The MacNeil/Lehrer NewsHour

Intro

ROBERT MacNEIL: Good evening. In the news today, President Reagan signed the sweeping tax reform bill into law. The U.S. economy grew by 2.4% in the summer. Mikhail Gorbachev said the Iceland summit made progress, but Star Wars remained the obstacle to arms control. Moscow ordered five more American diplomats to leave. We'll have the details in our news summary coming up. Jim?

JIM LEHRER: After the news summary, Commerce Secretary Baldridge, economist Charles Schultze and analyst William Randol look at the economy and oil prices. Judy Woodruff reports on the short, dramatic history of the tax reform law. And we have a report from California about an election concerning AIDS. News Summary

LEHRER: Tax reform is now the law of the land. President Reagan made it so this morning at one of the largest bill signing ceremonies ever. Some 1,500 people assembled on the south lawn of the White House to witness the event. They included members of Congress and others who were involved in enacting the legislation, which makes the first major overhaul of the income tax system in 50 years. President Reagan said the law means this country now has the lowest tax rates and most modern tax code in the industrialized world.

Pres. RONALD REAGAN: Fair and simpler for most Americans, this is a tax code designed to take us into a future of technological invention and economic achievement, one that will keep America competitive and growing into the 21st century. And vanishing loopholes and a minimum tax will mean that everybody and every corporation pay their fair share. And that's why I'm certain that the bill I'm signing today is not only an historic overhaul of our tax code and a sweeping victory for fairness; it's also the best anti-poverty bill, the best pro-family measure, and the best job creation program ever to come out of the Congress of the United States. I feel like we've just played the World Series of tax reform, and the American people won.

LEHRER: The new gross national product figure was out today. From July through September, it was up 2.4%, according to the Commerce Department. That's four times what it was the previous quarter. Beryl Sprinkel, the chairman of President Reagan's council of economic advisers, had an upbeat analysis of what it meant.

BERYL SPRINKEL, Council of Economic Affairs: The economic expansion, now it its 47th month -- almost four years old -- is already the second longest peacetime expansion in the postwar period, and further expansion lies ahead. Total employment is up over 11 million persons, and the percentage of our working age population now employed has trended upward to a postwar high. Unlike the experiences of the 1960s and the 1970s, the economic expansion has occurred while bringing the inflation rate down. Indeed, 1986 will mark the fifth year of inflation below 4%.

LEHRER: Economic news was also made in Geneva by OPEC. The oil producers' cartel agreed to limit production until the first of the year. The oil minister of Nigeria, who is also president of OPEC, said the decision could raise oil prices $3 a barrel from the current range of around $14 to $17.

MacNEIL: Moscow raised the diplomats explusion competition another notch today, ordering five more U.S diplomats to leave. The Soviets also imposed new restrictions on the American embassy in Moscow and the consulate in Leningrad, including the removal of 260 Soviet employees at the two missions. The foreign ministry said it was retailiating for yesterday's U.S. order that 55 Soviets leave to bring the embassy personnel number in line in both countries. Reagan administration officials briefing reporters today said they believe they have now expelled the entire leadership of the Soviet intelligence in this country.

In Moscow, Soviet leader Mikhail Gorbachev went on television for his second address since the Iceland summit. Gorbachev told the Soviet public that the talks had brought the two countries closer to agreemednt, while clearly defining the many obstacles to arms control. But the Soviet leader said military circles in the West were frightened by the progesss in Reykjavik and wanted to prevent an arms control agreement. Star Wars remained the major obstacle.

The Soviet Union today officially confirmed that it had tried and executed a scientific researcher for spying for the CIA. The man, Adolf Tolkachev, was arrested 13 months ago. Tass said he had been caught trying to pass defense secrets to the U.S. The Los Angeles Times reported earlier this year that Tolkachev had been executed because he was turned in by Edward Lee Howard, a former CIA man who defected to Moscow in August.

LEHRER: Another major U.S. company may be pulling out of South Africa. The Minneapolis Star Tribune said Honeywell Incorporated made the decision at a Tuesday board meeting, but the company declined to officially confirm it. Honeywell employs 159 people in its South Africa subsidiary. Forty-nine of them are black. General Motors and IBM already announced this week that they were selling off their South African operations.

In South Africa today, the largest Afrikaner church came out against apartheid. Its ruling synod passed a resolution reversing its long-held support of racial segregation.

MacNEIL: The Nicaraguan court trying Eugene Hasenfus for running arms to the contras today refused his lawyer's request for a delay in the trial. Tomorrow, Hasenfus will have to reply to the charges read to him two days ago. His Nicaraguan lawyer complained he'd been able to spend only 15 minutes with Hasenfus. Yesterday, the accused man told NBC News in an interview, "I'm guilty of everything they've charged. How can I say I wasn't carrying small arms and munitions to their resistance?"

In another development, the Reagan administration point man on Central America, Assistant Secretary of State Elliott Abrams, made an unannounced visit to Costa Rica for talks with the government and was reported going on to Honduras.

LEHRER: Attorney General Edwin Meese today announced a major new crackdown on the pornography industry. He said at a Washington news conference, the federal effort is aimed at child pornography and the depiction of violent and degrading sexual conduct. The outlined a seven point program, including a Justice Department task force to prosecute hard core pornographers.

EDWIN MEESE, Attorney General: Those of us in the federal government have a responsibility to respond aggressively to crimes of such dimension and consequence. Current federal laws are being violated. And thus, I am committed to redoubling the federal effort to insure that those criminal elements who are trafficking in obscenity are pursued with a vengeance and prosecuted to the hilt.

LEHRER: The Meese announcement was immediately matched by one of opposition from the American Civil Liberties Union.

BARRY LYNN, ALCU: These initiatives are really a declaration of war against the wrong enemy. This federal campaign will certainly not make Americans safer from sexual assault, but it may very well erode Constitutional values of privacy and free expression.

MacNEIL: Nearly 15,000 Americans have now died from the disease known as AIDS, and close to 180,000 may perish over the next five years. That's according to a report today by the U.S. Surgeon General. Dr. Everett Koop made the study at the request of President Reagan and said there is still no cure in sight for Acquired Immune Deficiency Syndrome. But he did say the disease can be curbed through better education.

C. EVERETT KOOP, Surgeon General: AIDS is not spread by casual, non-sexual contact. It is spread by high risk sexual and drug related behavior -- behaviors which we can choose to avoid. Now, many people -- especially our youth -- are not receiving information that is vital to their future health and well being because of our reticence in dealing with the subjects of sex, sexual practices and homosexuality. This silence must end. We warn our children, for example, early on about the dangerous consequences of playing with matches or crossing the street before checking the traffic. We have no less a responsibility to guide them in avoiding behaviors that may expose them to AIDS.

LEHRER: Two final stories from overseas. In the Philippines, President Aquino said she was retaining Juan Ponce Enrile as her defense minister. Enrile is a hard-liner who has been critical of Mrs. Aquino's lack of firmness toward the communist rebels. Mrs. Aquino said today she would soon set a deadline for the rebels to stop fighting or accept a full declaration of war.

And in Lebanon, a Lebanese Christian professor was released by his kidnappers after five months captivity. Moslem terrorists seized the man May 7. They gave no public reason for his release.

MacNEIL: That's our news summary. Coming up, focus sections on oil prices and U.S. economic performance, the road to tax reform, and AIDS disease as an election issue. Charting the Course

MacNEIL: Our first focus is today's economic news -- specifically, oil prices and the growth of the U.S economy. We start with the news from Geneva, where OPEC ministers ended 17 days of wrangling with an agreement to extend the production control pact they reached in August for two more months. To tell us what happened and what it means, we have William Randol, who watches the oil industry for First Boston Corporation, a New York-based investment banking firm.

Mr. Randol, will this agreement for another two months push our oil prices up again?

WILLIAM RANDOL, oil analyst: Well, I think that the OPEC accord that's been rolled over and expanded will probably push prices up a few dollars a barrel. But that's more the seasonal effects, going into the winter demand period, and the fact that they've trimmed production between one and one and a half million barrels a day below consumption.

MacNEIL: Let's just take this a little more simply. It was as low as $9, $10 a barrel before their August agreement.

Mr. RANDOL: Indeed, seven to eight.

MacNEIL: Seven to eight. The August agreement to curtail production a bit pushed it up to the, what?

Mr. RANDOL: Mid-teens. Fourteen, fifteen.

MacNEIL: Mid-teens. And you're expecting this extending of the agreement may push it to what?

Mr. RANDOL: Seventeen, eighteenat most.

MacNEIL: Yeah. What could that mean in something everybody sees, like gasoline?

Mr. RANDOL: Every dollar a barrel is two and a half cents a gallon at the fuel pump.

MacNEIL: So it could be --

Mr. RANDOL: So two to three dollars might be, what's that, six, eight cents a gallon. Something like that.

MacNEIL: In all its history, OPEC has never had a meeting that went on for 17 days. What was going on behind the scenes?

Mr. RANDOL: Well, people like ourselves quipped before the meeting that the best thing that OPEC could do was not even have a meeting, and just agree to roll over the formula that was agreed in August. But then the Kuwaitee oil minister, Sheik Ali K'al-Sabah, sort of muddied the waters by saying at the outset that he wanted an increase in his quota, and he was adamantly opposed to rolling over the agreement as it was then constituted. A week later, he was joined by the Saudi oil minister, who took exactly the same tack. So here were the two richest countries in OPEC with the largest monetary reserves and smallest population basically throwing a monkey wrench in what could have been a very smooth meeting that didn't even have to take place.

MacNEIL: And what do you think was behind that?

Mr. RANDOL: Well, that's an interesting question, and we my never know. But I suspect that there was some resentment on the part of both the Kuwaitees and the Saudis that the Iranian oil minister had sort of stolen the limelight at OPEC's August meeting by putting forth the proposal which was later agreed upon and which, miraculously, firmed up the market.

MacNEIL: In August, a lot of analysts predicted, some to us, that the OPEC ministers would have great difficulty renewing this agreement two months later -- meaning at the meeting that's just been concluded. Now, they had great difficulty, but they did it. Does it -- the fact they did it -- mean OPEC is getting its act together again?

Mr. RANDOL: I think yiou can make a strong case that OPEC is well along the road to getting its act together. And I don't mean to imply that they're going to be a stranglehold on prices or that we could expect $30 oil anytime soon. But I think the fact that they were able to forge an agreement, despite huge differences among them politically, culturally, financially, the fact that they agreed to keep production a million and a half barrels a day below demand and the fact that -- and this has not been in the press, but I think it's true -- the fact that they have begun to discard the notion that the price should be determined by the supply-demand balance. I think you'll see in the coming months and years that OPEC will take a more active role in managing supply, in order to keep price within a targeted band.

MacNEIL: Would you predict they will be able to renew the agreement again when they meet in December?

Mr. RANDOL: Well, I think there's a good chance that they will. There was an awful lot fo acrimonious debate about what we would consider nit-picking -- you know, very small increments that they hassled each other about. But I think what they were trying to do was set market shares for each of the 13 members of what has been agreed upon as 17 million barrel a day market. In the future, you may see them stick to those same market shares, but just adjust the total in line with what they perceive demand to be.

MacNEIL: If, as you're suggesting, OPEC is beginning to get its clout back over international oil prices to some degree, are they on their way back to being in the driver's seat and to having the kind of impact on our economy that they had a few years ago?

Mr. RANDOL: Well, I think OPEC is facing at least a two year, and possibly three year, period of very tough sledding. Because the over-capacity is huge. And the simple fact of the matter is, the available pie for them is much smaller than they would collectively like to have financially.

MacNEIL: Because all our use of oil has gone down.

Mr. RANDOL: Our use of oil has gone down, and non-OPEC supply has gone up. Therefore, their market has shrunk dramatically. But if you take, say, a 1990 view, the work that we've done at First Boston would suggest that this country alone will be importing three to three and a half million barrels a day more OPEC oil. That's by far the largest single impact on the OPEC supply-demand balance. But we would see the demand for OPEC oil in the 80 to 85% of usable capacity, which means upward pressure on prices will begin.

MacNEIL: Okay. Thank you. Jim?

LEHRER: The OPEC decision was only one of three big economic happenings of the day. New gross national product figures showed the economy doing better -- a 2.4% increase from July through September, being four times the previous quarter's increase. And President Reagan signed tax reform into law. We look at it all now with Secretary of Commerce Malcolm Baldrige and Charles Schultze, an economist who was chairman of President Carter's council of economic advisers.He is now a senior fellow at the Brookings Institution.

First to you, Mr. Secretary, on this OPEC decision. How important is that to the U.S. economy?

MALCOLM BALDRIGE, Secretary of Commerce: Well, it's important in a lot of ways. We're beginning to use more oil now as a recovering expansion in its fourth year. We have to worry about oil as a national security problem in the future. Our drillers down in the Southwest are in a very severe recession. They're actually in a depression now. I think that drilling probably -- decline has probably bottomed out or bumping along bottom now. We hope so. But that's giving a lot of our country a good deal of grief. So all of that's very important.

LEHRER: So if the price goes up, though, that helps those people in the Southwest, correct?

Sec. BALDRIGE: It would help them.

LEHRER: You agree. Charlie Schultze?

CHARLES SCHULTZE, Brookings Institution: It would sure help them. It wouldn't help American consumers. I would say, on balance, we ought not to be hoping for, certainly, higher oil prices. Now, my own guess is -- and I have to underline the word guess -- that OPEC, in the long run, as Mr. Randol said, for the next two to three years has so much excess capacity that they are going to have a hard time jacking prices up much further. So I would be fairly confident -- fairly confident -- that oil prices won't go up a lot more, and grateful because, even though it hurts the drilling industry when oil prices are low, it helps the vast majority of Americans, both business and consumers.

LEHRER: What about if Mr. Randol was right? He says that it could go up two and a half dollars -- well, it could go up six to eight cents a gallon -- gasoline. What is that -- where does that come on your scale of impact on the U.S. consumer?

Mr. SCHULTZE: Somewhere between insignificant and small. That is, it will be noticeable, but it is not large enough by any stretch of the imagination to push the economy in one big direction or another. So it is unfortunate, but it's not a major annoyance.

LEHRER: How do you see that, Mr. Secretary?

Sec. BALDRIGE: I would agree with Charlie on that. We're foregetting -- or not forgetting, but we haven't mentioned -- the effect of oil price rises on the lesser developed countries. They're having tremendous problems in paying their debt back, and there's that side to look at too. But of course it's true that the lower the oil prices, the more the U.S. consumer in general is going to be helped. I think there are other factors to be taken into account, though.

LEHRER: Okay. Let's go to the gross national product figures. Up 2.4% the last quarter. What do they mean, Charlie Schultze?

Mr. SCHULTZE: Well, my guess you could sum up by saying ho hum. That is, over the last two years our gross national product has grown at a 2.5% rate. This quarter it grew at a 2.5% rate. That is something I would call a gentleman's C. That is, it's not bad. It's passable. It keeps the unemployment rate from rising. But it's not very exciting. And the thing about that particular report that we got today, it probably didn't give you a lot of evidence one way or the other about which way the American economy is going to jump in the future. My own view is, we are not going to go into a recession. We will continue to grow. It may even pick up a little bit. But there wasn't a lot of big news in today's report that would all of the sudden tell you, hey, we're either in real trouble or we're really going to boom.

LEHRER: Mr. Secretary, your reading please, sir?

Sec. BALDRIGE: Well, I don't know what Charlie needs for kicks, but I didn't look at that as ho hum at all. After all, we're looking at a recovery and expansion that's almost in its -- entering its fifth year. There's been four years of it. That's the second longest one, to my knowledge, or shortly will be the second longest expansion since World War II. All expansions begin to peter out a little bit toward the end. This one keeps going, and it was six tenths of a percent rise in the second quarter. Now, when it comes to 2.4 in the third quarter with some indications that the fourth quarter's going to be higher. I don't ho hum that. That's very good news to me.

Mr. SCHULTZE: I think the key thing to look at in the short run is what's going to happen to the U.S. trade deficit. That's critical. Over the next year, several strong features of our economy are going to weaken. That is, consumers have been spending like it's going out of style, almost, in the last year or so. They've really --

LEHRER: Is that bad?

Mr. SCHULTZE: It's good, as long as they don't overdo it. But that may weaken. Oil prices, which were coming down, first bottomed out and have now gone up. And that really is going to mean consumers won't have as much money left over for other things. And everything else being equal, the growth of consumer spending's going to tail off. The budget deficit, after all is said and done, is going to come down next year. In the long run, that's good. But immediately, that takes a little more steam out of the economy. My own view is that will be offset, finally, by the effect of the lower dollar, the cheaper dollar, in stimulating our exports and reducing imports. And the economy next year will do rather well. But -- and it's a big but -- it all hinges almost on whether or not we economists, most of us, are right -- that the lower dollar is finally going to start boosting our exports and restricting imports. I think it will, but it's not open and shut.

LEHRER: Is that -- where is it toyou? Where is it for you, Mr. Secretary, on his thesis -- the open and shut business on the dollar, etc?

Sec. BALDRIGE: I'd agree. I think -- I don't want to say for once and all the economists are right, but --

LEHRER: That's okay. Feel free. Charlie's not too sensitive.

Sec. BALDRIGE: I think they're correct on what the dollar -- the effect the dollar is going to have on the trade deficit. I believe, actually, that we have already seem the turn in the trade deficit, that we saw the high water mark in July, and that it won't come down every month, month after month -- there will be some jigs and jags -- but that on a quarter to quarter basis, we'll see that deficitg coming down.And I also agree with Charlie that that's going to be one of the major factors in how the GNP does as a whole next year. Because the trade deficit -- the size of the trade deficit -- has literally robbed us of one to two points of potential GNP growth simply because of its size. And if that meliorates, we should get more GNP growth.

LEHRER: As a practical matter, Mr. Secretary, the GNP figure comes from your department. It comes from the Department of Commerce. Why is that such an important measurement? What does it tell us? What does it tell the experts, at least, that we should listen to?

Sec. BALDRIGE: Well, it's the sum total of the whole United States economy. It's made up of so many parts that it's possible, if you follow the parts in detail on a monthly basis, to find some significant trends. For instance, the trade deficit. That's a very important part. Consumer spending, as was mentioned before. I happen to agree that consumer spending's been very high this year. It's helped the GNP. Next year it's still going to rise, but at a lower rate than it did this year. Therefore, we have to look at what other parts of the GNP are going to help in the overall growth. I happen to think that the trade deficit, as was mentioned, and also business fixed investment is going to pick up next year. There are a jillion trends that are worthwhile studying, if they're a little boring to some.

LEHRER: When you look at the GNP, Charles Schultze, what do you look for? Is it the trade deficit now? Is that the most important thing to you?

Mr. SCHULTZE: Well, I think what you look at depends on where the economy is and where the action is. In the last year and a half, it seems to me, the thing that characterizes our GNP is that spending by Americans in general -- consumers, business and government -- has risen quite nicely, quite rapidly, tending to generate a lot of economic activity.

LEHRER: What's caused that?

Mr. SCHULTZE: Consumption, principally. State and local spending has gone up a good bit. It's been those two mainly, but also producer purchases of new equipment has gone up moderately well. Spending has gone up nicely. However, unfortunately, we've been buying a lot of it from abroad and not selling much abroad, so the total GNP has been the result of these two offsetting forces. Domestic spending on everything's been booming along, but because of our high dollar, fundamentally rising from our huge budget deficits, that in turn has meant we don't buy that -- so much of it from here as we used to. We buy from, but we don't sell abroad. Those two countervailing forces have netted out to what -- the secretary and I might disagree on the adjective -- but has been moderate growth. So I have been looking at the last year and a half at those two big components and seeing how they balance off against each other.

LEHRER: Thank you. Robin?

MacNEIL: Mr. Randol, back to you. Do you agree with the assessment they made on the impact of oil on the economic performance as a whole -- not startling, not --

Mr. RANDOL: I would think it would be fairly minimal. In fact, the work that we've done shows that what affects gasoline prices as much as OPEC prices is inventories and what I would call the role of the oil companies in widening the margin between gasoline and crude.

MacNEIL: Okay. Let's finally discuss what effects this historic tax reform measure that was signed into law today -- what effect is that going to have on the economy, Mr. Secretary?

Sec. BALDRIGE: Well, I think you have to decline --

MacNEIL: You heard President Reagan earlier in the show say that it was going to be a great boon for job growth and families and so on.

Sec. BALDRIGE: I think you have to decline whether you're talking about short term, medium term or long term. I think inevitably in a major tax revision like this, it's going to take a while for people to get used to it and figure out what to do. That means some hesitancy about buying and so forth. We've seen that in capital investment, for instance, up to date. So I think the short term, there may be some holding back. I don't think there's any question about in the long term the fact that loopholes are closed up, it seems to be more fair. All of those things are going to help in really people paying their taxes and not cheating or being afraid to put everything down. So I'm in favor of it.

MacNEIL: Charlie Schultze, a positive effect on the economy?

Mr. SCHULTZE: Positive but small. I think it's a good measure more because of its fairness, its equity. It makes people believe in the tax system more than they otherwise would. And that's very important. Economic impact positive, but it's easy to overstate it. I think the secretary's right that to the extent it has a positive impact, it will be in the long run. Because the big thing about this bill, at least that I like and many other people, is that it gets rid of some of the distortions. People aren't chasing investments just for tax purposes. They're more likely to do things for economic purposes. When you take out your pencil and try to calculate how much that is, it may not be very large, but it is positive. And over a longer run, like the secretary, I at least hope that this small positive may get even larger.

MacNEIL: What do you see about the impact of tax reform on the -- how do you people analyze this? What about the -- investment was mentioned earlier.

Mr. RANDOL: Well, from what I have seen about the tax bill, it will have a negative impact on the oil industry, which doesn't need any more negative impacts right now, due to the crash in crude and gas prices.

MacNEIL: How will it have a negative effect on them?

Mr. RANDOL: It removes the investment tax credit. It does a lot of complicated things that, frankly, even the oil company tax managers haven't figured out yet. But I mean, some of the basics have remained in place, like the expensing of intangible drilling costs, but there are aspects of it.I'm told -- one major company, for example -- told me their tax bill would probably go up 10% based on this.

MacNEIL: Another blow for the oil industry in tax reform?

Sec. BALDRIGE: Well, as was mentioned, some of the basic incentives were left there. I think -- I think yes, it's a minus, but it's not a major blow to the industry.

MacNEIL: Ten percent isn't a significant blow?

Sec. BALDRIGE: Ten percent increase in your tax? Well, it depends on from what base. A lot of those people haven't paid much in the way of taxes. And I'm not -- I'm not arguing that they should have. That they shouldn't have is the way the system was set up. But I wouldn't -- they are going through a hard time now, and none of them -- and I can understand it -- wants to pay another 10% in taxes when they're up to their elbows in alligators. But over the long haul, I don't think that's going to have a serious effect one way or the other on the industry.

MacNEIL: Charlie Schultze, would you, with your nose for Washington -- you've been around a long time there -- would you imagine that this tax bill as was signed into law today is going to stay in the shape it's in with the rates that are imposed that come into effect today for very long?

Mr. SCHULTZE: I hope not. That is, I think the biggest problem the country faces over the long un is the budget deficit. I do not think in the long run you're going to get rid of it without a tax increase. Unfortunately, but I think that's a fact. The nice thing about this bill -- it's not an easy thing to say -- but a nice thing about the bill is that it lowers tax rates so much, you can raise them a little bit without hurting people. Unfortunately, I think sometime over the next two or three years, it's inevitable those are going to have to go back a little. However, I hope that we will leave the structure of the system the same. It's a good structure. But unfortunately, I think we may have to raise those rates a modest amount.

MacNEIL: And in a word, the President has just said he would resist that down the line next year.

Mr. SCHULTZE: Like Star Wars, the President is not a --

MacNEIL: I was asking Mr. Baldrige.He's just going to have to nod, I'm afraid, because that is our time, Mr. Baldrige.

Sec. BALDRIGE: The President has and will resist tax increases.

MacNEIL: Thank you. Jim? Long Road to Tax Reform

LEHRER: President Reagan did sign tax reform into law today. It led a rocky, cat's life to enactment -- a story now told by Judy Woodruff.

Rep. DAN ROSTENKOWSKI, Chairman, Ways and Means Committee: They said out there that it couldn't be done. Well, we've done it.

JUDY WOODRUFF [voice-over]: When the joint House-Senate conference committee on tax reform finished its work in August, there was near unanimous rejoicing and completely unanimous relief over an agreement on this sweeping piece of legislation. It was an ending almost no one predicted when this kind of tax reform first surfaced four years ago. One of the few who did was New Jersey Democratic Senator Bill Bradley, who says when he introduced his so-called fair tax plan along with Congressman Richard Gephardt in the summer of 1982, he believed the country was ready for real tax reform.

Sen. BILL BRADLEY (D) New Jersey: Because the system had gotten so bad, it had bred such disrespect for the law, for rules generally. And I felt that is also combined what had historically been a Democratic tax reform position, which is closing loopholes, with the new Republican idea just to cut tax rates and forget about everything else.

WOODRUFF [voice-over]: But Bradley concedes he found few takers in those days.

Sen. BRADLEY: We proposed the bill. I talk about it constantly. It makes a little splash. Then people said, "Oh well, you know, just another bill introduced."

WOODRUFF [voice-over]: It wasn't until January '84, when a well known Republican brought up tax reform, that many people even bothered to take a second look.

Pres. REAGAN: I am asking Secretary Don Regan for a plan for action to simplify the entire tax code so all taxpayers, big and small, are treated more fairly.

WOODRUFF [voice-over]: What had elevated tax reform from a freshman Democratic senator's pet issue to a place in President Reagan's State of the Union address the year he was seeking reelection?

JAMES BAKER, Secretary of Treasury: It was a defensive measure on our part to, in effect, foreclose the option to the other side of adopting tax reform as a major campaign issue.

WOODRUFF [voice-over]: Then White House Chief of Staff James Baker says the President's men were worried that the Democrats might try to adopt tax reform as their own issue and criticize Mr. Reagan for having no plan of his own. Besides, as another key White House aid at the time points out, it was a natural for this President.

RICHARD DARMAN, deputy secretary of Treasury: He had been interested in lower rates, as he has said many times, since he was in Hollywood. And for many, many years, even before he was President, he argued the importance of lower rates.

WOODRUFF [voice-over]: Many in Congress ridiculed the idea of a year long study on tax reform. But Richard Darman, who was part of the White House team in 1984, says there was no other way to go in an election year.

Mr. DARMAN: If a specific proposal were out ther, the people would have treated it in a highly partisan way. I mean, tax reform, as such, is an enormous undertaking. Most people said it would be impossible. That we felt from the start, if it were to have a chance, it would have to be on a bipartisan basis.

WOODRUFF [voice-over]: Walter Mondale chose not to make an issue of tax reform, giving the Reagan administration breathing space to put a serious proposal together. Then Treasury Secretary Donald Regan says his department had done its own work on tax reform apart from Bradley Gephardt.

DONALD REGAN, White House Chief of Staff: Theirs wasn't nearly as complete as ours, and their economic effects -- the study of that -- had not been completed. We wanted to take the idea to its ultimate conclusion and give the numbers, as well as the conclusions on what should be done.

WOODRUFF [voice-over]: While Treasury worked in secret, a little known public lobbying group called Citizens for Tax Justice came out with a report that helped prepare the way for what would come later.

BOB McINTYRE, Citizens for Tax Justice: We put out a report on 250 of the country's biggest companies. And what we found is that over half of them hadn't paid any taxes in at least one of the first three years of the Reagan administration. We got front page headlines all over the country. People were talking to their congressmen about it. And right on the heels of our report came out the Treasury Department's tax reform proposal.

Mr. REGAN: Our plan will substantially curtail tax shelters. And we think that our recommendations will go a long way to assure the average American that the other person is being taxes on the same basis as he or she is.

WOODRUFF [voice-over]: Surprised Democrats applauded the Republican plan to eliminate most special interest tax breaks while lowering most rates. But much of the business community went into a state of shock.

CHARLS WALKER, corporate lobbyist: I didn't think it would get anywhere because, to a considerable extent, it was such a change in the basic thrust of Ronald Reagan's position. Here is a man who for years had said that the corporate tax is something passed on to people, and it's not right, and we shouldn't have it, all of a sudden saying $120 billion increase in taxes on business over the next five years in order to get lower rates.

WOODRUFF [voice-over]: White House reaction to the Treasury plan wasn't much warmer.

Mr. DARMAN: It took on every single political constitutency one could imagine, without having the rates low enough to be of countervailing appeal.

Sec. BAKER: Our reaction to it was that it was a little bit too Draconian from a political standpoint to ever have a chance of passage -- that in some respects it represented perhaps very good tax policy, but that the worst thing in the world we could do would be to have the President embrace it promptly. And so he didn't.

WOODRUFF [voice-over]: The proposal that had already been studied for a year was sent back to the drawing boards for another six months. This time, there were consultations with Congress and with many special interests who felt the first Treasury proposal had left them out in the cold. The result was a plan somewhat more generous to business and to other interest groups than the first plan had been.But that wasn't what President Reagan stressed when he unveiled it in May of 1985.

Pres. REAGAN: Talking about our historical -- or historic -- proposal to completely overhaul that old jalopy of our tax system. Replace it with a fairer, simpler, sleeker, more compassionate model -- an all-American tax plan providing new freedom, fairness and hope for all.

WOODRUFF [voice-over]: Almost everybody found something to criticize about the plan. But the man who had the most influence on the tax writing process in the Democratic controlled House of Representatives saw it as an opportunity he couldn't refuse.

Rep. ROSTENKOWSKI: Democrats recognized that, should this administration -- Ronald Reagan -- suggest reforms to the extent that he did and we not use this opportunity, we could never then be serious or at least tell the American people that we're serious about tax reform. And so the politics of it, I think, was originally the driving force. We're not going to let Ronald Reagan lay this on our doorstep and have it die there.

WOODRUFF [voice-over]: For all the political logic of going along with tax reform. Rostenkowski ran into nothing but obstacles as he shepherded the plan through a summer of hostile hearings and committee skepticism that lasted well into the fall.

Rep. ROSTENKOWSKI: I had meetings every day with membership -- different sections of the country -- convincing them that we can't drop this ball -- Democrats. Democrats had to be convinced that we could put a Democratic flavor in the bill.

WOODRUFF [voice-over]: But the changes those Democrats imposed -- primarily a higher corporate tax rate to pay for keeping several popular, existing tax breaks -- almost did tax reform in. The bill passed the Ways and Means Committee only over the objections of most Republicans on the panel. Worse still, in the House floor, Republican leaders vowed to kill it.

Rep. TRENT LOTT (R) Mississippi: We have an opportunity, ladies and gentlemen, to defeat this rule -- to kill this snake before it gets out of the hole. Because the procedure is not fair and right, and the bill is not what it should be. Let's put it under now and see if we can do better another day.

WOODRUFF [voice-over]: And put it under they did. They refused to let it even come up for a vote.

Mr. WALKER: It died a death from which legislation "never" comes back from. The rule was defeated when it came to the floor of the House. That's a procedural technique for killing legislation which works 99 times out of 100, when you don't have a Gipper to come up to the hill and turn the thing around.

WOODRUFF [voice-over]: Despite his own misgivings, the President did go to the hill to twist enough Republican arms to get the bill passed. He argued a flawed bill was better than none at all.

Sec. BAKER: What we said was, this is a -- there's a pressing need for tax reform out there. The American people want to get rid of this system. They want to reform the code. It's the President's number one domestic priority or coequal priority with reducing the deficit. Give him a chance. Let him try to improve upon it in the Senate.

WOODRUFF [voice-over]: The House passed its bill. Now it was up to the Senate to come up with its own version. But in the spring of 1986, new obstacles quickly surfaced.

Sen. BOB PACKWOOD, Chairman, Senate Finance Committee: Along about early April we began to vote in lots of new exemptions and deductions. The bill got more costly. The subsidies got more ridiculous.

WOODRUFF [voice-over]: Senate Finance Committee Chairman Bob Packwood says at that point he realized he had made a mistake in not urging major tax reform on his members.

Sen. PACKWOOD: I tried to draft a bill initially that would please them all. I put all of the little things they wanted in the bill, and I think in the end probably ended up pleasing nobody.

WOODRUFF [voice-over]: In a dramatic turnaround, Packwood completely rewrote the bill before his committee to include much lower tax rates.

Sen. PACKWOOD: I thought, well, all right, we'll give them a bill like they've been talking about, and we'll see what happens. And low and behold, I drafted the bill and gave it to them, and they were attracted to it like moths to the light.

WOODRUFF [voice-over]: There was still the full Senate and a joint conference committee to go through, as well as final passage by both houses. But seasoned Washington lobbyists like Charls Walker at that point all but gave up trying to kill tax reform.

Mr. WALKER: Twenty to nothing out of Senate Finance Committee -- a very balanced committee from the political standpoint; all the way from very conservative people to pretty liberal people, with old hands on there like Russell Long and Lloyd Bentsen, Bob Dole. No, I said this is it. Damage control.

WOODRUFF [voice-over]: Why had the bill that virtually everyone pronounced dead at one point or another survived? Senator Bradley says the public had always been for a fairer tax code, but in the past the rates proposed hadn't been low enough to compensate for taking away people's favorite loopholes.

Sen. BRADLEY: But in this, the lobbyist not only had to say don't accept this dose of pain, but don't accept this dose of pain, and therefore, don't have the opportunity to have people get this very good thing, which is the lower tax rates. And so what this was was a tradeoff between the lower tax rates and the closing of the loopholes. And they were never able to overcome the positive. Because in many cases, they themselves -- they themselves were split on this.

WOODRUFF [voice-over]: Corporate America and its lobbyists were divided on the tax bill, because some sectors would be helped by it an others hurt.

Mr. WALKER: Total corporate taxes in this legislation are supposed to go up $120 billion over the next five years. That is being borne by the capital intensive people -- our clients. Whereas, if you're in retailing, if you're in wholesaling, if you're in a business that doesn't use much capital -- you have a hamburger chain -- your taxes are going to go down very sharply. So the business community was split, and some very big corporations supported the bill. And that means that the effectiveness of business was very much reduced.

WOODRUFF [voice-over]: But everyone involved agrees the biggest factor in pushing tax reform over the top was the involvement of a Republican President who several years earlier had presided over generous new tax breaks for business.

Mr. McINTYRE: Having Reagan on board tax reform, as ultimately happened, was critical. Because you can't -- it's Nixon going to China. You need the man who made the tax system the way it is today to repudiate that in order to move forward. The Democrats were always ready, at least rhetorically, to be for tax reform. It was easy, as long as there weren't enough votes in Congress to pass it.But when you had the President coming from the right and a good contingent of liberal Democrats, that's a majority in Congress.

WOODRUFF [voice-over]: Not surprisingly, the Democrats want their share of the credit too.

Rep. ROSTENKOWSKI: In all that time that I've been here, the only time we really get reform is when a Republican suggests it.We don't get it under Democrats, because there's a strong wall of resistance that never is penetrated by Republicans. Republicans don't like reform. They protect the business community. This guy downtown is the most conservative President I've ever served under, and look at the reform that we've put together. Oh, you know, he'll be out taking all the low bows, I'm sure. But you know, Democrats did a lot in this bill.

Sen. BRADLEY: The story throughout this has been that the conventional wisdom -- which is, something like this can never happen -- always gave those of us who were advocates -- who believed that this was important for the country, for the middle class, the general interest -- the room to maneuver and to plan, which you wouldn't have had, had it not been viewed by the conventional wisdom that this could never happen.

WOODRUFF [voice-over]: Bob McIntyre of the Citizens for Tax Justice says both sides deserve credit.

Mr. McINTYRE: Every time tax reform took a hit down, it always helped it come back up stronger. When Reagan tried to weaken it, it gave the Democrats an opportunity to come in with Dan Rostenkowski and make it better. And the same thing in its own way happened in the Finance Committee when Bob Packwood was taking things down the tubes, and all the sudden was the subject of general ridicule around the country. And not only that, but Republican pollsters were finding that the Republicans were in danger of losing control of the Senate over this issue.

WOODRUFF [voice-over]: Even before Congress finished with tax reform, there were plans underway to come back next year and change it. But proponents say major changes could be a big mistake.

Rep. ROSTENKOWSKI: It's not a perfect bill. I never said it was. But at least the base from which we will be looking at fairness will be level.

Mr. REGAN: There will have to be some technical corrections, but I hope that that ends it. Unless it can be proven after this isput into effect taht we have seriously harmed some segment of the economy or some group of individuals.

Sec. BAKER: But what we shouldn't do is now, having accomplished this, set about the task of picking it apart section by section by coming in and changing provisions, arguing that this or that other sector of our economy needs a special boost and so forth. Because what that will do, that will ultimately result in an inching up or tremendous pressure to inch up the rates. And that would be totally self-defeating. Campaign Against AIDS

MacNEIL: Next, an election story about AIDS. There's an initiative on the California ballot in November that could, if approved, lead to mandatory testing for AIDS and even the quarantine of those who have the deadly disease. Such drastic measures were rejected today in a report on AIDS prepared for President Reagan by the U.S. Surgeon General, C. Everett Koop. Proposition 64, as the California ballot initiative is called, is being pressed by the followers of political maverick Lyndon LaRouche. It's being fought by a coalition that includes gays and public health officials. Peter Graumann of public station KCET, Los Angeles, has our report.

PETER GRAUMANN [voice-over]: The AIDS epidemic has hit California especially hard, claiming the lives of more than 2,000 victims, nearly a fourth of the national toll. Another half million Californians are believed to be carrying the disease, so this state is especially ripe for a ballot measure claiming to fight AIDS -- EVEN ONE BY LYNDON LAROUCHE.

LYNDON LaROUCHE: They are frightened. They are terribly frightened.Fifty percent or sixty percent in, say, in California, in San Francisco or Los Angeles, already have it -- the infection. They're sitting there thinking, "Whem am I going to die?"

GRAUMANN [voice-over]: The LaRouche initiative would add AIDS to the list of reportable diseases in California, making people afflicted with the virus subject to measures ranging from mandatory testing to quarantine and isolation. Opponents of Proposition 64 reply that AIDS is already reportable, and health officials insist that they are already taking the steps necessary to protect the public's health.

DEMONSTRATORS: Hey hey, ho ho, Lyndon LaRouche has got to go.

GRAUMANN [voice-over]: California's large and politically active gay and lesbian communities feel they have the most to lose if the LaRouche initiative passes. So they're turning out in large numbers at marches and rallies like this one in Hollywood to encourage a no vote on the referendum.

ROBYN TYLER, lesbian activist: This is not to stop AIDS; this initiative is to get the queers and to stop the civil rights movement in this country.

GRAUMANN [voice-over]: In typical California fashion, prominent members of the entertainment industry have been pressed into the political fight. Screen Actors Guild President Patty Duke has been one of the most visible opponents of Prop 64.

PATTY DUKE, president, Screen Actors Guild: Where there is ignorance, it is my responsibility to help shed the light of knowledge. It's yours too. Help them. They're scared out there. Face them. God bless you.

[clip from TV ad]

DOCTOR: Now, we've got a big problem here, and in your town too. It's AIDS. It's serious.

GRAUMANN [voice-over]: The No on 64 campaign is spending millions of dollars on television spots to convince voters that the LaRouche initiative isn't needed.

[clip from TV ad]

ACTOR: We must stop AIDS. We must stop Proposition 64.

GRAUMANN [voice-over]: To pay for those ads, No on 64 has been holding house parties where members of the public pay to be wined and dined alongside some of Hollywood's glitterati, all to the disgust of the man behind Prop 64.

Mr. LaROUCHE: You have kind of a cult group, a new age group, which is typified by Patty Duke and the freak show she put together in California.

GRAUMANN [voice-over]: Getting AIDS on the ballot has given Lyndon LaRouche, the eccentric right wing political figure with designs on the Presidency, another shot at the national spotlight. LaRouche spoke in Virginia to reporter Jeff Goldman.

Mr. LaROUCHE: I certainly did not want AIDS to come along to help my political career. As a matter of fact, I'm not a political careerist. I got into politics contrary to my natural inclinations, which are more on the scientific and related side.

GRAUMANN $0[voice-over]: In San Francisco and Los Angeles, Larouche disciples are waging the campaign to pass Proposition 64 under the acronym PANIC, the Prevent AIDS Now Initiative Committee.Most of PANIC's funds have come from a New York-based LaRouche company, CDC Distributors. Brian Lantz is co-chairman of PANIC.

BRIAN LANTZ, co-chairman, PANIC: We've got to approach this thing as a war. We have a disease. It's killing our citizens. And we have to respond with tested health measures that have been applied in the past.

GRAUMANN [voice-over]: To stop AIDS, LaRouche and his followers call for the reactivation of quarantine facilities originally built to isolate tuberculosis patients 50 years ago. People infected with the virus would be prohibited from attending school or working in restaurants, where they migh casually transmit the disease to others. These measures are not being taken, says LaRouche, because of a conspiracy.

Mr. LaROUCHE: Because we have a massive cover up through the international public health mafia, which is orchestrating false statements by local medical institutions and others, who are telling what they know to be lies. Because if they don't, their money will be cut off. Therefore, there has to be a political initiative to break the logjam, to smash the cover up, to break it open, to force government to face reality and responsibility in dealing with what is, in fact, the most deadly pandemic since the Middle Ages.

GRAUMANN [voice-over]: The LaRouche stigma has limited support for Proposition 64 among mainstream California politicians. Republican Governor George Deukmejian, generally a conservative on social issues, came out against Prop 64, but has stayed away from the issue in his reelection campaign. Los Angeles Mayor Tom Bradley, his Democratic opponent in the race, has denounced the measure as preying on the fears of the public. The only significant endorsement from outside the LaRouche movement has come from a conservative congressman -- Republican William Dannemeyer of Orange County.

Rep. WILLIAM DANNEMEYER (R) California: I think these people have come up with an initiative that makes sense, that is in the public health for us to adopt. And quite frankly, I think the reason what we haven't adopted such a proposal in our state is because the male homosexual community in California has a profound political impact on the state legislature. That community has a ring through the nose of the political leadership in San Francisco and Los Angeles. In my judgement, the health officer of Los Angeles County and San Francisco County should have been fired a year ago, because they have failed to take action to protect the public health by shutting down these AIDS factories which we sometimes call bathhouses.

Dr. SHIRLEY FANIN, Los Angeles County Health Department: You can not isolate and quarantine and bring about the desired result that this initiative says it's addressing.

GRAUMANN [voice-over]: Dr. Shirley Fanin is head of communicable disease control for Los Angeles County. Until we have a treatment to cure, when you say quarantine, you mean isolation or quarantine for life. You know, our society really, one, isn't prepared for this type of incarceration. And two, I'm sure it would be very, very illegal.

Dr. MARK MADSEN, California Medical Association: The medical community is very united around No on 64.

GRAUMANN [voice-over]: Health care professionals have taken a prominent role in the campaign against the AIDS initiative. At strategy meetings, the main topic is how to counteract the public's fear of AIDS without seeming to gloss over the epidemic's true danger. Dr. Mark Madsen speaks for the California Medical Association.

Dr. MADSEN: Obviously, the LaRouche people have a hand up on us, because the fear has created the education in the minds of many voters, and all they need to do is convince them to vote yes. And we need to inform voters about what's really happening out there, so they can then make a proper decision. I'm confident that after they really get the message and understand the message and believe the message, believe the truth, that they'll vote no on 64.

MODERATOR: What, at optimum, will passage of Proposition 64 do?

GRAUMANN [voice-over]: Physicians opposed to Proposition 64 have debated representatives of PANIC, the LaRouche group, on television and radio shows around the state. On this program, Dr. Madsen is pitted against Kushiro Ghandhi, PANIC's Southern California co-chairman.

KUSHIRO GHANDHI, PANIC: We have the worst AIDS situation in the country here in California. The California medical establishment is viewed as a joke internationally. They have created the worst situation in the United States. They don't wish to admit the fact and change their policies. Their policies have resulted in 500,000 people in California infected with this disease.

MODERATOR: Would you care to respond, sir?

Dr. MADSEN: Well, it's hard to respond to that, because it's just nonsense. The California medical community is considered a joke throughout the world? We have the top AIDS researchers, we have the top epidemiologists.

GRAUMANN: According to the latest polls, neither side appears to be getting its message across. Two thirds of the voters have yet to make up their minds on the issue. Of those who have, the LaRouche initiative is losing 26% to 10%. But whatever the outcome here, back in Virginia, the man behind Proposition 64 is claiming victory.

Mr. LaROUCHE: I'll win either way. But that's not the immediate question. What this would mean is, once you break the barrier in a high density AIDS state, such as California, you will break it around the world. What you will do is destroy the cover up.

Dr. FANIN: If we thought you could stop the spread of this disease by this, it would have been invoked two years ago, one year ago. But we know that you can't. We know it would be an impossible thing to do. And when you can predict ahead of time that something is not likely to work, then you say, "Please let us avoid this blind path."

LEHRER: Again, the major stories ofthe day. President Reagan signed the tax reform bill into law, bringing the first major overhaul to the U.S. tax system in 50 years. New gross national product figures show the economy up 2.4% last quarter, four times the growth of the previous quarter. And the Soviets kicked our five more American diplomats. Good night, Robin.

MacNEIL: Good night, Jim. That's our News Hour tonight. We'll be back tomorrow night. I'm Robin MacNeil. Good night.