In opting for a tax cut as his grand strategy, Bob Dole replays the supply-side oldies who have had their chance to convince and have failed miserably. The claim that much of the tax cut repays itself with extra growth, an expansion in the tax base, and hence increased collection was disproved in the 1980s. Saving and investment did not increase when taxes were cut, and just as important, they did not collapse when taxes were raised to help pay for the resulting budget deficits. The Kemp-Roth tax cuts did not work; the Dole-Kemp cuts won't, either.
Moreover, the promise of "unspecified" cuts to make up the loss of revenue must invite maximum cynicism--after 15 years of slicing off the easy pieces by Republicans and Democrats alike, there is very little meat left on the bone. True, a cut in capital-gains taxes will bring in a rush of revenue as stocks are quickly sold and gains taken. But that is more nearly like a tax amnesty, not a growth-building tax reform. The Dole program will surely lower national saving by increasing the budget deficit. And if it creates a consumption spree, it may raise growth for a while--but only by borrowing even more abroad.
The Dole-Kemp tax plan may be good election politics, but it is bad economics. Like most people, I don't like paying taxes and think the government often wastes my money. Yet tax cuts today will mean more taxes tomorrow. In the end, we will all pay for them with higher taxes, lower growth, and financial instability.
LOOMING DEFICIT. Dole missed a chance to be bold. A better program would have focused on two key sources of growth: saving and education. Privatizing Social Security and education through vouchers and a broad series of experiments would bring about a transformation of the U.S. economy, creating more investment and raising real wages as a result of capital formation and better skills. Let's be honest: Lasting growth does not come from tax breaks and consumption booms. It derives from genuine investment.
Privatizing Social Security is an important idea for two reasons. First, Social Security currently finances a substantial portion of the budget. The baby boomers are out there working and paying into Social Security. The deficit as a result looks much smaller than it is and little is being set aside to finance the accumulating Social Security claims that will come due once the baby boomers retire, stop paying taxes, and start collecting.
By privatizing Social Security, everyone in the labor force will be required to make their contributions, but rather than giving the money to the government they will be able to invest it in the marketplace. The resulting capital formation will support rising real wages and therefore offer a long-term answer to the eroding standard of living.
Second, privatizing Social Security means that the looming fiscal crisis, some 15 or 20 years down the road, simply will not happen. An early and significant response such as privatization stops it from building up.
VOUCHERS. Privatizing education is long overdue. The traditional argument runs as follows: If the government ordains universal education, it also must supply it. There is room for the government to regulate and supervise educational standards and the performance of various suppliers--just as for banks or airlines. The government also plays a key role in providing financing. But just as in many other areas, there is no presumption whatsoever that the government is a particularly good supplier. The argument that education is too important to be left to the marketplace is the kind that needs challenging. Churches provide first-rate education in this country, and there is every reason to believe that a wide array of organizations, including profit-seeking businesses, can do the same.
The obvious answer, fought tooth and nail by teachers' unions, is a voucher scheme. Let parents choose where to send their kids. Let competition take on the hard-core resistance to innovation, excellence, and accountability that now characterize the school establishment. Of course, with teachers organized in Washington as a powerful interest group, the step would be bold. But it is time to experiment with alternative education programs, given the abysmal record of the current system, particularly for the people who need it most. We just threw out "welfare as we know it." Is it so far-fetched to think education should be next?
Politicians hate the idea of privatizing Social Security because it would unmask the true nature of their profligacy. Teachers' unions hate privatizing schools because the market and competition would make them accountable. If Dole had made these proposals, he might have caught our imagination.