Last year, Republicans in the Reagan administration took a theory--supply side economics--and fashioned a tax package around it. This year, Sen. Bob Dole approached a practical problem-- how to raise $98.4 billion of revenue over the next three years in order to hold the deficit down--with the kind of homely values shared by most people, Republicans and Democrats, in his home town of Russell, Kansas. "It seemed to us that if we were going to reduce tax rates, which I agree with"--that is what Congress did last year--"then we ought to start broadenid security scandal hit the royal court. ng the tax base by closing loopholes. Passing a big tax cut limits what you can do, so you end up doing the right thing."

Dole won his victory at 4:45 a.m. Friday when the Senate finally passed the momentous tax bill he sponsored. All the yea votes for the bill, which was passed 50-47, were cast by Republicans and Sen. Harry Byrd Jr. (I-Va.). We spent an hour with Dole Friday afternoon, exploring how this bill had been been put together--and passed.

Since the beginning of the year, Bob Dole and key staffers, especially Robert Lighthizer of the Senate Finance Committee and Mark McConaghy of the Joint Committee on Taxation, had known, as Dole put it, that "we were going to have to do something." Some administration supporters were arguing that there should be no revenue increases at all. Dole was obviously of a different mind, and proceeded on his own, taking care, however, to keep Senate Majority Leader Howard Baker and the White House informed of what he was doing.

Why not just let the administration or the Democrats worry about revenues? "All of us were searching for some easy way out," Dole says. "If you can just get a compromise with the Democrats, then, boy, we're just going to push this thing through. And there was this hiatus before all those meetings started; no one seemed to want to do anything. But on the Senate side, we realize that we are the majority party, and we don't have the luxury of sitting on the sidelines any more. We knew that much of the action was going to come to the Senate Finance Committee, whatever happened, and we ought to start getting prepared."

President Reagan has attacked the congressional budget process--the new requirement that Congress vote on spending, revenue and the deficit as one package. But the fact is that it did frame the issue for Bob Dole. This requirement gave a clear indication of the amount of revenues needed to hold down the deficit to what everyone considered tolerable levels. Dole remembers feeling relieved when the amount needed over the next three years was lowered from $122 billion to $98.4 billion. "The question then," Dole says, "was how to get $100 billion, if you can't touch the third year of the tax cut and you can't touch the energy taxes"--the administration's conditions. "Without the budget reconciliation process"--which sets deadlines --"we'd still be in markup"; that is, no bill would be passed.

The specificity of the deficit figures produced by the new procedures seems to have imposed a tight discipline on Dole and the Senate. "If you lose a couple and you're down, then you'd have to say you can't get $98.4 billion, you can only get 96. At some point somebody said to me, you don't have to worry about the targets. Well, if you don't have to worry about the targets, you don't have to worry about the process. I said, 'Let's try it.' People were saying, 'Let's go home.' I said, 'I want to go home, too, so let's try it.'"

About $30 billion of the $98 billion in revenue increases in Dole's bill come from what he calls compliance measures--including the withholding of 10 percent of interest and dividend income. It was "the key vote"; without it, there could not have been enough revenue increase to meet the target without tax rises the administration or others wouldn't accept.

Ironically, withholding of state income taxes was a measure Ronald Reagan opposed vigorously as governor of California--and then switched on when it became clear the state needed the revenue.

Treasury Secretary Donald Regan and Assistant Secretary John Chapoton worked with Dole to put the burdens of withholding on the Internal Revenue Service rather than banks, but nonetheless "the banks and savings and loans went after withholding after we'd been told they were quiet." New Jersey Sen. Nicholas Brady, former head of the Dillon, Read brokerage firm, made a speech saying no one would be really hurt by withholding, and Dole called Kansas bankers who said that people with interest income ought to pay their taxes. Dole needed Democratic votes on this issue, and got them, from senators who had voted with him for withholding in the past. Why was he so adamant?

"It's not increasing taxes," he says; it's just a matter of making sure that taxes that are owed are paid. "You just can't justify people not paying taxes."

"A lot of the lobbyists didn't feel I would do it because it would be counter to 'Republican philosophy' to do anything that might affect business, even if it was a big loophole," Dole says. Tax bills are always heavily lobbied, and Dole feels sorry for the lobbyists who lined the hall outside the Finance Committee's rooms; they brushed their shoes so often against the wall that it had to be repainted. "I walked out of the room one night, and someone made the comment that there were wall-to-wall Guccis; and I said, 'They'll be barefoot in the morning.'" Dole did not accomplish all he wanted on what he calls loophole issues, but his bill did curb business depreciation allowances, "safe harbor" leasing (which allows money-losing companies to sell their tax losses to profit-making companies) and tax breaks for government contractors, and also toughened the minimum tax law.

Dole believes that the lobbyists did not always reflect the views of their clients. "I talked to the Chamber of Commerce president, Paul Thayer, of LTV, and he took a different view from what some of the staff of the Chamber did. And they put out a statement grudgingly supporting the bill."

"The White House seemed uninterested for a long period," Dole says. Although the Gang of 17--top administration officials and the key congressional figures in both houses--was kept informed as his proposals took shape, the administration seems to have made few moves to shape them until relatively late in the process; "they wouldn't go into specifics until the budget passed the House." Dole credits Assistant Treasury Secretary Chapoton with important assistance, and says that Treasury Secretary Regan made crucial calls. The president made about 20 calls himself before the vote; Vice President Bush would have been in town ready to cast tie-breaking votes had Dole and Howard Baker decided he was likely to be needed. Dole does not note that the president's letter endorsing the Finance Committee bill expresses "some reservations about a few items" --a phrase that could have been a signal to some Republicans that it was all right to vote against some provisions, which is exactly what some Republicans did. In all but one case, however, Dole was able to rally enough Democratic votes to hold his bill together.

The one issue on which Dole lost, by a 70-25 margin, was requiring withholding on tip income of waiters and waitresses; the hotel and restaurant workers lobbied heavily against it. But Dole was prepared with other measures. He pulled out of his pocket--and got a majority of Finance Committee members to support, as he had to in order to get it on the floor--a provision providing that only half the cost of business meals in one's home town could be deducted. Democrats have attacked the "three-martini lunch" deduction for years, and Dole got enough Democratic votes to pass this, as well as whole-hearted support from such conservatives as Jesse Helms.

This was "the capstone" in Dole's view, and he takes a certain relish in beating the restaurant interests: "If you can't take the income out of the restaurants, then you can just take the customers out of them." He notes that the administration still doesn't support this 1 1/2-martini-lunch provision, but he says he is very serious about it."I'm also in charge of making cuts in the scholl lunch program and food stamp programs, and I can't see why if these people have to take cuts it isn't fair to take a look at the people who are lunching at Sardi's." When It Got to the Five-Yard Line From the transcript of the talk with Dole:

Dole: There was always some feeling that, when it got down to the five-yard line, we were going to have real trouble. A lot of the people who were thinking about the deficits and the interest rates and making a lot of speeches about how we should do something about them would balk at revenue increases. It just runs against the grain with some. Even though you can give them the charts on compliance and on loophole closings, that still looks like a tax increase.

And of course when it got down to the goal line, it was really kind of exciting, because we were behind.

Q: You were?

Dole: Yes. We were behind, with Schmitt and Helms and East having already voted, and Jepsen hadn't. They were all voting against us. Then

Harry Byrd came in and--

Q: Did you talk to him?

Dole: The president talked to him. He

walked in and stood over on the Demo cratic side, and his was a key vote, and I

didn't expect him to vote for the pack age, so I was pleasantly surprised

when he did. You know, Sen. Byrd

always goes down and reads the

final passage so he's certain

what he's voting for. He voted aye, and I thought, now we're going to get some movement. Then Sen. Jepsen said, "Well, if it's got to be, I'll do it," and Sen. Schmitt, who's running for reelection, and it's a tough race, said, "I'll switch if I know we're going to win." Sen. Helms said pretty much the same. But he told me beforehand he would not let the package fail. So then John East sort of came in on his own and changed his vote. I didn't talk to him.

Q: Did he talk to Sen. Helms?

Dole: I assume when Helms switched that might have had some influence. But I don't know. He felt very strongly about the tax bill, particularly when you're doubling the excise tax on cigarettes, and how are they going to explain that in the package? I think the sunset provision on that tax helped some.

Q: So this was right up at the 11th hour?

Dole: This was at 4:40 in the morning. And I tried to get Mattingly to stand by. I said, "Mack, you can't do this. You've got to stay here. At least you can give us a pair." But there wasn't anybody to pair with. Goldwater and Weicker had left notes that they wanted to be recorded against the bill. So the vote would have been 49 to 50. The other absentee was Dan Inouye, and if he had been here it probably would have been 50-50, and then we'd be wondering why we didn't have the vice president there. I assume we could have had a long quorum call while we brought him back from Chicago.