President Bush announced yesterday that he could accept an income tax rate increase for the wealthiest Americans in exchange for a cut in capital gains taxes, but under pressure from Senate Republicans the White House was frantically backtracking from that position by day's end.

Bush's announced willingness to drop his longstanding opposition to an increase in income taxes sent a new shudder of dissent through splintered Republican ranks when more than a dozen GOP senators pleaded with him later in the day to avoid such a bargain as part of a budget and deficit-reduction package. By nightfall, the White House issued statements saying income tax rate increases and capital gains tax cuts were "off the table" as far as the president is concerned.

The Senate Republican eruption over the tax issue and the quick White House retreat underscored the difficulty Congress still faces in implementing a five-year, $500 billion deficit-reduction agreement that was outlined in a budget resolution approved by Congress early yesterday morning. Along with the budget resolution, Congress also enacted -- and Bush signed -- a new stopgap spending measure to keep the government functioning until Oct. 19. The spending bill allowed all federal workers to return to their jobs yesterday morning.

Before Bush's apparent reversal under pressure late yesterday, the prospect of an increase in income tax rates on the wealthiest taxpayers in return for a cut in the capital gains tax rate gained additional strength when it was supported by two key committee chairmen on Capitol Hill.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) held a closed-door drafting session of his panel last night and sources said Rostenkowski's plan included such a proposal, although they were unable to supply exact tax rates.

Congressional aides said that Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) is expected to propose raising the top income tax rate on the wealthiest Americans from 28 percent to 33 percent in exchange for accepting Bush's plan for cutting capital gains taxes. Administration officials, however, said Bentsen's proposed effective capital gains rate is 24 percent, nowhere low enough to make a deal even if Bush changed his mind again.

The pull and counterpull in GOP ranks over the tax issue, one of the most contentious through four months of budget talks, was reflected throughout a day of frantic phone calls and conflicting statements inside the White House. Both Chief of Staff John H. Sununu and Office of Management and Budget Director Richard G. Darman were said to oppose making such a bargain, while Vice President Quayle and others were described as favoring it. In the House, many GOP officials originally opposed to the exchange now favor it.

Emerging from the late afternoon White House session with Bush, Sen. Bob Packwood (R-Ore.), senior Republican on the Finance Committee, said, "We all put up our hands and said, 'No deal on rates at all.' He {Bush} just acquiesced." Packwood added that Bush "agreed. Our uniform position was that we will not go up on {income tax} rates, no matter what."

The new eruption in Republican ranks came on a day in which congressional leaders of both parties began a frantic effort to fill in the blanks left by the budget framework accepted early yesterday morning.

Bush's concession on higher income tax rates came during a 40-minute news conference during which he also staunchly defended the way he and his aides have handled the budget talks, brushed aside the possibility he has been politically damaged in the budget morass, and gamely admitted he prefers dealing with foreign policy compared to domestic issues.

Despite the refusal of Congress to approve the original budget pact, Bush predicted yesterday the next budget agreement will closely resemble the failed package. Most congressional and even White House officials were predicting yesterday that the new package will, however, have significant changes, with Democrats who control the key committees pushing hard for the income tax rate-capital gains exchange, smaller out-of-pocket costs to Medicare recipients, a lower increase in gas taxes, no home heating oil tax increase, and other variations.

Bush's news conference comments on the tax issue came after a private White House meeting Saturday with Bentsen during which the senator urged the president to accept such a revenue deal as part of a package he will outline to his committee today.

At the same time, several House Republicans, including Rep. Bill Archer (Tex.), the senior Republican on the House Ways and Means Committee, also endorsed such a potential deal. Another 15 House Republicans are to unveil today their alternate budget proposal, which includes a capital gains

cut-income tax rate increase exchange.

Asked about raising rates for the wealthy, Bush said yesterday, "That's on the table. That's been talked about. And if it's proper, if it can be worked in proper balance between the capital gains rate and income tax changes, fine."

Bush added, "The action is in the Congress, but we'll work with them" on filling in the blanks in the budget plan, which provides $500 billion in deficit reductions over the next five years, including $40 billion this year. Under the budget resolution passed by Congress, the key congressional committees must decide by Oct. 19 which programs to cut and whose taxes to increase or the government will shut down again, as it did last weekend.

The president, with a grinning Sununu standing to one side, staunchly defended his aides in their handling of the talks, while admitting that some feelings in Congress were bruised. "Anytime you have a difficult road like this, there's bound to be griping about it," Bush said. He added, "When the passions get high, I understand that there is bound to be a little broken china up there."

Providing details of the plan that Bentsen will propose to the Finance Committee today, Senate aides said that to further offset the capital gains tax reduction's benefit to the rich, Bentsen would seek to increase the alternative minimum tax rate from 21 percent to 25 percent. The alternative minimum tax is applied to very wealthy taxpayers who have a large number of deductions and exclusions from their taxable income.

Raising tax rates on the wealthiest taxpayers would generate about $50 billion in new revenue over five years, while the cut in the capital gains tax rate would reduce revenues by about $9.8 billion over the same period. The net effect of these proposed changes would be to generate about $40.2 billion over five years, about $7.3 billion of it next year.

In addition, Bentsen would

propose dropping the failed

budget summit agreement's provision to limit the benefit of federal tax deductions for those earning more than $200,000, the aides said.

On taxes, Bentsen plans to propose generating a net total of between $140 billion and $150 billion in new revenue over five years. The package would include tax breaks totaling between $20 billion and $25 billion over five years, meaning the panel would have to raise a gross of as much as $175 billion in new taxes.

The budget summit agreement contained provisions generating a total of $162.9 billion over five years and tax breaks totaling $25 billion, resulting in a net gain of $137.9 billion.

Bentsen would drop the proposed two-cent-a-gallon tax on refined petroleum products and lower the proposed federal gas tax increase from a total of 10 cents a gallon to nine cents, phased in over two years.

In addition, Bentsen would eliminate the contentious package of tax breaks for investment in new small businesses, which Bush said yesterday the package must contain.

In Medicare, Bentsen's plan would save $43 billion over five years, compared with the budget summit's plan to save $60 billion over that period. It would leave untouched the premiums paid by beneficiaries of the voluntary coverage of physicians and outpatient hospital services. It would raise from $75 to $100 the maximum out-of-pocket expenses a beneficiary in that program must pay before receiving benefits; the summit had proposed raising it to $150. Bentsen is also considering raising the amount of annual income subject to the 1.45 percent Medicare payroll tax from $51,300 to as high as $90,000.

Bush aides said last night that the confusion in the White House over what the president would or wouldn't accept reflected not so much opposition to tax rate increases, or a passion for capital gains reduction, as it did a determination by some officials that the new package should be as close as possible to the old. Those advisers told Bush, one said, that "if he opened this can of worms he'd never get an agreement. It would be fights all over the playing field again."

But another set of advisers urged Bush to start the budget "mix-and-match" process anew because that, in fact, was happening in Congress anyway. Bush accepted the later view as the day started, but sided with the no-deal advisers by day's end, his aides said.

After Bush's news conference, White House advisers hastily organized a meeting for the 17 Republican senators. Sources said it was designed by these advisers to assure that Bush would hear the opposition of key senators to a deal involving higher rates, thereby making such an agreement virtually impossible.

Aides gave conflicting interpretations of what Bush intended to signal during his news conference but by the end of the day agreed that, in the Senate at least, the question was off the table.

The late-day reports of the meeting at the White House caused alarm among Democrats in the Senate, who were optimistic about striking a budget deal that all sides could accept. "We thought we had clear sailing," one Democrat said. "It's going to be anything but."

Staff writer Dan Balz contributed to this report.

Because of a clause in the 1986 tax reform law, some Americans pay a higher tax rate on a portion of their income than others earning far more money. Those forced to pay the higher rate are said to be trapped a "tax bubble."

Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, is expected to propose "bursting" the bubble so that the wealthiest taxpayers also pay the highest rate. Such a change would probably be linked to a cut in the capital-gains tax rate.



Marginal tax rate: 15%

Taxable income: $0 to $32,450

Marginal tax rate: 28%

Taxable income: $32,450 to $78,400

Marginal tax rate: 33%

Taxable income: $78,400 to $185,730*

Marginal tax rate: 28%

Taxable income: $185,730+

*The maximum amount of income subject to the 33% rate depends on the number of exemptions claimed by the taxpayer.