The Bush administration's Chicken-Little cry that the budget sky is falling, while failing to force quick agreement at the budget summit, did pose a character test for Republican negotiators.

Will they insist on both retention of the 28 percent top income tax rate and a cut in the capital gains rate? Since Democrats say they cannot have both, the GOP is at a crossroads of potentially historic consequences. It can take one of the options or play hardball by forcing at least temporary meat-ax spending cuts.

Seldom has one event cast so long a shadow into the future. Decisions by President Bush and the congressional Republicans will shape economic conditions and the political playing field for the '90s.

So far, the administration and its strategist, Budget Director Richard Darman, have been less than masterful. Summoning the summit long before the effective budget deadline in August and without a stated goal bred inaction. Bush's announcement last month of willingness to increase taxes produced no progress but crippled Republican candidates across the country who wanted to campaign on the tax issue.

Nor did Darman succeed in last week's effort to stun the summit by revealing an estimated doubling of the budget deficit. The administration's own figures show future deficits declining. Supply-side economic consultant Jude Wanniski accuses the White House of manufacturing ''a sense of crisis in order to hammer out a budget deal.''

But what deal? Budget summiteers have spent much more time haggling about spending than projecting revenue. Senate Majority Leader George Mitchell (D-Maine) finally focused the tax question by repeating what he has been saying for years: If Republicans really want back the preferential rate on capital gains that was surrendered in the 1986 tax reform, they must give up the 28 percent top bracket income tax rate passed that year.

In a letter to Darman last week, Wanniski proposed a swap of a 33 percent income tax for a 15 percent capital gains rate. He even offered language for the president to justify this on grounds that ''a vibrant economy requires encouragement of capital flowing to high-risk enterprise.''

But conservatives -- including Wanniski's close friend and supply-side collaborator, Housing Secretary Jack Kemp -- are not buying. The reason is the proclivity of budget negotiations to establish rigid patterns for future talks. Past budget summits laid down the rule that deficit reduction be balanced evenly between revenue and spending. The Gramm-Rudman Act has engraved in stone that spending cuts be split evenly between domestic and defense.

The new parameter for budget fixes would be a regular increase in the top marginal rate. If the top rate is brought up to 31 percent, as a few Republicans suggest, that would be only the beginning. Mitchell wants at least 33 percent. At the budget summit last Thursday, Ways and Means Chairman Dan Rostenkowski (D-Ill.) advised that House Democrats would insist on 38 percent (which Ronald Reagan at one point agreed to in 1986).

While the Republican consensus is against raising the top rate, support for a capital gains cut is less certain. House Minority Whip Newt Gingrich (R-Ga.), probably the strongest anti-tax voice in the summit, is reported as willing to forget about capital gains. But he told us he wants both the 28 percent rate and a capital gains cut, no matter what Mitchell demands. So does Senate Minority Leader Robert J. Dole (R-Kan.).

To achieve this requires a cool head not easily spooked by opposing gunfire. On the day that Gingrich was reported telling Democratic summiteers he would support higher taxes in return for budget cuts, he told us: ''I'm ready to walk away from the summit.''

That would mean a willingness to accept temporarily the costly sequestration of spending under Gramm-Rudman and assume Democrats would blame their own leaders for the decimation of social services. But Dole flatly predicts an agreement before the August recess, which suggests dropping capital gains under the Mitchell formula unless Democrats feel forced to capitulate.

The stakes are immense. Without a capital gains cut, economic growth is endangered. Without holding the 28 percent cut, a return to bracket escalation beckons. Without a stand taken soon by the Republicans, the party's candidates across the nation can hardly campaign on the tax issue without generating more horse laughs than applause.