How the Plan was Born

Thursday, January 30, 1997

On Monday, August 5, 1996, Bob Dole put forward his long-awaited tax plan. The key element was a 15 percent across-the-board tax-rate reduction. The idea was in effect to repeal the Clinton tax increase by reducing revenues, as a share of gross domestic product, to what they were in 1992. At that time, federal revenues averaged 19.2 percent of gross domestic product. By 1995, that figure had risen to 20.4 percent. A tax cut of about $90 billion a year, equivalent to 15 percent of individual income tax revenue, was necessary just to make taxpayers no worse off than they had been in 1992.

Of course, a $90 billion tax cut could be implemented in any number of ways, such as sending out "rebate" checks to every taxpayer, as Jimmy Carter had proposed in 1977. But such a tax cut would do nothing for the economy because it would not change economic behavior. To do that, it is necessary to cut tax rates, which increases the rate of return on productive economic activity, such as work, saving, and investment. This was the argument made by John F. Kennedy in 1963 and by Ronald Reagan in 1980, when they both proposed across-the-board tax-rate reductions. Therefore, a 15 percent tax-rate reduction would achieve the twin goals of giving the American people tax relief and at the same time stimulating economic growth.

I brought this idea to the attention of Senator Spencer Abraham, Michigan Republican, who immediately saw the potential for a large tax-rate reduction to energize the Dole campaign. On May 8, Mr. Abraham attended a dinner with Mr. Dole that had been set up for the purpose of developing an economic agenda for his campaign. Six leading economists had been asked to come to Washington to offer their thoughts. They included John Taylor of Stanford University, Gary Becker of the University of Chicago, Charles Wolf of the Rand Corporation, John Lipsky of Salomon Brothers, and Martin Feldstein and Robert Barro, both of Harvard.

Mr. Abraham made a strong pitch for the 15 percent across-the-board tax-rate reduction as the centerpiece of the economic plan. The idea received a positive reception from the economists, as well as the other senators at the dinner. Mr. Dole asked the economists to flesh out the idea.

One reason why the economists were so receptive to the idea of a 15 per-cent tax-rate reduction is that a number of economists at the Hoover Institution at Stanford had already been working on such a plan for the state of California. And four of the economists at the May 8 meeting-Messrs. Taylor, Becker, Wolf, and Barro-are affiliated with Hoover. Thus many of the issues relating to a 15 percent tax-rate reduction had already been thought through by them.

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