DOLE AIMS TO SLASH GAINS TAX IN HALF : GOP SUPPORTS CUT AS WAY TO PUMP UP ECONOMY BY REWARDING BIGGER RISKS WITH GREATER PROFITS.

Byline: Michael Wines The New York Times

As the self-proclaimed candidate of a financially squeezed middle class, Bob Dole is proposing a drastic cut in the capital gains tax - which taps the profits that investors realize when they sell stocks, bonds, real estate and most other staples of American finance.

The Republican presidential hopeful wants to slash the tax in half, or by even more for people of more modest means. Starting in 2001, he also would tie it to the inflation rate, meaning that the tax would apply only to profits that did not stem from inflation.

Wall Street, small-business groups and real estate executives in particular have pressed passionately, and for years, for a rate cut. Republicans need little prodding; the provision is a party axiom and has been for decades.

George Bush made a capital-gains cut a centerpiece of his domestic agenda. A provision similar to Dole's was at the heart of the GOP Congress' ``Contract With America.''

Republicans argue that a capital-gains cut would pump up the economy, unleashing a burst of entrepreneurial energy by businesses willing to take greater risks for the prospect of a greater payoff should they succeed.

Dole feels so strongly about it that he briefly threatened in 1994 to hold up approval of a global trade agreement unless Congress and the White House tacked the provision onto it.

The Clinton White House, perhaps noting the ballooning number of average Americans with a toe in the stock market, has been mostly mum on the subject. But traditional Democrats say the provision is nothing more than trickle-down economics, in which the vast bulk of benefits flow to the wealthy who own and sell the vast bulk of assets subject to the tax.

They agree only on this much: The cut that Dole proposes would initially make the government a lot of money, as investors sell off long-held assets to take advantage of the new, lower tax rate. After that, it would be a consistent money loser.

Under existing law, taxes on capital gains are capped at 28 percent. The tax rate on ordinary income ranges from 15 percent for low-income households to almost 40 percent for the wealthiest.

There are some loopholes. The biggest involves homeowners, who generally pay the tax on home sales only if they fail to buy another house within two years, or if they still have profits after buying a new home. Even then, many taxpayers can exclude the first $125,000 in profit from taxation.

Dole would immediately cut the maximum tax rate on capital gains from 28 percent to 14 percent and the minimum tax from 15 percent to 7.5 percent. And he would increase the $125,000 exclusion for homeowners to a minimum of $250,000, rising to $500,000 for taxpayers who have lived in their homes for 20 years or more.

The tax rate would be indexed to inflation beginning in 2001 for assets that have been held for more than three years.

Dole's advisers estimate that those provisions would cost the government $13 billion in forgone revenues from 1997 to 2002, a relative pittance in a campaign that proposes to cut $535 billion in other taxes.

Republicans on the House Ways and Means Committee predicted this month that the changes would increase capital-gains tax revenues by a total of $3 billion in the 1997 and 1998 fiscal years, as the tax income from the increased sale of assets overwhelmed the losses from rate cuts.

From 1999 forward, the provisions would lose money - $17.2 billion over four years, the panel estimated.

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Photo: Bob Dole wants to trim the capital gains tax from 28 percent to 14 percent.

Associated Press