TAX POLICY
SPECIAL SECTION: THE PLAN THAT WASN'T:
These Are the Facts, Folks

By Michael J. Boskin

Wouldn't the Dole plan have been Reaganomics all over again? Voodoo Two? Hoover fellow and Stanford economics professor Michael J. Boskin points out that Reagan's tax cut wasn't voodoo in the first place-and that Dole's plan wasn't black magic either.

Bob Dole's comprehensive economic growth program was met by ferocious and disingenuous attacks. "Voodoo Two! Dole is claiming the tax cuts will pay for themselves." The same argument was hurled ferociously at President Reagan in 1981 and has been used to try to discredit Reagan's policies ever since. The charge is simply fallacious. First, the Dole program assumed that a modest 27 percent of the revenue would be recouped by some combination of higher incomes and less tax sheltering.

The historical evidence from the 1980s tax cuts, and the symmetric evidence from the 1990s tax increases, suggests that the figure was more likely 40 percent to 50 percent. Thus the Dole assumptions were conservative.

Second, Reagan never said his tax cuts would pay for themselves. The Reagan taxes also assumed a modest revenue reflow. What happened in the 1980s was that the tax share in the economy was stabilized, not reduced, by tax cuts and indexing of tax brackets. The revenue reflows from the rate cuts were substantial, but not sufficient overall to pay for themselves. The culprit for the deficits in the 1980s was that spending went up, not down, because Congress would not control it.

The savings in the Dole plan, not only to finance the tax cut but to balance the budget by 2002, came from slower growth of overall spending, including some outright cuts. About two-thirds of these were expressly laid out in the Dole program-the $393 billion in the 1996 Congressional Joint Budget Resolution.

Of the remaining approximately $200 billion to get to a balanced budget, Dole laid out a variety of potential options. A 10 percent across-the-board reduction in the administrative expenses of government would have saved $90 billion, for example.

The charges that the Dole plan was vague are thus simply ludicrous. Dole was far and away the most specific any presidential contender had been in history. Compare his plan with Clinton's 1992 Putting People First plan, almost all of which was just hyperbolic rhetoric. When costed out, Clinton's program would have produced a revenue shortfall of between half a trillion and a trillion dollars. That is one of several reasons Clinton pushed the largest tax increase in history rather than his middle-class tax cut.

No one suggests that the spending constraint would have been easy, but surely it would have been within the grasp of a President Dole, receiving budgets from a Republican Congress, able for the first time to use a line-item veto to reject even Republican pork.

The Dole plan made sense. The numbers were credible. As Sergeant Joe Friday on the old television series Dragnet used to say, "Just the facts." Well, those are the facts, folks.

Michael J. Boskin is a senior fellow at the Hoover Institution and the T. M. Friedman Professor of Economics at Stanford University. He is also a research associate at the National Bureau of Economic Research, serves on several federal advisory panels, and advises heads of state, finance ministries, and central banks around the world. Among other posts, he served as chairman of the President's Council of Economic Advisers from 1989 to 1993.