustrative" cuts of the depth that would be required, such as elimination of Community Development Block Grants, Urban Development Action Grants, the Job Corps, federal sewer grants and subsidies for rural electrification.
Other items on the list, the officials said, are to stop Amtrak subsidies, phase out the filling of the Strategic Petroleum Reserve, and abolish the Export-Import Bank. Some of these programs use federal credit to finance their activities.
By some administration estimates, many government departments would have to be squeezed by more than a fourth to meet the goal of reducing the deficit to $100 billion by 1988 if taxes, Social Security and defense remain off limits, White House officials said.
The officials said Reagan is being urged by some senior advisers to move ahead with such spending cuts in his forthcoming fiscal 1986 budget, keeping his campaign promises and applying pressure for domestic spending cuts much as he successfully did in his first year in office.
But other officials say privately that such a budget would be dead on arrival in Congress, costing the president the initiative he gained from his reelection landslide and leading to stalemate in the all-important first months of his second term. They said they hope Reagan will decide to take a second look at some areas he has fenced off, such as the Pentagon.
Officials stressed yesterday, however, that Reagan remains firm in his determination not to consider a tax increase.
The list of cuts is part of a process that Reagan and his aides have gone through before.
He has generally compromised with Congress on fiscal issues in past years, but not in his original budget. Thus, last year he also balked at either a tax increase or major defense cuts in his first spending plan. But the resulting deficit was so large that he also disowned that plan before it even got to Congress, inviting the legislators instead to join him in bipartisan negotiations toward a deficit-reduction "downpayment."
Now, with deficits still in the $200 billion range for as far as the estimators can see, some officials expect him to bend again; the question is whether he will do it before or after the budget is drafted.
The new list of possible spending cuts will be presented by Office of Management and Budget director David A. Stockman to the Cabinet on Wednesday and congressional leaders on Thursday.
Some senior officials, reportedly including White House counselor Edwin Meese III, think Reagan should stick by his guns and "take his case to the people" as he did in 1981.
These officials are particularly anxious that Reagan not allow tax simplification to become a vehicle for tax increases.
"It's important that tax simplification stand on its own merits so it doesn't become a subterfuge for a tax increase," Meese, Reagan's attorney general-designate who has been highly active in policy-making recently, said in an interview last week.
Reagan's advisers now have set a working target of cutting the deficit in half, to about $100 billion or 2 percent of the gross national product, by 1988.
If this is to be accomplished, officials say there is no way to avoid a wholesale closing of entire government programs, restraint on automatic spending programs known as "entitlements," and cuts in subsidies to businesses.
This could translate into a $50 billion domestic spending cut next year, and more in the years after. The savings on Reagan's 1981 budget cuts were estimated in the first year to be $36 billion, and that was the best year in his budget-cutting battles with Congress.