Democrats and Bush Vie For High Ground on Taxes

THOUGH there's little chance the Congress-White House tax battle will actually result in signed legislation, each side will come away with something: campaign ammunition.

House Democrats, who scraped together a 221-to-209 majority last Thursday to pass their bill, can now tell voters they approved a middle-class tax cut. And they can tar President Bush, who has said he would veto the bill, as anti-middle-class.

The Democrats can also tell a public weary of congressional squabbling that they are capable of taking unified action (if only barely) - in this case, well in advance of Bush's March 20 deadline for an economic growth plan.

Rep. Barney Frank (D) of Massachusetts, who voted for the package and lobbied other Democrats to do the same, denies that the passage of the bill was a cynical exercise - even though some members voted yes while figuratively holding their noses.

"Either way, we're criticized," he says. "If you push a bill that might not be signed, people say you're cynical. But if the bill hadn't passed, everybody would have called us cowards."

For their part, Republicans can use and already are using the bill to claim that the Democrats want "tax-and-spend policies."

"The administration can score points by continually hitting on the theme that the Democrats will raise taxes as long as they can get away with it," says economist Henry Aaron of the Brookings Institution. "Republicans can say tax increases on the wealthy are a stalking horse for eventual tax increases on the middle class." Democrats plan

The Democratic package would grant a modest tax break to most Americans - up to $400 a year for the next two years in tax credits - and pay for it by raising the top tax rate from 31 percent to 35 percent and imposing a 10 percent surtax on millionaires. The Democrats also proposed to cut the capital-gains tax on small-business stock and index capital gains for inflation.

The point of this exercise, launched by Bush in his State of the Union speech, was to boost the slow economy. But faced with criticism that giving the average American an extra 97 cents a day isn't going to end the recession, Democratic leaders counter that the main purpose is to instill "fairness" in the tax structure.

The centerpiece of Bush's plan was a cut in the maximum tax on capital gains, earnings from the sale of property and other assets, from 28 percent to 15.4 percent. The administration claims this tax cut would bring in $76 billion in revenues because it would break a logjam of assets waiting to be sold. Some analysts, including the Congress's Joint Committee on Taxation, doubt this claim. The JCT places the bill for this tax cut at $15.4 billion over six years. Concern over deficit

Tax analysts have their doubts about the finances of the Democrats' package as well, saying it would greatly increase the budget deficit in the first three years, before tax increases on the rich are completely in effect.

Mr. Aaron and other economists hope that Congress and the White House do reach a stalemate.

In hearings, many of them urged caution, warning that the proposed plans could damage the expected economic recovery.

Even though the Democratic package and Bush's proposal have some points in common, overall "they present two visions of what to do, and they're not reconcilable," says Aaron. "Some people are saying this is low politics, but it's not. It's high politics. There are honest differences, and the voters can settle them in November."

Bush's problem is that he can't blame his economic problems on his predecessor, so he has to attack Congress, which makes consensus less likely, says Herbert Stein, a senior fellow at the American Enterprise Institute.

The lesson, says Sen. Dave Durenberger (R) of Minnesota, is that you just can't reform tax policy in an election year.

Be that as it may, Democrats in the Senate Finance Committee will start writing their own tax and economic growth package tomorrow.

The basic outlines are already known: Like the House bill, it will offer a middle-income tax break to be paid for by higher tax on the rich. The Senate committee would make its tax credit smaller than the House's - $300 per child under 16 in families earning up to $70,000 annually - and it would be permanent. The House tax credit would last only two years. Possible R&D tax credit

Looking beyond the expected stalemate over tax policy, Senator Durenberger, a Finance Committee member, sees the probability of some kind of "slimmed-down" tax measure this summer that could enact changes both parties agree on. Those would include: making permanent the tax credit for research and development expenditures by businesses, allowing corporations to depreciate assets faster, and repealing some luxury taxes.

But, says Durenberger, "I don't think taxes are the real issue. It's the economic future of the country. There's no vision of what to do over the next five years."