Capital Gains Compromise May Be Near : Budget: Foley says Democrats would accept cuts if other taxes on wealthy were raised. GOP concedes need for balance.

Last May, when President Bush first called for budget talks between the White House and Congress to reduce the mushrooming federal deficit, the central dispute between Republicans and Democrats was not really over tax increases but whether to cut capital gains taxes on investments. Four months later, after endless debate back and forth, it still is.

But as the budget negotiators entered their ninth day in seclusion at Andrews Air Force Base near here, there were finally some hints of a possible compromise.

House Speaker Thomas S. Foley of Washington made it clear Democrats would accept a cut in capital gains--taxes on the sale of such assets as stocks, bonds and real estate that are largely paid by wealthy investors--if Republicans go along with higher taxes on the rich to make the overall tax system more progressive.

“Capital gains is a proposal that the President strongly supported,” Foley said in an interview Sunday on NBC’s “Meet the Press.” “We could conceivably agree to (a reduction in the tax) if there was a balancing burden-sharing by high-income, wealthy taxpayers who are going to get the bulk of the benefit of the capital gains reduction.”

And Republicans, whose initial tax proposals would have provided a windfall to every taxpayer making more than $50,000 while boosting taxes for those with incomes below that level, now concede they must ensure that lower- and middle-income groups come out at least no worse off than the rich.

“We have to have a balance. We have to have progressivity,” said Senate Republican leader Bob Dole of Kansas. “And I think we’re going to have it.”

In a three-hour negotiating session Sunday night, however, bargainers fell into a dispute over spending rather than taxes, an aide said. Democrats argued that they could no longer support earlier plans to curb Medicare spending sharply and require the elderly to pay a greater share of the cost.

The acrimonious talks, which suggested negotiators are still a long way from resolving their differences, are scheduled to resume this morning.

On the central issue of capital gains, Dole hinted that the White House is seriously considering a proposal to accept stiffer taxes on the wealthy--perhaps through higher income tax rates or a surtax on the richest taxpayers--in return for a lower capital gains rate, which Republicans believe would stimulate the sagging U.S. economy.

“I think it’s fair to say that that’s in the process right now,” Dole said.

Capital gains “will be offset so that the system does not get less progressive,” agreed Sen. Phil Gramm (R-Tex.) in an interview on ABC’s “This Week with David Brinkley.”

A private study prepared by the nonpartisan Joint Committee on Taxation suggested that raising the top income tax rate to 31% from 28% in conjunction with a cut in the capital gains rate would keep the distribution of income taxes roughly the same as it is today.

But Republican negotiators also argued that the Democrats who control Congress are demanding too high a price for their acquiescence to a capital gains tax reduction.

Gramm, for example, said he would oppose raising income tax rates. “What the Democrats want--and I mean the people that are in the negotiation--is they want a dramatically more progressive tax cut. And that’s an agenda quite aside from the budget summit.”

The struggle over capital gains boils down to a fundamental dispute between Republicans and Democrats over whether to continue or reverse former President Ronald Reagan’s economic policies of the 1980s.

Republicans believe that earlier “supply-side” tax cuts targeted mainly at the wealthy fostered an investment-led economic recovery after the stagflation of the 1970s. They favor another such shot-in-the-arm to prevent the economy from falling into a recession after almost eight years of steady growth.

Democrats believe the economic prosperity of the 1980s was purchased primarily at the expense of future generations through excess borrowing. They contend that little of the wealth generated over the past decade trickled down to middle- and lower-income families.

Spurred on by the success of a best seller, “The Politics of Rich and Poor,” a Populist tract by Republican iconoclast Kevin Phillips, Democrats argue it is now time to reverse course.

But Democrats have been fighting mostly a rear-guard action against Bush, who campaigned in 1988 for a capital gains tax cut.

Last year, many rank-and-file Democrats deserted their congressional leaders to support the White House. Majorities in both chambers backed a reduction, but it was blocked in the Senate on a rule requiring a larger majority.

The goal of the current budget talks is to reduce the deficit for the fiscal year that begins on Oct. 1 by $50 billion and wipe out about $500 billion in red ink over the next five years.

Negotiators have agreed to raise taxes and fees about $130 billion over that five-year period.