Dole’s Economic Plan Not Enough
Bob Dole, like George Bush, never liked supply-side tax cuts because they were the political property of Jack Kemp. Now that Kemp is no longer a political rival, Dole can have a political face lift, exchanging his dour demeanor for supply-side optimism. This is a happy development. Nevertheless, Dole will get only one cheer from supply-siders for a conversion based on expediency rather than conviction.
If clothes make the man, the new Bob Dole (if it lasts) will be a more formidable presidential candidate. Americans prefer an optimistic president who believes in them, the economy and the country. They prefer a hopeful outlook to hand-wringing about the deficit, the ozone hole and other contrived horrors that heighten anxiety and gloom.
Economic trends also are pushing policymakers to supply-side solutions. It can no longer be denied that the aging of the population means problems for Social Security. Either benefits will have to be cut or the payroll tax raised, repeatedly. Cutting benefits takes away retirement income, and raising the employment tax means fewer jobs, especially in a globally competitive world economy.
Global competition also is putting pressure on our income tax system, which penalizes saving and investment, thus denying Americans the productivity boosts necessary to protect American jobs and wages.
The old economic policy focused on redistribution and has no solutions for these problems. A balanced budget won’t solve them either, but unless they are solved, the deficit will grow as red ink tries to fill the gap between ends and means.
Dole’s walk on the supply side indicates the political establishment is beginning to recognize the need for a tax system that encourages success and self-reliance.
By cutting the capital gains tax rate from 28 percent to 14 percent, Dole’s program would greatly reduce the confiscation of private wealth that occurs when people sell their homes, businesses and farms. The lower rate also means more reward for taking risks and will spur entrepreneurs in new ventures.
By expanding individual retirement accounts, Dole’s program helps Americans to provide for their own retirement. As people become accustomed to these responsibilities, they will lose their fear of a privatized Social Security system.
Dole’s tax cut gets its supply-side visibility from the 15 percent reduction in personal income tax rates. This sounds like a bigger tax cut than it is. It would bring the top rate down from 40 percent, where President Clinton’s tax hike put it, to 34 percent, which is higher than President Reagan’s 28 percent or President Bush’s 31 percent. The middle rate would fall from 28 percent to 24 percent and the bottom rate from 15 percent to 12 percent or 13 percent.
Some noticeable incentive effects would result from the cut in the top rate, but overall the boost to the economy would be muted compared to what followed from the 1981 tax cut.
Still, it is a move in the right direction from a politician who never before thought in these terms. The problem with the income tax is that by taxing wages, salaries, interest, dividends and capital gains, leisure and consumption are subsidized at the expense of work and saving. Our tax system was designed to maintain high consumption in order to ensure full employment. It was a response to the Great Depression.
Today, the dangers are different. The productivity boosts necessary to maintain wage levels and to keep American labor from being priced out of world markets require a higher rate of saving and investment.
Getting this across to Americans will be a challenge, especially for Dole, who doesn’t radiate conviction. He will get little help from the media or from intellectuals whose belief in government programs is a secular religion.
Dole is accustomed to cutting political deals, not to leading in new directions. His caution shows in the restrained character of his tax plan. He could have better made the point by calling for a total restructuring of the tax system, abolishing the capital gains tax and replacing the income tax with a consumption tax.
Such a bold plan would meet with much more opposition, but something more forceful is needed to get the tax debate out of the hands of class warfare advocates and deficit hawks. Neither government transfer payments nor lower interest rates can shield Americans from global competition. Only a tax system that rewards success and enables self-reliance can generate the competitive economy demanded by the 21st century.
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