THE BUDGET talks are hung up on the president's insistence on cutting the capital gains tax. The Republicans are right that other issues persist, but none that matters as much as this one. This is a tax gift that shouldn't be given, a bad idea that threatens for the second year in a row to derail a budget agreement on which the president himself acknowledges the economy depends.

A gains cut would be harmful fiscal, distributional and tax policy, all three. In the short run it would churn the markets and increase revenues, but that would be illusory. In the long run it would cost the Treasury money the government doesn't have, widen the deficit the talks are supposed to close, lower the national savings rate that proponents claim it would stimulate and leave the government even less able than now to fulfill its international and social responsibilities.

All this to benefit the people least in need in the entire society: more than 80 percent of the tax cut would go to the richest 2 or 3 percent of the population. They are the ones who have most of the assets on which the gains would be realized; they are also the group whose share of the nation's income already grew most in the 1980s. A gains cut would shift a larger share of the tax burden to the rest of the population or else have to be offset by higher rates -- which the Republicans resist -- or some other increase in the burden at the top. Offset or not, the creation once again of two classes of income would represent a major step back from tax reform. No other decision did more to increase the fairness of the code in 1986 than the one, which the president would reverse, to treat capital gains the same as so-called ordinary income.

Proponents argue that all these supposed disadvantages would be washed away by the stepped-up investment and economic growth a gains cut would produce. But the growth claim of trickle-down in modern dress is itself much disputed, and in any case it is hard to see how new investment would be induced by giving the holders of assets a juicy tax break on investments already made. The right way to stimulate growth is to take the pressure off capital markets and interest rates by getting the deficit down. A lower deficit will, in the long run, be a restorative for government as well. A gains cut would be a gratuitous favor for the already-favored that stands in the way of doing something badly needed by the country as a whole. The president and the Democrats inclined to bargain with him on the issue should give it up. Their business is to cut the deficit instead.