Bush Held Unable to Unilaterally Cut Capital Gains Tax : Law: Justice Department tells the White House the President cannot sidestep Congress in effort to tie the levy to inflation rate.

WASHINGTON —  Dooming conservative hopes for a pre-election tax cut, the Justice Department told the White House Thursday that President Bush lacks legal authority to sidestep Congress and unilaterally order a cutback in the capital gains tax.

Only hours later, the White House announced that it would not attempt such a move, which it had described earlier in the day as being “on the front burner” of consideration among top Bush aides.

Press Secretary Marlin Fitzwater said that the White House was “disappointed” by the Justice Department opinion, which ruled out a plan for Bush to issue an executive order waiving taxes on capital gains caused by inflation. He said that Bush instead will ask Congress to approve the effective tax cut.

While initially pressed by conservatives, the idea that Bush should unilaterally “index” capital gains had been embraced in recent days by some White House advisers, who saw it as a way to show the embattled President confronting what he calls a “gridlocked” Democratic Congress.

There were indications, however, that the expression of White House disappointment may have been intended mostly to soothe proponents of what would have been an unprecedented action. Indeed, one Administration official suggested that the Justice Department rebuff might have been exactly what the White House wanted.

“No one ever thought this was legal,” the official said. “But this way, Bush can say he would have taken on Congress if only the lawyers had let him.”

A senior White House official confirmed that several top Bush advisers had objected strongly to the plan and confirmed that no agreement had ever been reached about whether the President should seek to assert unilateral power.

“Everybody you talked to had a different opinion,” the official said. “Nobody seemed to think this was happening immediately.”

At the same time, however, the ruling could reinforce an impression of presidential impotence, with the Justice Department underscoring the fact that Bush’s capital gains proposals remain incapacitated by congressional opposition.

Under the plan advocated by some advisers but rejected by the Justice Department, Bush would have tackled the problem by fiat: Effectively lower the tax imposed on profits from the sale of stocks, bonds, real estate and other investment assets by declaring that no tax would be levied on any profits attributable to inflation.

Under current regulations, an investor who purchased real estate 10 years ago for $100,000 and sells it now for $150,000 is subject to a tax on all $50,000 in capital gains, even though much of the increase is caused by inflation. The Bush plan would exclude those inflation gains.

In its formal ruling, which had been requested by the White House, the Justice Department said that neither the President nor any other executive branch official could legally revise regulations to ensure that taxes no longer would be levied on capital gains attributable to inflation.

The opinion was signed by Assistant Atty. Gen. Timothy E. Flanigan, who heads Justice’s Office of Legal Counsel. Atty. Gen. William P. Barr, who once headed that office, continues to closely supervise its work and it was assumed throughout the Administration that he supported the ruling.

Justice Department officials declined to provide details of the ruling, which was described only in a two-paragraph White House statement. But Administration officials earlier had said that the opinion had characterized the proposed White House action as legally unsound.

“It was a fairly straightforward call,” one source said.

The White House, in a written statement issued Thursday evening, nevertheless said that Bush continues to believe that such a unilateral move would represent “sound economic policy--and would be sound as a matter of fairness.”

One senior White House official said that the decision to abandon consideration of the plan was made late Thursday afternoon after aides convened to review the Justice Department ruling. “The decision was that there was no other option,” the official said, “but we regard the economic arguments made by conservative economists as very compelling.”

Among top White House officials said to have embraced some of those views was Richard G. Darman, director of the Office of Management and Budget, who reportedly argued that the plan for Bush to bypass Congress in indexing capital gains would carry economic and political benefit.

Together with a handful of allies, he was said to have contended that the effective tax cut could help to stimulate the economy and could be portrayed as a way to restore fairness to middle-class Americans penalized by inflation.

“A lot of people policy-wise would like to do it,” a top Bush aide said early in the day. “But it’s another question when your chief legal officer says you can’t. Then you’d have to pause.”

But other officials said that C. Boyden Gray, Bush’s own legal counsel, also had raised legal objections to the proposal. And other top advisers were said to be skeptical about the benefits of seeking such a confrontation.

“It doesn’t do the President any good to say he can do something that he can’t and then have that action overturned by the courts,” one Bush loyalist said. A White House official separately questioned the political benefit of a plan that might be portrayed by Democrats as an initiative aimed only at the wealthy.

“How many ordinary voters can even tell you what indexing capital gains means?” the official asked.