Dole Proposes to Slash Taxes, Balance Budget

Entering the most crucial phase yet of his uphill presidential campaign, Bob Dole unveiled his much-touted “plan for economic growth” Monday and rejected arguments that its linchpin--a 15% across-the-board cut in income tax rates--amounted to an election-year conversion.

Dole emphasized that cutting taxes and his long commitment to reducing the federal budget deficit were not mutually exclusive.

“There is no magic in fixing this problem,” Dole told the Chicago Chamber of Commerce. “I will reduce taxes while I am balancing the budget.”

Dole, who trails President Clinton in public opinion polls, is gambling that voters will flock to his hopeful, Ronald Reagan-style promise of prosperity without worrying too much about the budgetary arithmetic. His Democratic opponents, clearly uneasy about the effect Dole’s proposal might have on the campaign, essayed damage control.

Clinton said Dole’s tax package, which would drain $548 billion from government coffers in the next six years, would “balloon the deficit, raise interest rates and weaken the economy.”

White House Chief of Staff Leon E. Panetta distributed a June 1995 interview in which Dole said he could not understand why, “if you just cut taxes, you have this big, big revenue increase. . . . And you didn’t have to make hard choices about spending.”

The Clinton campaign immediately launched television commercials accusing Dole of “gambling with our future.” They reminded viewers that the Reagan-era tax cuts were followed by budget deficits unprecedented in peacetime.

Dole detailed his long-awaited economic agenda in a noontime speech that also contained a stinging critique of Clinton’s economic policies, which he said have yielded “lackluster” results. He condemned the president’s forecast of average economic growth of scarcely more than 2% a year over the next four years and said he could deliver 3.5%.

“That seems like a very big number to me,” said Herbert Stein, who served as chief White House economist for President Nixon. “But I wouldn’t say it’s impossible.”

Dole’s growth target is also higher than the 2% rate that many experts see as the noninflationary limit.

In his speech, Dole recalled his hardscrabble Kansas upbringing and said: “I know the importance of living within your means and I know the consequences of not doing that. Deficit reduction is in my blood and a balanced budget will be my legacy to America.”

But it is precisely Dole’s lifelong record as an ardent deficit hawk that sparked the questions about the sincerity of his call for a major tax cut, which comes at a time when he lags behind Clinton by about 20 percentage points in most national polls.

Several times, Dole confronted that issue head-on. While expressing his “great pride” in his reputation as a deficit hawk, Dole also noted that one of his “proudest achievements was helping to pass Reagan’s historic, across-the-board tax cut” while chairman of the Senate Finance Committee.

Another potential liability for Dole is that his tax-cut proposal explains only in broad terms how he would make up the huge revenue shortfall.

His advisors and aides said economic growth--stimulated by the tax cuts--would compensate for some of the lost tax dollars.

Additionally, to make up for the shortfall over six years, Dole’s plan projects $217 billion in savings by cutting non-defense federal government administrative costs by 10% ($90 billion), selling FCC spectrum airwaves ($34 billion), cutting $32 billion and $15 billion from the departments of Energy and Commerce, respectively, and reducing by 1% “other spending programs.”

When asked for one example of an Energy Department program that would be cut, Donald H. Rumsfeld, a top Dole aide, cited the travel budget of Energy Secretary Hazel O’Leary, who has been under fire for her extensive global trips. The disputed costs arising from her trips, however, involve only thousands of dollars.

In a briefing Monday, Dole’s advisors called on reporters to view the plan as a broad-based strategy aimed at stimulating economic growth by various means, including less regulation, rather than just a tax cut.

In addition to the 15% cut over three years, Dole’s plan, in “phase one,” would:

* Give middle-income families a $500-per-child tax credit.

* Halve the capital gains tax rate to 14%.

* Expand individual retirement accounts to include nonworking spouses.

* Repeal the 1993 tax increase on Social Security benefits.

* Call for a minimum 60% vote, or a “super majority,” before Congress may increase taxes as opposed to the current simple majority vote.

In the longer term, Dole said, he intends to “repeal the entire tax code and replace it with a simpler, fairer, flatter system” that will enable millions of taxpayers to do their own returns rather than paying professionals to do so.

Dole also said he intends to “eliminate the IRS as we know it” and shift the burden of proof in IRS audits so that taxpayers are “presumed innocent until proven otherwise.”

Taken together, the various elements would create “a different arrangement between the government and the American people,” allowing for a burst of growth that is not possible under current conditions, said Rumsfeld.

Dole and his strategists believe that articulating a vision for growth could be vital for the struggling candidate because many households have enjoyed little progress in incomes in the 1990s.

But others greeted Dole’s prescription with some skepticism, particularly in its promises of sustained growth without inflation and its reliance on spending cuts that are even deeper than those that were abandoned by congressional Republicans earlier this year.

“It sounds great if you believe in the tooth fairy,” said Benjamin Friedman, a Harvard economist and authority on the deficit. “This is exactly the kind of claim that the Reagan people made in the early Reagan days.”

But if analysts had doubts about some of the claims, there was little dispute on the basic concerns that Dole is trying to address in his plan. Despite an economy that has expanded for five years and created 10 million jobs, many workers feel threatened by corporate cost-cutting. In addition, a changing labor market offers fewer chances than ever to those who lack education and skill.

By appealing to such fundamental worries arising from a changing economic landscape, Dole is reaching out to working people who in the past may have viewed Democrats as more attuned to their economic concerns.

In choosing the across-the-board approach, Dole opted for a sweeping tax cut that would be felt by wage earners at all levels, rather than just the wealthy who were most affected by the 1993 tax increase.

At the same time, the pressing, political need for Dole to come up with a political stroke to recharge his campaign was widely noted. Not all observers believed that he would succeed.

“This is a Hail Mary pass--a desperate attempt to get back in the ballgame,” said Robert Reischauer, senior fellow at the Brookings Institution and a former head of the Congressional Budget Office. “I don’t think it’s going to work because the American people have not responded with much excitement to politicians who have offered them tax cuts over the last couple of years. This is the dog that won’t bark.”

Not surprisingly, White House officials agreed, and immediately seized on the fact that deficits ballooned during the Reagan era.

“We do not need to implement another version of supply-side economics that blows a hole in the deficit and basically would reverse the kind of economic growth that we’ve been able to have over the last few years because of the Clinton economic strategy,” said Panetta.

Despite such criticism, many conservatives were pleased that Dole had allied himself with the forces for economic growth in his own party.

Across-the-board cuts in tax rates, supplemented by a $500-per-child tax credit for middle-income families, clearly would put more money in the pockets of many Americans and, goes the theory, foster a boost in economic activity that would create new jobs and business opportunities throughout society.

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Financing Dole’s Tax Cut

Republican presidential candidate Bob Dole proposes to balance the budget in 2002 along with a 15% cut in the income tax rate, a $500-per-child tax credit and a 50% reduction in the capital gains tax--$548 billion in tax cuts over the next six years. Critics say many of his proposed spending cuts are illusory.

THE PAYMENT PLAN

Dole’s assumption: Projected savings

* Tax cut will generate new economic growth, adding revenue: $25 billion

* Measures already planned by congressional Republicans for welfare, Medicaid and other programs will cut spending: $39 billion

* Unspecified other programs can be reduced: $15 billion

* In addition, non-defense administrtive costs can be cut: $15 billion

* Newly available bands of the broadcast spectrum can be auctioned: $5 billion

Source: Dole campaign

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What Taxpayers Can Expect

Chart shows how four hypothetical taxpayers would be affected by Bob Dole’s tax plan once it takes full effect in its third year.

Taxpayer / gross income: Single individual, standard deduction $50,000 (all wages)

Tax, current law: $9,180

Tax, Dole plan: $7,803

Chief reasons: 15% tax rate cut: -$1,377

****

Taxpayer / gross income: Retired couple, standard deduction $80,000 (including $20,000 in social security benefits and $60,000 in interest and dividend income)

Tax, current law: $12,843

Tax, Dole plan: $9,243

Chief reasons: 15% tax rate cut: $2,000; repeal of 1993 increase on Social Security benefits: $1,600

****

Taxpayer / gross income: Married couple, one child, standard deduction $30,000 (all wages)

Tax, current law: $2,096

Tax, Dole plan: $1,156

Chief reasons: 15% tax rate cut: $300; spousal individual retirement account: $140; child tax credit: $500

****

Taxpayer / gross income: Married couple, two children, itemized deductions of $37,000 $240,000 (including $40,000 in capital gains)

Tax, current law: $54,417

Tax, Dole plan: $42,317

Chief reasons: 15% tax rate cut: $6,500; capital gains tax rate cut: $5,600

Source: Los Angeles accounting firm Holthouse Carlin & Van Trigt