Regan 'leans' toward proposal for modified flat-rate income tax

Taxpayers could lose deductions and find themselves in different and possibly higher tax brackets under a tax reform plan the Treasury Department is now completing, according to Treasury Secretary Donald T. Regan.

At a breakfast meeting with reporters Wednesday, he also said he expected the US dollar to remain strong and thought the agreement between the United Automobile Workers and General Motors Corporation was ''pretty fair'' for the economy. He also warned that action to shore up medicare would be needed in the coming four years.

Mr. Regan said he leaned toward recommending a modified flat tax to President Reagan when the Treasury Department's tax study is completed Dec. 1. A modified flat tax ''is the thinking now - subject to change,'' Regan said.

In such a tax plan, many deductions are eliminated so that the rate at which income is taxed can be lowered. In a pure flat tax, everyone is taxed at one rate. In a modified flat tax, there are several tax brackets so that the rate at which a person's income is taxed rises with his or her taxable income.

Three other options also are under study. One is a tax on consumed income, in which only that portion of income a person spends is subject to tax. A second option is a value-added tax (VAT), in which a tax is levied on goods at each stage of producton. A national sales tax also is under study. But Regan previously has ruled out a national sales tax, and Wedneday said he had ruled out a VAT ''as a substitute for a complete change in the tax law.''

At the moment the Treasury Department has not decided which deductions it should ask Congress to eliminate under a flat tax.

''We don't know what we have to knock out in deductions to bring rates down, '' Regan said. ''At this point we haven't knocked out anything or said we would keep anything'' except the home mortgage deduction, which the President has promised to keep, Regan said.

Mr. Reagan has said he wants to be sure any tax reform plan would not raise more revenue for the government than the existing tax system.

While he has not decided on what deductions to target, the treasury secretary said the new system will be less progressive than the current one, in that there will be fewer tax brackets on which to calculate tax rates.

Currently there are 14 tax brackets, the Internal Revenue Service says. A different tax rate is attached to each bracket. In the lowest tax bracket, married couples filing jointly pay 11 percent on their taxable incomes over $3, 400. In the top bracket, married couples pay 50 percent of their taxable incomes in excess of $162,400.

In the package under development at Treasury, the Reagan administration will ''try to take down'' the number of brackets, Regan said. The result: ''Some people pay more, some people pay less. It will be a different mix,'' he said.

Such a plan will not add to criticism that the administration is unfair, Regan argued. A modified tax plan proposed by Sen. Bill Bradley (D) of New Jersey and Rep. Richard A. Gephardt (D) of Missouri would create three tax brackets (with rates of 14 percent, 26 percent, and 30 percent) ''and no one has knocked that as being unfair,'' Regan said.

While some people will find themselves in a higher tax bracket under the Regan plan, ''there will be no massive tax hike for business or for any particular class of taxpayers,'' said Ronald A. Pearlman, acting assistant treasury secretary for tax policy, in speech Sept. 18. He added that while the distribution of the tax burden would change, ''we will try to minimize'' the changes.

Designing a simpler tax system ''is not simple, it is complicated,'' Regan said. But devising a tax-reform plan is perhaps the easiest part of the process. Assuming Reagan is reelected, his economic team will then have to convince Congress to change the tax law.

''You are going to have a lot of opposition'' to changes, especially from those losing a valued tax break, Regan said.

He added that he thought it would be possible to move both deficit-reduction and tax-reform legislation through Congress next year. But if forced to choose, ''I might even give up tax simplification because I think deficit reduction is the No. 1 priority in the country,'' he said.

The treasury secretary said his decision whether to serve in a second Reagan administration, if there is one, will depend in part ''on how well this (tax plan) is received and what the President decides to do about a tax program.''

Regan argued that the economy can achieve the 4 percent average annual growth rate the administration is predicting through fiscal 1989 despite recent signs that the economy is slowing. If economic growth lives up to the administration's projections, it would make a major dent in the budget deficit, he added.

The treasury secretary also was optimistic about the outlook for the dollar. ''I do think our dollar will remain strong, stronger than it has been on average over the last several years,'' Regan said. ''I see no need for the dollar to go back to its previously very weak condition.''