PLAN WOULD ALTER CAPITAL GAINS\Plan closes loopholes in capital gains tax.

Byline: Floyd Norris The New York Times

Capital gains taxes are back on the table in Washington, but the newest proposal is aimed at forcing wealthy investors to pay more to the government, rather than allowing them to pay less.

President Clinton, who has resisted efforts by Republicans to reduce the capital gains tax rate, instead will propose measures today to close what he sees as loopholes in the tax, according to people who have been briefed by administration officials.

While it is unlikely that the proposals will be adopted in an election year, they could change the tenor of the capital gains debate. The administration may be hoping for a compromise in which the tax rate on capital gains is cut while loopholes are closed. And just making the proposal is likely to cause anger and anguish on Wall Street while giving Clinton a possible campaign issue.

The proposed changes would end the practice of allowing investors to say the shares they are selling are the ones that cost them the most. Instead, they would be required to compute profits based on the average cost of the shares they own.

At the same time, the proposal would bar techniques used on Wall Street that enable some investors to cash in while deferring or completely escaping capital gains taxes. And the administration is expected to argue that it would significantly reduce the complexity of the tax law and of computations that investors now must make.

The likely effect would be to raise taxes on sophisticated investors. But it could result in lower taxes for some investors who do not know how to structure transactions to take advantage of the current tax rules.

If enacted, the proposals are expected to bring in billions of dollars in additional taxes, although the administration's exact revenue estimate could not be learned. One reason for the proposal may be to reduce the apparent deficit in the president's budget.

On Capitol Hill, Republican aides said they were willing to work with the White House on the issue, but they said any change that might be interpreted as a tax increase would not be politically acceptable.

Last year a cut in capital gains taxes appeared to be a sure thing, thanks to very strong Republican congressional support, with only the timing uncertain.

But the atmosphere for such a cut worsened after a Republican presidential primary battle that saw Pat Buchanan score surprisingly well with attacks on Wall Street and the idea that investors were getting rich while workers were being laid off. Even a rejected plan to close a loophole enjoyed primarily by large investors might do Clinton some good on the campaign trail.

While some tax provisions are made effective on the date they were proposed, the Clinton proposal to require average-cost accounting would not take effect until 30 days after it is signed into law by the president.

It is conceivable that a capital gains compromise could give investors a period with the best of both worlds: a lower rate that took effect immediately while the loophole-closing provisions were delayed.

That in turn could prompt a wave of selling during the window period, providing a windfall of tax revenues for the Treasury and possibly putting pressure on stock prices.

The current law provides a top tax rate on long-term capital gains of 28 percent, well below the 39.6 percent top rate on ordinary income. The tax cut bill passed by Congress but vetoed by Clinton would have cut the maximum rate on capital gains to 19.8 percent, half the ordinary income rate.

The change proposed by Clinton would affect investors who buy and sell such securities as stocks, bonds, options and mutual funds.