Rabin Executes About-Face on Tax Issue : Israel: Prime minister now favors cancellation of the capital gains tax that triggered drop in stock values.

Prime Minister Yitzhak Rabin reversed his stance and said Monday that the government now favors cancellation of the unpopular capital gains tax.

Politically, the controversy over the tax has eroded Rabin’s credibility at a critical juncture in the peace process with the Arabs and at a time his popularity is declining because of continuing terrorist acts and governmental infighting.

The tax was to go into effect Jan. 1 but had not been implemented. Criticism of the measure was partly to blame for the collapse of the Tel Aviv Stock Exchange in the past year, when it lost 40% in value.

Finance Minister Avraham Sohat, apparently acting under pressure from Rabin, told reporters the tax had lost the support of his fellow ministers, parliament and the governing Labor Party.

He said the tax had become a “political tool to strike at the government. . . . I feel comfortable recommending we cancel the tax.”

After years of promising there would be no stock market tax, Rabin agreed to the levy at Shohat’s urging six months ago, arguing it would help fight inflation. Later, Rabin backed away from that argument and implied he was misled by economists.

The initial proposal, presented in August, would have imposed a 10% levy on all profits from selling stock with no compensation for losses.

The announcement led to a one-day plunge of 10% in the stock market index, worsening a slide that began earlier in the year.

Responding to heavy criticism that the plan could have led to taxation on losses, the government then proposed letting investors opt for a 20% tax on net profits only.

The Tel Aviv Stock Exchange rose about 5% Sunday because of rumors the tax would be canceled. Trading was sluggish Monday and had closed by the time of the announcement.