Dole's Tax Cuts

Sanjay Paul
August 1996

A version of this article appeared as Dole is not forthcoming about tax cuts in Business Forum, Green Bay Press-Gazette, August 10, 1996.

In an attempt to revive his flagging Presidential campaign, Bob Dole has proposed an economic plan centered around an array of tax cuts. And these are no piddling cuts either: an across-the-board 15 percent reduction in the tax rate alone would cost the Treasury $406 billion over the next six years. And adding the costs of the other proposed tax cuts - the $500 child-care credit, 50 percent reduction in the capital-gains tax rate, deductibility of Social Security taxes, repeal of the 1993 tax increase, etc. - would bring the six-year bill for the Dole plan to around $550 billion.

Critics of the plan, particularly those of the Democratic persuasion, have delighted in castigating Dole for throwing fiscal caution to the winds. The Dole plan, they say, would bring to nought the budgetary achievements of the last four years - a period which saw an astonishing drop in the federal budget deficit from around $300 billion in 1992 to the current $120 billion. Furthermore, they argue, it is the rich folks who stand to gain the most from the tax cuts. The 15 percent tax cut, for example, will cause a bigger drop in the tax bill for those earning $200,000 than for those earning $50,000. The capital-gains tax cut too, the Democrats point out with gloomy relish, leave the rich disproportionately better off.

How does Dole respond to the criticism? First, he argues, the tax cuts will spur economic growth. Taking a page from Reagan's supply-side textbook, Dole asserts that reducing Washington's bite out of household incomes will encourage families to save more. The increased savings will lead to greater investment by private firms. Subsequently, the output of goods and services produced in the economy will increase substantially. Dole envisages a rise of 3.5 percent every year - a growth rate that would distinctly raise the standards of living of most Americans.

Is this feasible? Can the U.S. economy grow at 3.5 percent without unleashing inflationary pressures? Perhaps, but it would require a significant increase in labor productivity. The current trend depicts more modest economic growth - the Federal Reserve is thought to favor something along the lines of 2.5 percent. Anything higher than that might cause the Fed to step in and raise interest rates thereby putting a brake on economic activity. Unless, as mentioned earlier, labor productivity obliges....

Dole's answer to the budget-busting charge is more nebulous. While he relies on faster economic growth, with a measure of sanguineness that is not shared even by some of his own Republican colleagues, to produce an increase in tax revenues, Dole recognizes the need to slash government spending in order to keep the deficit from ballooning. Alas, cutting government programs is not as simple as cutting taxes, and since unpleasant tidings must be kept to the minimum in an election year, Dole has not been very forthcoming about the details of the spending cuts.

It is this nebulousness that gives serious observers the willies - and Dole's critics additional ammunition. A more courageous man than Dole (or, for that matter, Clinton) would have taken the opportunity to tackle the more egregious problems in the government budget, viz. the spiralling expenditures on Social Security and Medicare. But that would have meant alienating certain powerful voting constituencies which, given his abysmal standing in the polls, Dole was reluctant to do. Instead, he has chosen to differentiate himself from Clinton by offering a sop to voters - the promise of a heftier paycheck - without providing the means for paying for it.

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