Negotiators Reported in Tax Accord : Budget: A breakthrough is reached on capital gains and top-bracket rates. Social Security remains on the table as talks grind on.

In a major breakthrough, budget negotiators tentatively agreed Saturday night on a bipartisan tax package that would scrap the capital gains tax cut sought by President Bush along with top-bracket tax rate hikes favored by Democrats, according to sources close to the talks.

White House and congressional bargainers, seeking to head off $85 billion in automatic spending cuts due Monday, endorsed a proposed tax incentive for investments in new businesses and a limit on deductions for people with incomes above $100,000, the sources said.

The negotiators also rejected any freeze in Social Security cost-of-living adjustments, but were considering increasing the tax on Social Security benefits for those with retirement incomes above $25,000 a year for individuals and $32,000 a year for couples, the sources said.

Even so, final agreement on a plan to reduce the federal deficit by $500 billion over five years remained elusive as the bargaining extended into the early morning hours today. Besides taxes, the negotiators must approve significant reductions in federal benefits, domestic spending programs and defense outlays. Difficult issues involving enforcement--in particular, how to make Congress abide by spending ceilings--also remained unsettled.

The eleventh-hour talks were aimed at devising a longterm deficit-reduction that would avert paralyzing reductions in government services and furloughs of up to 1 million federal workers beginning Monday under the terms of the Gramm-Rudman budget law.

The breakthrough occurred after White House negotiators abandoned efforts to cut the maximum tax rate on capital gains to 15% from 28%, and Democrats shelved their counterproposal to raise the top income tax rate closer to 33% from 28% to offset benefits for the wealthy.

Instead, the negotiators tentatively agreed to provide a tax deduction of up to $12,500 a year for investments of up to $50,000 in new firms with equity of no more than $50 million, according to sources.

“It’s coming together,” said a Democratic aide to one of the negotiators.

But another Capitol Hill aide said it was not certain that an agreement would be wrapped up by the time the House and Senate assemble today to consider legislation to delay the Gramm-Rudman spending cutbacks and keep the government running temporarily.

In New York, White House spokesman Marlin Fitzwater said earlier Saturday night that the budget talks could either be resolved or remain deadlocked, judging by reports sent to the President at that time.

During the day, Bush said during meetings at the United Nations that the bargaining was “like pulling teeth,” but he said both sides were getting “closer and closer.”

Federal employees were told to report for work as usual Monday, but they were warned that all but essential workers might be sent home if there was no resolution of a budget crisis that has defied a solution during more than four months of high-level negotiations.

Details were sketchy about the eleventh-hour bargaining, but a key Republican senator and a top Democratic lawmaker said the accord would not include a three-month delay in Social Security cost-of-living adjustments suggested by White House officials earlier in the talks.

Even so, it remained possible that budget negotiators might agree to increase taxes on more affluent Social Security beneficiaries.

“We’re not going to change the cost-of-living index,” Sen. Pete V. Domenici (R-N.M.) said in a television interview. “We’re not going to freeze it.”

Rep. William H. Gray III of Pennsylvania, the third-highest-ranking Democrat in the House, agreed that Social Security inflation adjustments would continue untouched. But he cautioned that other aspects of the budget package remained up in the air.

“Things hit the table, bounce off and come back again,” said Gray, who was also interviewed on CNN’s “Newsmaker Saturday” program. “So you really don’t know what’s going to be in the package until there’s a final shaking of hands and a signing-off.”

Bush’s persistent call for a capital gains tax cut--and Democratic demands for offsetting increases in taxes paid by upper-income Americans--had been a key stumbling block as weary negotiators tried to resolve remaining differences before the fast-approaching deadline.

Participants in the discussions on Capitol Hill said they were looking at alternatives to a broad cut in capital gains taxes on investment profits in an effort to find other means of providing incentives for new business investment.

Both Democrats and Republicans said that a decision to set aside the bitter debate over capital gains could clear the way for a settlement of other unresolved issues.

Senate Minority Leader Bob Dole of Kansas, asked if capital gains might be removed from the bargaining sessions, responded: “We’re looking at other options. . . . We’re looking at a lot of options, growth options.”

And House Speaker Thomas S. Foley (D-Wash.) indicated that Democrats were adamant that any capital gains tax break, which primarily would benefit wealthy investors, must be offset by higher income tax rates for richer taxpayers.

It appeared that Bush dropped his yearlong quest to include a capital gains tax cut in the budget package rather than go along with a tax increase for high-income Americans that Democrats favored but Republicans strongly opposed.

“We’re looking at alternatives to a capital gains tax rate change and a general rate change,” Foley had told reporters before joining the negotiations Saturday afternoon. “We haven’t actually concluded anything yet.”

Despite the difficulty of forging an agreement acceptable to both Republicans and Democrats, budget leaders remained optimistic that they would reach their goal of reducing the deficit by $50 billion in the fiscal year that begins Monday and by $500 billion over the next five years.

In view of the brighter prospects, Domenici said, Bush should pull back from his threat to trigger automatic spending cuts on Monday as called for under the Gramm-Rudman budget law.

“I think we are close enough to getting an agreement that I personally do not believe it ought to be implemented,” Domenici said, “because we will work it out.”

If an accord is reached by tonight, Gray said, Congress could pass a bill to continue government spending at current levels while lawmakers work out the details within the next two weeks.

But there was widespread concern among the budget negotiators that a package of deep spending cuts and tax increases--even if backed strongly by the White House and the bipartisan leadership of Congress--will face strong opposition from lawmakers worried about their reelection prospects on Nov. 6.

“When you are talking about the range of $120 billion in net domestic cuts over five years, that’s tough business,” Gray said. “Everybody wants to have deficit reduction, but nobody wants to pay the price.”

One apparently unresolved item is a Democratic proposal to tax a greater share of Social Security benefits paid to upper-income retirees. For elderly individuals with incomes above $25,000 and couples above $32,000, half of Social Security income is currently subject to taxation. Democrats have suggested raising the limit to 85%.

But many lawmakers are wary of tampering with Social Security at all. Congress’ last attempt to raise taxes on more affluent retirees, designed in 1988 to help finance health benefits for “catastrophic” illnesses, produced such a strong backlash that the law was repealed barely a year later.

Lawmakers, however, will not have to vote today on the contents of any budget agreement. The House and Senate were called into session primarily to approve stopgap legislation to postpone the Gramm-Rudman spending cuts and authorize the government to keep running at current levels.

This year’s long battle over the budget has delayed congressional action on the 13 regular appropriations bills for 1991. No spending measures have passed both houses and been sent to the President for his signature.

If there is a budget accord, Congress will be forced to devote the final days of the current session to a hurry-up effort to limit spending and raise taxes to the levels called for under the agreement.

Despite their differences over policy, two of the participants in the negotiations were united in at least one cause.

White House budget chief Richard G. Darman and Senate Majority Leader George J. Mitchell (D-Me.), both from New England, are big fans of the Boston Red Sox, now two games ahead of the Toronto Blue Jays in their battle for the American League East championship.

A television set outside the negotiating room was tuned to the Red Sox-Blue Jays game. A cheer erupted when the Red Sox won in the bottom of the ninth inning Friday night, one of the few moments when reporters actually learned what the participants were doing during their endless bargaining sessions.