DEMOCRATS SHOWING WILLINGNESS TO CUT CAPITAL GAINS TAX.

Byline: The New York Times

After years of deriding any cuts in the capital gains tax as a handout to country club Republicans, Democrats in Congress have softened their opposition and, in some cases, have come to support a reduction in the tax, increasing the likelihood of a compromise this year on the long-running and often bitter partisan dispute.

Democrats said the change had been driven to some degree by the stunning rise in the stock market, which has left many small, middle-class investors sitting on big gains and interested in minimizing their tax bills if they sell shares.

But the political dynamic of the issue has been most changed by increasing complaints about the tax from farmers and the owners of small businesses, powerful constituencies. Those voters have received a far more sympathetic hearing from Democratic lawmakers than have the Wall Street securities firms and other traditional proponents of reducing the tax on profits from the sale of stocks, bonds, real estate and other property and investments.

``This issue has moved from the country clubs and the boardrooms to the barrooms of middle America,'' said Sen. John Breaux of Louisiana, a leading Democratic proponent of capital gains cuts, whose view would be disputed by his more liberal colleagues.

Important differences still hinder a compromise. Most Republicans want to slash the top capital gains rate of 28 percent on all profits, arguing that such a reduction would unleash new investment and create jobs and economic growth. Democrats tend to favor narrower and far less costly proposals aimed specifically at small-business owners, farmers and homeowners.

Still, because a compromise will be essential to efforts by the Clinton administration and the Republican-controlled Congress to reach agreement on balancing the federal budget, members of both parties said that enough common ground existed on the issue to reach a deal.

``There has been a significant evolution of Democratic thinking on capital gains,'' said Rep. Robert Matsui, D-Sacramento, a member of the tax-writing Ways and Means Committee who has introduced a proposal aimed at helping small businesses.

Sen. Joseph Lieberman of Connecticut, one of the few Democrats to support a Republican proposal for an across-the-board reduction in the maximum rate, to 19.8 percent, acknowledged that only a handful of his Democratic colleagues would be willing to vote with him today. ``But you're now talking about positions along a spectrum, rather than saying, `No way; this can never happen,' '' Lieberman said.

Part of the reason that Democrats in Congress appear more flexible is that President Clinton, who has never taken a strong ideological position on the issue, has made clear that he is willing to use capital gains as a bargaining chip in the negotiations over a balanced budget.

Republicans say no budget deal is possible without broad capital gains relief, although it remains unclear what trade-offs Republicans might be willing to make between capital gains and their other tax proposals, including a credit for families with children.