THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, October 7, 1996 TAG: 9610030037
SECTION: FRONT PAGE: A8 EDITION: FINAL
TYPE: Editorial
LENGTH: 99 lines
Americans have an appetite for more government than we are willing to buy. We want lower taxes without curbing entitlements, defense, environmental protection, education.
Ronald Reagan embraced supply-side dogma in part because it promised we could have our cake and eat it too. The result instead was a huge borrow-and-spend binge. Since 1981 when Reagan took office, the public debt has more than quadrupled.
Now Bob Dole proposes a supply-side rerun. The central premise of the theory is that lowering tax rates will cause people to work harder and invest more of their gains. Thus, the economy will be spurred. Taxes paid on added wages and investment income will offset some of the revenue lost to tax cuts.
In practice, the question is the magnitude of the effects. Supply-side enthusiasts regularly overstate the potential payoff. The Dole plan assumes his tax cuts would spark an extra 0.5 percent a year in growth, but Wall Street economist Allen Sinai forecasts a 0.1 percent rate.
In the four years after the Reagan tax cut, the economy expanded at a 2.4 percent rate, nowhere near the 3.5 percent rate of the '50s through the '70s that the cuts were supposed to replicate. Productivity gains during the Reagan era were about 1 percent a year, again less than half the rate during the Eisenhower era.
And under Reagan the economy was stimulated by a huge defense buildup that added 250,000 Department of Defense jobs in three years and 300,000 contractor jobs in 1984 alone. That stimulus will be unavailable this time around.
Tax cuts simply can't pay for themselves. For example, a 25 percent reduction in the tax rate actually translates into just about a 10 percent increase in take-home pay. Thus, the percentage increase in work effort would have to be 2 1/2 times the after-tax wage increase to make up the tax loss.
That didn't happen in the Reagan era. Economist Benjamin Friedman who has studied the problem at book length reports that the Kemp-Roth cuts lost about $110 billion of tax revenue in 1984 and the stimulative effect provided just $16 billion in tax revenues - only about 14.6 percent of the tax cut. Yet the Dole plan calls for an offset of 27 percent.
Furthermore, the Reagan cuts didn't have the anticipated effect on after-tax savings rates. Direct savings (as opposed to pension-plan contributions) ran at a rate of 4.3 percent from the '50s through the '70s. From 1984-1987 they ran at an anemic 0.9 percent rate.
Some flaws in supply-side theory are obvious.
You can't save if you haven't got the money to save. The average worker's weekly pay was lower in 1987 than in 1980 despite the supposed stimulus of supply-side cuts. The downward pressure has continued since. Earnings for full-time male and female workers declined again in 1995, for instance. It's true that household income rose for the first time in six years, but that is presumed to be the result of more households than ever with two incomes.
Most full-time employees can't work more, no matter the tax rate, unless they take a second job. Dole has been confusing on this issue. He claims that tax cuts would call forth greater work effort to offset the cuts. But he also argues that tax cuts giving families more take-home pay will allow parents to work less. He can't have it both ways.
Reagan-era budgeting didn't rely solely on the stimulus effects to make up the revenue shortfall created by tax cuts. It also resorted to so-called magic asterisks. It was supposed that Congress would offset a third of the revenues lost to tax cuts by making $44 billion in unspecified spending cuts.
Those savings never materialized. Politicians didn't have the stomach for cuts of that magnitude in popular programs. Republicans often blame Democrats for this failure, but the record doesn't support the notion. Reagan budgets called for 92 percent as much spending as actually took place and he vetoed just seven of 100 spending bills.
David Stockman, Reagan's budget chief, has admitted that ``Under the gun of massive budget deficits, the GOP politicians were forced to examine its programs and promises time after time. . . .They decided when all was said and done to ratify the American welfare state as it had evolved by 1980.'' Rather than cut programs, they borrowed and spent and ran even bigger deficits.
History has already repeated itself. When the GOP won Congress in 1994, it advocated huge cuts in programs including entitlements. The voting public was unenthusiastic. Congress backed down.
Yet Dole now offers another budget based on unprecedented cuts. He says he won't touch entitlements, defense or interest payments. But with them off the table, cuts of 40 percent in everything else would be needed to achieve balance - the FBI, student loans, farm subsidies, national parks.
That's because nondefense discretionary spending makes up less and less of the budget. In 1980, entitlements, defense and interest came to 59 percent of the budget. By 1987 they accounted for 73 percent. They now consume 85 percent. Getting hundreds of billions out of the remaining 15 percent of the budget is not feasible. Especially since the easy cuts have already been made as a part of previous budget-balancing efforts.
The Concord Coalition advocates the sensible approach to a balanced budget: Cut spending first, including entitlement reform. Then worry about tax cuts. Its take on the Dole plan is, therefore, instructive. The Coalition says: ``the unprecedentedly huge $548 billion tax cut over six years . . . cannot plausibly be incorporated in a balanced-budget plan.''
The Dole plan raises a red flag by providing few details of spending cuts. Instead, it relies on its own magic asterisks: a $250 billion ``fiscal dividend,'' $90 billion saved by cutting unspecified ``nondefense administrative costs,'' $46 billion saved through a 1 percent cut in ``other spending programs.''
You'd think we would have learned the supply-side lesson by now, but Bob Dole's presidential campaign is premised on one more free lunch. We'd be wise to remember the words of Ecclesiastes: ``Do not be made a beggar by banqueting on borrowing.'' by CNB