The Post was correct to argue that a cut in the capital gains tax rate would lose money in the long run, undercut tax reform and exacerbate income inequality {"Sen. Mitchell on Capital Gains," editorial, July 16}.

However, The Post also argues that capital gains should be indexed for inflation. In fact, investments that appreciate are already taxed less than investments that pay interest. Inflation doesn't change things, since inflation eats into interest as well as capital gains.

Suppose an investor has a choice between investing $1,000 in either a money-market fund that pays 10 percent interest, or shares of stock the price of which rises by 10 percent per year. In 10 years, the stocks would be worth $2,594 (ignoring dividends). After a 28 percent tax, the investor would have $2,147.

With the money-market fund, the investor would have to pay a 28 percent tax on the interest earned every year. Even if the remaining interest were reinvested, the investor would still have only $2,004 after 10 years. This is because yearly taxes reduce the interest on the money market fund from 10 percent to 7.2 percent, while the stocks increase by a full 10 percent per year and are taxed only when sold.

Even though both investments pay the same 10 percent per year, our current system of capital gains taxation makes the stocks the better long-term investment. Increasing this preference by "indexing for inflation" would have the same drawbacks of a simple cut in the capital gains tax rate. DAVID M. FRANKEL Research Associate Economic Policy Institute Washington