Red Ink Update: August 5, 1996

Update for August 5, 1996.

Bob Dole's Proposed Tax Cut

Bob Dole's promise to cut taxes if elected comes from desperation. It is an election-year gamble made necessary because nothing else is likely to draw much attention. The tax-cut proposal includes a 15% cut in income taxes (in comparison, the income tax cuts that helped elect Ronald Reagan equaled 23%), cutting the maximum capital gains tax cut in half (from 28% to 14%), a reduction in the upper tax bracket, and a $500-per-child tax credit (a "credit" reduces the actual tax, whereas a "deduction" reduces taxable income).

Dole's gambit will probably be countered by a more modest proposal by Bill Clinton, who continues to follow the brilliant political strategy of "preempt or match" - either figure out what the opposition is going to do next and do something nominally similar before they have the chance (preempt) or, when caught by surprise, simply say you are going to do what they are going to do, only differently and better. Clinton, though, who can make the claim that tax cuts this deep are reckless (they are) will propose only small cuts that will impact mostly those in the bottom half of the income spectrum.

Dole's plan could become counterproductive. Though a political strategy like this worked for Ronald Reagan in 1980, the public is clearly more cynical about contradictory promises to balance the budget and cut taxes, especially on this scale. This may have the effect of drawing more attention once more to Ross Perot, who can again use this as an issue to galvanize his own campaign (or at least draw more attention to himself - who knows why he is running for President again). Most important, it undermines the only real political asset that Dole has - his own integrity. Dole may be inept as a campaigner, temperamental, and a lousy public speaker, but he has always been regarded as honest, even by his old adversaries in the Senate. But Dole knows what happened in the early 1980s. Ronald Reagan was swept into office with a dual promise - huge tax cuts and a balanced budget by 1983 - an attractive platform offered in speech after speech. The first promise was kept, the second abandoned, and the national debt grew from $900 billion in 1980 to $3.6 trillion by 1990.

Even without such tax cuts, the prospects for balancing the budget by 2002 are dim. Most of the necessary cuts are back loaded into the final years (true for both the Republican and Clinton budgets) and require sizeable cuts in Medicare and Medicaid. Welfare reform, the singular budgetary victory so far, was relatively easy - it was popular and generally impacted a constituency who don't vote (yet) in large numbers. Medicare is another matter. The current Republican plan, which clearly does not take into account the impact of Dole's tax proposal, requires Medicare cuts relative to program projections of $53 billion in the year 2002 alone. This is not possible without a radical overhaul. Huge tax cuts compound an already intractable problem.

The lesson has already been learned once - you cut taxes after you have balanced the budget, not before, and certainly not at the outset. Strangely, there is one person who knows that, at least privately, better than anyone else, and that's Bob Dole. This has put him back in the headlines, but at what cost to his credibility?

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