By refusing to index capital gains for inflation, the government taxes income gains that are not real. It gets the revenue and leaves those who have invested in the country's future holding the empty bag, say observers.

Here is an example of how that happens.

• Say you bought a farm for $100,000 in 1975, then worked it for 20 years.

• In 1995, you decided to retire and sold the farm for $300,000 -- realizing a $200,000 capital gain.

• You owe 28 percent ($56,000) of the profits to the tax man but the consumer price index has increased 183 percent over the period.

• So after inflation, you've only made $17,000 in real profits; you'd have to have sold the farm for $283,000 just to break even.

The $56,000 you must pay the government under the current system means that you have actually lost money on the sale -- an effective tax rate of over 1,000 percent. Had the capital gains tax rate been indexed for inflation, the payment to the government would only have been $4,760.

Tax legislation which emerged from the House Ways and Means committee included a provision to index capital gains. The Senate version does not. President Clinton has said he would not sign a bill which indexed -- claiming it would be too costly. Advocates of tax-fairness say reducing the cap gains rate or indexing for inflation would cut the cost of capital and spur growth.

Source: Perspective, "The Most Unfair Tax," Investor's Business Daily, June 23, 1997.