The Bush Administration's current drive to cut the tax on capital gains is part of a larger economic policy agenda that, if enacted, will fundamentally change the nation's tax system while swelling the federal budget deficit--all at the expense of middle- and lower-income Americans.

The Administration has persuaded the House (and now awaits a Senate vote) to cut the capital-gains tax, at a net cost of $21 billion over 10 years. Bush also wants "incentives" for savings, such as expanded Individual Retirement Accounts (IRAs), arguing, against a mountain of contrary evidence, that this will stimulate personal savings. Treasury Secretary Nicholas F. Brady has proposed a cornucopia of costly corporate tax breaks, including a deduction for stock dividends that would cost $40 billion a year.

To deal with the budget-busting impact of these changes, the President's team is likely to seek enactment of a regressive national sales tax similar to the value-added taxes assessed in Europe.

Unfortunately, some key House and Senate members are receptive to these ideas. The Democratic congressional leadership had already endorsed expanding tax breaks for IRAs. And Senate Finance Committee Chairman Lloyd Bentsen has said that "there'd be a good chance" for enacting a national sales tax if Bush gave the plan his full support.

These proposals will all swell the deficit. They will all contribute to a further shift of wealth from the middle class to the wealthy. None of them will increase savings or reduce the cost of capital.

These proposals are on the table because the 1986 Tax Reform Act has been an economic success but a political failure. Although tax sheltering is down and both savings and investment are up since the tax bill was enacted, the public has never been convinced that the Reagan Administration and Congress did the right thing three years ago.

Public skepticism has left tax reform vulnerable to special-interest lobbyists who want pre-1986 tax breaks restored in the name of helping business capital formation.

Advocates of capital formation point with alarm to our high real-interest rates and our low national-savings rate. Capital costs in the United States are indeed higher than in Japan and West Germany. But the primary cause is Washington's excessive borrowing--to cover the debt run up by the supply-side tax cuts of the early 1980s.