Reagan to Ask Cut in Tax on Capital Gains

President Reagan will propose a reduction in the capital gains tax when he submits his State of the Union message to Congress tonight, a White House source said Sunday.

The proposal will be included in a separate message on legislative requests, but will not be spelled out in the speech which the President will deliver in person at 6 p.m. PST, the official said.

The tax on capital gains, which is realized from sales of properties--generally securities or real estate--that have appreciated in value since they were acquired, was levied at a top effective rate of 20% until the Tax Reform Act of 1986 took effect. Under present law, such gains are treated like regular income, which is taxed at 28% for most taxpayers.

Reagan’s proposal does not suggest a new rate for taxing capital gains, but asks instead that the legislative and executive branches confer and agree on one.

Arguing for a reduction in the present rate, the President said in a draft of his legislative message that a lowered tax rate may result in increased tax revenues because a high level of taxation discourages sales of appreciated properties. In some cases, the President said, substantial capital gains are passed on in estates, so that no taxes are realized.

Because they are based on increases in the value of property, capital gains taxes bear primarily on wealthy taxpayers, many of whom benefited from the 1986 law, which brought the top-bracket tax down from 50% but eliminated many deductions and exemptions that added up to tax shelters for the wealthy.

A Preferential Rate

Although Vice President George Bush has urged restoration of a preferential rate for capital gains taxation, the Administration has thus far avoided a firm commitment on the question. In a campaign speech last October, Bush said reduction of the capital gains levy to 15% would “create more jobs than you can imagine.”

Under the Constitution, any change in tax law must originate in the House, which is controlled by Democrats, as is the Senate. House Speaker Jim Wright (D-Tex.) said Sunday that the House leadership “certainly will consider” a capital gains tax reduction. But he seemed skeptical in an interview with reporters covering a Democratic conference in White Sulphur Springs , W. Va., about supporting a change that would aid primarily wealthy taxpayers.

“We want to apply the rule of progressive taxation, if we can, to any recommendation that he (Reagan) sends,” Wright said. Democrats, he said, “are concerned that the President, consistently through his Administration, has requested tax cuts for the wealthiest 5% of this country.”

“Our guiding goal,” Wright continued, “should be fairness in taxation, not increasing the tax burden on low- and middle-income people.”