Dole Joins Supply-Siders as Last Great GOP Convert : Economics: Kansan embraces a flatter tax, other policies. His switch from deficit hawk helps knit party.

During the nearly two decades in which battles over economic policy bitterly divided the Republican Party, Sen. Bob Dole had a joke he liked to tell. “The bad news is that a bus went over the cliff,” he would say. “The good news is that it was loaded with supply-side economists.”

Tuesday, Dole climbed aboard the bus.

In a major speech on economic policy in Chicago, Dole set aside his long-held concerns about the deficit and embraced the major tenets of supply-side policy: a “flatter tax system,” abolition of the Internal Revenue Service and a constitutional amendment requiring a three-fifths vote in Congress to raise taxes.

The speech marks a milestone for Dole, who for years was derided by supply-siders, in a put-down made famous by House Speaker Newt Gingrich, as the “tax collector for the welfare state.” But the landmark is equally significant for the Republican Party itself.

After years of debate between advocates of traditional fiscal conservatism, who emphasize the need to cut the deficit even if that means raising taxes, and supply-siders, who argue that tax cuts can generate enough growth to pay for themselves, the last leading figure of the traditional camp has surrendered.

Dole did fuzz over the terms of his tax proposal, and some veteran supply-siders question the sincerity of the old deficit hawk’s conversion to the pro-growth school. But the prolonged debate appears to be over--at least for now.

“The Republican Party now generally accepts the argument of supply-siders that tax cuts have beneficial effects,” said Jude Wanniski, an economic consultant and one of the earliest and most forceful proponents of the supply-side idea. “That argument has been concluded, and it’s now part of political history.”

Ahead, in the general election campaign of 1996, Republicans face another debate, this time with the Democrats, who will certainly argue that the tax cuts enacted during Ronald Reagan’s presidency came nowhere near paying for themselves and saddled the nation with enormous federal deficits.

As that battle develops, the Republicans will have to reconcile their new consensus on economics with their pledge to balance the budget without cutting programs on a scale that might turn the electorate against them.

Supply-side adherents attribute much of their political success within the GOP to the fateful decision by the last Republican President, George Bush, to break his celebrated “read my lips” pledge to not raise taxes. Bush once ridiculed supply-side theory as “voodoo economics,” a phrase he later tried to disavow. It is now an article of faith among Republicans that Bush’s decision to raise taxes eliminated his chance of reelection.

“What the Bush experience proves is not only that tax increases don’t work to reduce the deficit but that they are not popular among Republicans or in the country at large,” said James Pinkerton, a domestic policy adviser in the Bush White House. “Nobody who has a future in the Republican Party is talking anymore about tax increases, even just as part of a deficit-reduction package.”

Dole is certainly no exception to that rule. The Kansan demonstrated his new adherence to the faith by reciting the supply-side doctrine in his address to the Economic Club of Chicago.

“High marginal rates discourage work, reduce the rewards of entrepreneurship and encourage tax avoidance,” he said.

To be sure, in rendering his “flatter” tax proposal, Dole was not as explicit or as direct as others in his party. And some supply-siders, remembering that Dole was largely responsible for pushing enactment of the 1982 tax hike doubt his commitment to the new cause of low rates and high growth.

Still, even if Dole’s conversion is politically motivated, the fact he felt compelled to make the change speaks loudly about how far the economic policy debate within the GOP has moved.

Where once supply-siders were considered radical for talking of income tax cuts, leading Republicans now advocate eliminating the income tax altogether in favor of a national sales tax.

House Majority Leader Dick Armey of Texas recently introduced a plan to eliminate all tax deductions and credits and impose a single 17% rate on earned income. And Sen. Phil Gramm of Texas, Dole’s rival for the presidential nomination, has pledged that if he is elected to the White House, he will see to it that a flat tax “will be fully in place by Jan. 1, 2001.”

While the supply-side ideology has captivated Republican politicians, many economists remain wary, questioning the wisdom of the Republicans’ adopting a rigid position ruling out any sort of revenue hike.

Moreover, drastic changes in the tax system, while popular in theory, could ultimately spell bad news at the polls. “I think fundamental tax reform could have the same detrimental consequences for the Republican Party as the Clinton health plan had on the Democratic Party,” said Robert D. Reischauer, a Democratic economist who had challenged the economic projections put forth for the White House health reform proposal.

Many flat-tax proposals would lower taxes for people earning less than $30,000 a year or more than $200,000, but they would mean higher taxes for those earning $30,000 to $200,000, “and that’s where most Americans are,” Reischauer noted.

The flat tax, Reischauer added, is “very appealing when you are a mile or two away from it. But when you come up close and examine just what’s involved, you will find it very unpopular with the American people.”