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Some Economists See Dole Plan as 'Fantasy'

Economists have had time now to crank up their computers and analyze Republican nominee Bob Dole's economic plan, with its 15 percent cut in income taxes and other tax cuts. In a way, some consider the exercise futile.

"First of all, Bob Dole would have to defeat Bill Clinton, which currently does not look probable," write Peter Canelo and Scott Reed of Dean Witter Reynolds Inc. in New York.

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"Is it [the plan] a political fantasy?" asks Joel Prakken, of Macroeconomic Advisers in St. Louis. "I suspect it is. I don't see how it could happen, short of an overwhelming Republican sweep in Congress," plus Dole's victory for the White House job.

But if Dole does win and Congress approves his plan, what happens? There are two key issues:

Will the tax cuts stimulate economic growth and thus boost federal revenue as much as envisaged in the plan?

Yes, says J.D. Foster, chief economist at the conservative Tax Foundation in Washington. He calculates that the Dole plan will add 0.5 percentage points to the Clinton administration's six-year projection of 2.3 percent annual growth, after inflation. Such stepped-up growth appears "entirely reasonable," he says, based on an overall program that includes tax reform, a balanced budget, growth-oriented regulatory reform, and tort reform.

Mr. Foster assumes the tax savings will boost productivity and labor force participation, particularly by second earners in households. Spouses, discouraged from working by a 28 percent personal-income tax rate plus Social Security taxes, will find their marginal tax rate cut by 4.2 percentage points (15 percent of taxes). For some, the balance between choosing child rearing, leisure, or other activities will shift toward going back to work.

Mr. Prakken, contrariwise, doubts the plan will work as well as predicted in Dole's political handouts. The Dole plan estimates enough economic stimulation from the tax cuts to boost tax revenue over the next six years by $147 billion more than the Congressional Budget Office has estimated. This would offset about 27 percent of the $548 billion total tax cut, or some 33 percent of the tax cuts, excluding those that economists figure would have no "supply side" stimulative effect on economic growth. Prakken, using a model of the economy that helped his firm win a top prize in 1993 and 1995 for its forecasts, says the cuts will give a feedback in extra revenues of only 16 or 17 percent of the total tax cuts. That means more budget cuts would be needed to end the deficit by 2002 than the Dole plan presently allows.

To balance the budget, what cuts will be needed?

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The Dole program lists $217 billion in proposed spending restraint over six years. Foster describes this as "plausible, even minor." But the Dole plan states specifically that Medicare, Social Security, and defense programs are "off the table." These represent 51 percent of total budget spending. Another 15 percent goes toward interest on the debt. So the cuts from present budget plans must impact only 34 percent of the total budget. These areas would need to be restrained 5.4 percent, Foster calculates.

The Dole plan assumes an additional $650 billion of spending restraint planned in the congressional Republican budget resolution. "Those cuts brought a politically divided government to a standstill," notes Prakken. With the election ahead, these cuts, some of which would cost votes, have not actually been passed.

Prakken calculates revenues would run $80 billion to $90 billion below those estimated by the Dole plan. Another budget analyst, Richard Kogan, of the Center on Budget and Policy Priorities in Washington, puts the shortfall at $150 billion.

Mr. Kogan adds up the needed budget cuts for balance by 2002 as topping $1 trillion; Prakken figures $50 billion less than that.

Foster says spending by the federal government, instead of being $220 billion higher in 2002 than at present (as currently forecast), will be $167 billion higher after the Dole cuts.

Prakken holds that real cuts of 15 to 20 percent would be needed from the nonexempt programs to balance the budget by 2002. "Whole programs would be entirely eliminated," he says. "At the end of this period, government wouldn't resemble its form of today. Of course, proponents of the Dole plan say that's exactly the point."

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