Republicans have proposed reducing the top capital gains tax rate to 19.8 percent. Although the capital gains tax usually is portrayed as a tax on the rich, many rich investors have developed techniques to avoid it, while middle-class taxpayers are stuck with paying it. For example:

• If an investor sells stock for $1 million more than he paid, he would normally pay a tax of 28 percent or $280,000 on it.

• However, if the investor borrows an equivalent amount of stock from his broker and sells it, the IRS assumes he still owns the original stock.

• Then the investor pays interest to his broker, and at his death his heirs repay the loan with the original stock, thereby avoiding capital gains taxes entirely.

No one knows how much revenue is lost through such tax strategies, but the result is that most capital gains taxpayers are middle class.

• In 1994, nearly eight million taxpayers paid capital gains taxes.

• Nearly 75 percent of them had total annual incomes of $75,000 or less, and more than one-third earned less than $30,000.

• These taxpayers realized 24.4 percent of net capital gains, while those with annual incomes between $75,000 and $200,000 realized 27.5 percent, and those with incomes over $200,000 realized 53 percent.

Investors have been increasingly reluctant to take their gains since capital gains tax rates went up in 1987, discouraging investment and slowing the growth of productivity and wages.

• From 1987 to 1994, the Standard & Poor's index of 500 industrial stocks rose a whopping 95 percent, yet annual realizations fell by more than one-third.

• The Joint Economic Committee estimates that $1.5 trillion in accrued gains has been locked in or shunted into tax-free investment strategies since 1987.

Since the 1987 tax hike, average weekly private-sector pay has declined 6 percent, while from 1982 to 1986, during which the top capital-gains rate was slashed from 49 percent to 20 percent, wages rose 1.8 percent.

Source: Ed Rubenstein, "Right Data," National Review, January 29, 1996.