Cutting Taxes Gets Political

SOME shifts in taxes - especially capital-gains taxes - are liable to emerge from the election-year gamesmanship under way here.

The partisan positioning that began with President Bush's State-of-the-Union address has grown as elaborate as the circling and stomping of Sumo wrestlers before contact.

For both the president and the Democrats running Congress, the next few weeks offer a choice between each side staking out on its own moral high ground or getting something done to stimulate the economy.

The widespread view these days is that the politically correct move is to get something done.

Congress needs to act or the public will say "a pox on both your houses," says Congress-watcher Norman Ornstein of the American Enterprise Institute.

And Mr. Bush is hearing advice that using Congress as a foil will ring hollow. For an incumbent president to argue, says Dr. Ornstein, I haven't been able to get anything done because of them. Reelect me that's not a very powerful theme."

Both Bush's short-term growth package and the one produced on Friday by the Democratic leaders of the House Ways and Means Committee include substantial cuts in the capital-gains tax.

Bush's proposal cuts the maximum tax rate on capital gains at about 16 percent. The exception is for about one household in 400 - the very wealthiest - that pay a 24 percent alternative minimum tax on all their income.

The Democratic proposal would not change the top rate on capital gains, but it would cut the taxes on investment profits in some small businesses.

More important, the Democrats would index capital gains to inflation. Roughly $10 billion of taxes each year are paid on apparent profits that are due solely to inflation.

Ironically, even the most avid proponents of the growth-inducing effect of capital-gains tax cuts believe that it takes more than a year or two for new growth to result.

The only immediate impact that could help close out the recession at hand is on attitudes - building confidence in a more profitable future.

The sticking point in negotiating an actual tax bill will be the Democrats' desire, and Republican resistance, to help pay for it by raising taxes on the relatively wealthy.

The Ways and Means Democrats propose raising the top tax rate from 31 percent to 35 percent for individuals who claim more than $85,000 in adjusted taxable income and families above $145,000. For the very few at the pinnacle of the income pyramid, a 10 percent surtax would be charged on the portion of earnings above $1 million.

While Bush left out his greatest direct benefit to the middle class - a $500 tax exemption per child, the Democrats ignored his most immediate economic stimulus - a $500 tax credit to first-time home buyers.

The Democrats would give taxpayers a 20 percent credit on their Social Security wages this year and next, a value of up to $200 per wage-earner.

Bush may veto the first bill Congress sends him, but a compromise is likely by the deadline he set of March 20.

"Bush is going to want to sign a bill," says Dave Mason, a political analyst at the conservative Heritage Foundation. Like many conservatives, Mr. Mason fears that Bush will not hold his ground against higher taxes on the wealthy.