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Bob Dole's Baby Steps Toward The Supply Side


Economic Viewpoint

BOB DOLE'S BABY STEPS TOWARD THE SUPPLY SIDE

Bob Dole--a tax-cutter? I write about this with great trepidation. The chances are high that before this column goes to print, Dole will have flip-flopped again, declaring his opposition to "irresponsible tax cuts." After all, he has abandoned his own Dole-Canady bill, which would eliminate race and gender quotas in the federal government; trashed his promise to repeal the Clinton ban on selected guns; and back-burnered his pro-life stand on abortion, all in the name of political expediency.

This same expediency has now brought Dole to tax cuts. What he will find out is that choosing the easy path does not bring enough commitment to face down either the Democrats' (and the media's) class-warfare rhetoric or the Republican Establishment's deficit doom. By leading with a policy he doesn't truly believe in, Dole risks emphasizing his worst trait.

Still, I can't help crowing a bit that Dole had to turn to the supply side in order to revive his failing Presidential campaign. Dole is no doubt hoping that some of supply side's optimistic aura will attach to him. When supply side entered the fray 20 years ago, the country was certainly in a dark mood. President Carter was talking about "malaise," and stagflation seemed to doom our future. Supply-side economists revived hope by showing that rising inflation and unemployment were not an inherent feature of our economy but the product of an incorrect policy mix that could be changed. And it was. No one has seen stagflation since President Reagan cut tax rates and abandoned the policy of trying to inflate the economy to prosperity.

THE NANNY STATE. Politicians who appeal to the optimistic streak in the American character do well. No amount of denigration can hide the fact that Ronald Reagan is the envy of every politician. Dole is right to want to shed his dour image for an optimistic one.

If Dole can stick with his new face long enough, he has a chance. The nanny state has proved to be less successful than the Reagan economy. A measured step away from government entitlements toward individual wealth and responsibility is a proper political program. This is especially true with demographics turning against intergenerational-transfer programs such as Social Security and Medicare.

Would Dole's supply-side program work or just deliver a setback to deficit reduction? The plan's boost to incentives is small, compared with the 1981 tax cut, but other conditions are more favorable. Cutting federal expenditures is not as controversial as it was 15 years ago, and inflation is no longer raging. That means the Fed is unlikely to panic and run up the budget deficit with tight money, as it did in the 1980s. (The "Reagan deficits" resulted from a more-rapid-than-expected collapse of inflation that caused nominal gross national product and tax revenues to be less than forecast.)

FLAT-TAX COMPLICATIONS. Still, Dole's tax cut is barely aggressive enough to garner supply-side support. The 15% reduction in tax rates would bring the top rate down to 34% from Clinton's 40% but leave it higher than Reagan's 28%. The middle rate would fall from 28% to 24%, and the bottom rate from 15% to 12% or 13%. The incentive effects from the rate cuts in the lower brackets would be positive but not substantial.

The halving of the capital-gains tax from 28% to 14% would noticeably cut the existing tax bias against saving and investment and spur entrepreneurial activity. The expanded individual retirement accounts would also reduce the tax bias against saving, and the repeal of Clinton's tax hike on Social Security benefits would be a nice step back from the evolution of Social Security into a means-tested welfare system to which all Americans contribute but from which only the poor collect.

Dole's tax-rate reductions, however, could complicate more basic reforms, such as a flat tax. Unless government's size is cut further, it is unlikely that a flat tax as low as 12% or 13% can be implemented. That would saddle flat-tax advocates with the hard sell of a flat rate that would raise the income tax rate on the poor.

Another potential problem comes from the $500-per-child tax credit. It suggests that Dole thinks families are not helped by tax-rate reductions or that they are helped more by credits. This undermines the supply-side incentive approach. Why not give everyone a credit instead of lower tax rates? Moreover, does Dole really think that he can open his tax bill to one organized interest group without others demanding tax breaks, too?

The income tax discourages work and investment and supports a welfare system that encourages sloth. If we are going to be a stronger, more self-reliant people, we must have a tax system that enables us to look after ourselves. Two cheers to political expediency for bringing this home to Bob Dole.BY PAUL CRAIG ROBERTS


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