Dole is sorely tempted to forget everything he knows about the 1980s tax cuts. Here's a reminder.

Dole is sorely tempted to forget everything he knows about the 1980s tax cuts. Here's a reminder.

(1648 words, plus links)

By Jodie T. Allen

All his career, Bob Dole has stood for fiscal conservatism and balanced budgets. Most famously, he was almost alone among Republican leaders in his caustic skepticism about the supply-side economics of the 1980s. Now, political and economic advisers are urging the Republican presidential candidate to take off his green eyeshade, push aside that unappetizing bowl of budget cuts, and scarf down a tasty dose of tax-cut rejuvenator. Just the tonic for anemic poll numbers. And Dole is tempted. He reportedly will endorse some kind of broad-based tax cut in July.

Like Dole, the voters know better. But like Dole, they are tempted, too. A persistent majority of Americans piously tells pollsters that budget-deficit reduction is more important than tax cuts. "Yet," says Brookings Institution economist Barry Bosworth, "the politicians clearly believe that people are lying--and the election results tend to support the fact that they are lying. When they vote, they want a tax cut."

Of course, nobody is out there urging tax cuts instead of deficit reduction. And certainly no enthusiast is presenting tax cuts as a deficit booster. On the other hand, few (outside the Wall Street Journal editorial page) are still brash enough to claim that tax cuts could actually raise tax revenues. Many "old school" supply-side economists, such as Ronald Reagan's first Council of Economic Advisers chairman, Martin Feldstein, never did endorse the so-called Laffer Curve, that cocktail-napkin art purporting to show that big tax cuts would soon pay for themselves. The "loose talk of the supply-side extremists gave fundamentally good policies a bad name," Feldstein complained in 1986.

Now, though, Feldstein is reported to be among a group of well-known economists urging Dole to adopt a so-called "pro-growth" tax strategy, meaning substantial tax cuts. How they are to be paid for is unclear. The promise of painless redemption is there--if not quite explicit. But, unlike the last time we had this argument, in 1981, there is the record of the 1980s to show what happens when the supply-siders get their way.

Sen. Spencer Abraham, R-Mich., is an ardent advocate of a 15-percent across-the-board cut in tax rates. "Can we reconcile the seemingly contradictory notions of cutting tax rates and balancing the budget?" he asked in (where else?) a Wall Street Journal article last month. "The answer is yes," the senator revealed, if only we ignore the claims of "conventional thinkers" and focus instead on the fact that "from 1982 to 1989, federal revenues, adjusted for inflation, expanded by an average of 3.8 percent per year despite a sharp reduction in tax rates."

Abraham picked his years with care. Shortly after passage of the supposedly rejuvenating Reagan tax cut of 1981, the U.S. economy plunged into the deepest economic downturn since the Great Depression. The years 1982 through 1989 cover the recovery period from the pit of that recession to the beginning of the next one. If you believe that Reagan's 1981 tax cut was responsible for all those growth years--that otherwise we would have wallowed in stagnation for seven years--Abraham's choice may be fair enough. If you doubt it, you might prefer the traditional economists' method of measuring long-term trends from equivalent places in the business cycle.

Even so, Abraham's trough-to-peak comparison does not support his point. Official budget numbers do show total federal revenue growing at an inflation-adjusted rate of 3.1 percent over the period, reasonably close to Abraham's 3.8. But the components of that growth tell the real story. Individual income taxes--which, by supply-side theory, should have spurted since rates were cut--grew at only a 2.1-percent rate. What boosted federal revenues most was the 4.3-percent average growth in payroll taxes. This was mainly the result of rate hikes--not cuts--legislated in the Social Security Reform act of 1983.