The Reagan administration yesterday proposed eliminating the tax break for a fast-growing pension program that has enabled millions to save money and delay paying taxes on it until retirement.
The proposal is one of three modifications of President Reagan's proposed overhaul of the tax code submitted to Congress by the Treasury Department. Without the changes, the tax plan would bring in $25.1 billion less than the current tax code over the next five years, thereby increasing the federal deficit.
Besides eliminating so-called 401 (k) plans, the package also called for rescinding two other provisions of the president's tax proposal. One would have linked the value of business inventories to inflation for tax purposes; the other would have converted the tax credit for child-care costs into a deduction.
In a letter to key members of the House and Senate tax-writing committees, Treasury Secretary James A. Baker III said the proposals "present the best available means" of providing the needed revenue.
The new pension proposal would not affect tax-deferred Individual Retirement Accounts, to which taxpayers could continue to contribute $2,000 per year.
Together, the three measures in yesterday's revision package would bring in $22.9 billion in additional tax revenue from 1986 to 1990, $11.6 billion from the pension change, $11.1 billion from the business alteration and $200 million from the child-care change.
These new proposals, like Reagan's overall plan to lower tax rates and curb deductions which he submitted in May, are considered beginning points for congressional work. Both the White House and Congress have emphasized many elements of the plan are negotiable.
House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who pressured the administration make the plan "revenue-neutral," called the revisions "a good-faith effort to close the revenue gap."
"I accept their response as close enough to the mark. With the administration propoal in hand, Congress is now ready to begin its work," Rostenkowski said in a statement. His committee is scheduled to begin writing its version of tax overhaul on Sept. 17 in closed session.
Senate Finance Committee Chairman Bob Packwood (R-Ore.) said the changes "have boosted the chances for tax reform." While he praised the decision to retain the child-care credit, Packwood said he expected "significant opposition" from companies and workers to the proposed elimination of the 401 (k)s.
Under those plans, which have grown rapidly since they began in 1978 and now cover between 15 million and 20 million workers, employes can place part of their earnings into special accounts with their employers without immediately paying income taxes on those earnings or the interest generated.
The employer -- many companies supplement the money with contributions of their own -- invests the money and the employe can draw it when he retires. He has to pay taxes on it then, but is generally in a lower tax bracket at retirement and has been able to invest the money he would have paid in taxes otherwise.
The Treasury Department's original tax proposal, issued last November, also would have wiped out the 401 (k) plans on the grounds that they cost the government tax dollars and were unfair to employes who could not take advantange of them.
The president's tax overhaul softened that proposal by limiting the amount of money that could be deposited in plans.
Even that was the subject of heavy lobbying by business organizations. Companies such as IBM Corp. that otherwise supported the Reagan tax plan said in congressional hearings that they opposed the 401 (k) provisions.
Business can also be expected to oppose eliminating the planned inflation-adjustment for inventories, a firm's unsold goods. At present companies pay taxes on the increased values of those stocks, even if that increase is due to inflation alone. The original Reagan plan to provide inflation protection was warmly received by business.
The decision to continue the child-care credit is expected to be popular.
Critics complained that a deduction favors the rich more than a credit, since a credit is a dollar-for-dollar reduction in taxes while the value of a deduction is higher in higher tax brackets.