President Reagan, who will make final decisions on the administration's tax-simplification plan when he returns from Europe on Friday, said yesterday in Madrid that the completed proposal would make the tax code "less progressive."
It was the first time the president has attempted to sell tax simplification on these grounds.
"We believe that there's nothing progressive about tax rates that discourage people from climbing up the ladder of success," Reagan said in a speech to Spanish community leaders.
Reagan's statement came as administration officials in Washington put the finishing touches on the options they will present to him.
These officials are considering restoring to the oil and gas industry two-thirds of the tax breaks that the Treasury Department's original tax-simplification proposal would have wiped out, according to congressional sources.
Decisions have not been made on whether to keep alive the oil depletion allowance and allow fast write-offs for the costs of drilling dry holes and small wells. But oil and gas interests have lobbied Treasury Secretary James A. Baker III hard to keep their tax benefits when the modified package is announced, probably next week.
The original tax-simplification plan would have reduced oil production by 411,000 barrels a day and cut output of natural gas by 1.1 trillion cubic feet a year, according to an internal Treasury analysis.
The administration has also decided to retain the full deductibility of charitable contributions, congressional sources said.
Washington Post staff writer David Hoffman reported from Madrid that administration officials could not explain why the president decided to make the point about progressivity in his speech yesterday and said it had been written into it before Reagan left Washington on April 30.
Reagan asserted that "the greatest barriers to risk-taking, investment and a strong, growing economy are steep, progressive tax rates."
Progressivity, the idea that wealthier people should pay a greater share of their income in taxes, has been the basis of the income tax since it was enacted in 1913.
Neither the Treasury Department's original proposal nor congressional tax-simplification plans would change the percentage of taxes paid by various income groups. It was not immediately clear why Reagan described the plan he will advocate as "less progressive," other than that it sharply reduces top tax rates and cuts the number of tax rates.
Meanwhile, GOP backers of tax simplification said their support for the Reagan plan is softening because the top tax rate is too high and the personal exemption too low.
Rep. Jack Kemp (R-N.Y.) and Sen. Robert W. Kasten Jr. (R-Wis.), authors of a congressional tax-simplification plan, met with Baker and Deputy Secretary Richard G. Darman Monday and said their support could depend on whether Treasury can reduce the top tax rate for individuals to below 35 percent. That is the top rate in the original plan, but Kemp and Kasten recently have been pushing a lower rate.
Baker and Darman are believed to be unwilling to recommend a lower rate to Reagan because other changes they have made in the plan would cost federal revenue that must be made up somewhere. Reagan has promised that the plan will not change the total tax revenue.
"They say they can't get it to 30 percent and I say it's got to be 30 or below," Kemp said. If the administration sticks with a top rate of 35 percent, he said, "it would lead to an amendment process." Kasten added, "There will be a great deal of difficulty in having the proposals embraced" with a 35 percent rate.
Kemp and Kasten said it was premature to say whether they would oppose the administration's tax plan -- their plan has a single rate of 24 percent -- if the top rate remained at 35 percent. But Kemp said he would try to change the top rate or restore the deductibility of state and local income taxes, which the administration plan would eliminate. That provision, which is not likely to be modified, strikes particularly hard at high-tax states like New York.
Kemp, Kasten and other Republicans also oppose the administration's tentative decision to set the personal exemption at about $1,800, instead of $2,000 in the original version.
Treasury is considering compromising with oil and gas interests by reinstating portions of existing tax breaks for so-called "stripper" wells, which produce less than 10 barrels of oil per day, and permitting immediate write-offs for the drilling of dry holes.
That, plus a move to shorter depreciation periods for cost recovery, would restore two-thirds of what the first plan would have taken away, according to the document. The changes would be worth about $5.6 billion by 1989, according to Treasury documents.
The decision to wipe out the 2 percent-of-income limit below which charitable contributions can't be deducted comes amid heavy pressure from charities and their congressional allies. Rep. Robert T. Matsui (D-Calif.) is spearheading a move to oppose any limitation. He appeared yesterday at a news conference with a group of charities that said the 2 percent floor would reduce their receipts significantly