Some politicians and financiers see a tax cut as a potential threat to the U. S. bond market -- worrying that higher inflation and bigger budget deficits would send rates soaring.

Not so, say tax cut proponents. If tax cuts are accompanied by a steady decrease in spending and a credible commitment to balancing the budget, the impact on bonds would be minimal.

National Center for Policy Analysis economist Bruce Bartlett -- who originally suggested a 15 percent across-the-board cut to the campaign of presidential contender Bob Dole -- says that any cut would have to be paid for. Barlett's proposal would lower the tax burden -- and tax revenues -- by an estimated $350 billion; however, last year's House Republican balanced budget allowed room for a substantial tax cut.

Tax cut proponents make these points:

• Bonds rallied in 1995, when there was as much talk in Congress about slashing taxes as balancing the budget.

• If the economy's real growth were increased through rate reductions, inflation fears would subside.

• Increasing the well-being and income of Americans should not be held hostage to the concerns of one segment of the financial markets.

During the Reagan administration there was high growth spurred by tax cuts. There was no inflation as a result. Bond prices eventually soared. During the Bush and Clinton administrations, the country's growth potential has been significantly eroded by tax hikes. Growth has averaged just 2.3 percent during the Clinton years as opposed to 3.9 percent under Reagan. And 1994 was one of the worst years this century for bonds.

Source: James M. Pethokoukis, "Bond Vigilantes on Dole's Trail," Investor's Business Daily, June 25, 1996.