Plan on Capital Gains May Be Shelved : Budget: Bush defends the concept, but doubts he will be able to offer the tax cut proposal, fearing that it would increase the federal deficit.

President Bush expressed doubts Tuesday about his longstanding proposal to cut taxes on capital gains, adding credibility to earlier hints by senior Administration officials that he might drop plans to press again for the tax cut.

“I haven’t changed my view that capital gains (tax cuts) would be stimulative” to the economy, Bush said at a press conference with newspaper editors from around the country. But under the budget agreement reached with Congress this fall, he added, he might be prevented from proposing the tax cut because it would increase the federal deficit.

“I haven’t given up my philosophical commitment,” Bush said, “but we’re faced with this practical problem as to what we can do.”

Several senior Administration officials have made similar statements in recent weeks, but it was the first time Bush himself had expressed doubts about the future of cuts in tax rates on capital gains--profits from the sale of stocks or other assets.

Overall, Bush said, the deficit, swollen by the costs of the Persian Gulf deployment, is likely to reach $300 billion, despite the tax increases and spending cuts agreed to in the budget deal.

White House officials, however, stressed that Bush has not made a final decision on the tax cut plan. “We’re reviewing various options” about how the issue could be handled, one senior official said.

Within the Administration, conservatives have advocated the tax cut, arguing that it would stimulate the economy by increasing investment. Other aides, however, oppose the idea, noting how effectively Democrats used Bush’s plea for a cut in the gains tax over the last year to paint the White House as favoring the rich at the expense of the poor and middle class.

Because nearly all capital assets are held by people whose income is in the top 10%, a tax cut on the sale of such assets overwhelmingly benefits wealthy Americans. Bush, however, argues that the rate cut would indirectly help the less affluent by stimulating the economy and creating more jobs.

The President’s “practical problem” in pushing the rate cut is an ironic example of the real constraints the budget agreement puts on new proposals by both Congress and the White House. Under the budget agreement, any new program that would increase the deficit, whether a tax cut or a spending measure, must be offset by some corresponding measure to reduce the deficit.

White House budget officials designed those provisions of the agreement to keep congressional spending habits in check. But, as Bush’s aides are now finding, the agreement, which has the force of law, can be a two-edged sword.