McCain's Economic Plan: Sensible, Pragmatic, and Politically Impossible
Yesterday, John McCain gave a major policy speech on the economy:
Senator John McCain offered the broadest look yet at his economic policies in a speech on Tuesday in Pittsburgh, outlining a series of tax reductions and backing away from his pledge to balance the budget by the end of his first term.
The speech, delivered on the deadline for filing taxes, afforded the clearest view to date of what McCainomics might look like. There was a dash of populism, as Mr. McCain criticized executive pay and corporate wrongdoing. There was a strong supply-side bent, with Mr. McCain focusing on cutting corporate taxes and making permanent the Bush tax cuts that he once opposed. And there was a decidedly less hawkish note on deficits, as Mr. McCain called for spending cuts but did not mention balancing the federal budget.
With the address, Mr. McCain labored to overcome the impression that he does not understand the economy well, and the idea being pushed by his Democratic rivals that he does not comprehend the economic pain felt by many Americans.
The complete prepared text of the speech is here.
As I see it, Sen. McCain's proposals are a mixed bag -- a combination of the genuinely sensible and the pragmatically necessary with a dash of wishful thinking seasoned with a generous dollop of political impossibility.
The emphasis of the speech was on tax policy, timely considering that yesterday was April 15th, the day on which personal income tax returns were due to be filed. The word "tax" is mentioned in the speech 21 times.
Sen. McCain proposed to:
- Cut the corporate tax rate from 35% to 25%.
- Phase out the Alternative Minimum Tax.
- Double the deduction for dependents from $3,500 to $7,000.
- Ban Internet taxes permanently.
- Freeze cell phone taxes.
Probably his boldest proposals were an alternative parallel system of individual tax filing:
What we need is a simpler, a flatter, and a fair tax code. As president, I will propose an alternative tax system. When this reform is enacted, all who wish to file under the current system could still do so. And everyone else could choose a vastly less complicated system with two tax rates and a generous standard deduction. Americans do not resent paying their rightful share of taxes -- what they do resent is being subjected to thousands of pages of needless and often irrational rules and demands from the IRS. We know from experience that no serious reform of the current tax code will come out of Congress, so now it is time to turn the decision over to the people. We are going to create a new and simpler tax system -- and give the American people a choice.
and a temporary suspension of federal gasoline excise taxes to take a little of the sting out of the rising price of oil:
I propose that the federal government suspend all taxes on gasoline now paid by the American people -- from Memorial Day to Labor Day of this year. The effect will be an immediate economic stimulus -- taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up. Over the same period, our government should suspend the purchase of oil for the Strategic Petroleum Reserve, which has also contributed to the rising price of oil. This measure, combined with the summer-long "gas-tax holiday," will bring a timely reduction in the price of gasoline. And because the cost of gas affects the price of food, packaging, and just about everything else, these immediate steps will help to spread relief across the American economy.
Burnishing his reputation as a fiscal hawk a bit, Sen. McCain also promised to:
- Veto any bill containing earmarks.
- Reform the tax code.
- Eliminate corporate loopholes.
- Enact a pause in discretionary spending at present levels.
He also proposes means testing at least the prescription drug benefit component of Medicare:
Many retired Americans face the terrible reality of deciding whether to buy food, pay rent or buy their prescriptions. And their government should help them. But when we added the prescription drug benefit to Medicare, a new and costly entitlement, we included many people who are more than capable of purchasing their own medicine without assistance from taxpayers who struggle to purchase their own. People like Bill Gates and Warren Buffet don't need their prescriptions underwritten by taxpayers. Those who can afford to buy their own prescription drugs should be expected to do so. This reform alone will save billions of dollars that could be returned to taxpayers or put to better use.
Winding up his speech, Sen. McCain proposed reforms in unemployment insurance and job training, a subsidy for borrowers in danger of foreclosure, regulatory reform in the banking and financial industry, and reforms in student loan programs.
With this speech, the policy positions on the economy on his official web site, and the statement from McCain economics advisor Douglas Holtz-Eakin in the Washington Post a couple of weeks ago, the contours of Sen. McCain's views on the economy are beginning to take shape. He's distinguishing himself both from George W. Bush and from the two Democrats still seeking the nomination of their party. He is definitely a fiscal hawk, and gone is the rhetoric of "compassionate conservatism."
His view of how to balance the budget apparently rests on three legs: cutting taxes, freezing spending, and means-testing entitlements. I don't honestly think his numbers add up. When Ronald Reagan cut taxes 25 years ago the top tax bracket for individuals was 70%. Now it's 35%. Regardless of what you believe about the effects of Reagan's tax cuts it's pretty darned hard to make the case that cutting the marginal tax rate beyond 35% will bring more money into the treasury. We're just not on that side of the Laffer curve any more. And with "everything else" -- everything other than defense and security spending, entitlements, and interest on the debt, amounting to just 18% of the budget, I don't believe there's enough to cut there to balance out the spending increases he's proposing.
To his credit McCain does grasp the nettle and proposes a means to get some control over the growth in spending on entitlements, by means-testing at least the prescription drug benefit portion of Medicare. That's not enough, but it might give us a vision of things to come.
Further, while history tells us that Congress is pretty willing to cut taxes, it's shown no similar inclination to curb spending. I think McCain's proposals for cutting spending would face very tough opposition in the Congress, which regardless of the outcome in November is likely to remain pretty closely divided one way or another (although probably with a Democratic majority in both houses).
Curtailing earmarks cuts to the heart of many members of Congress's reelection plans. While I think it's a necessary component of bringing real fiscal sanity to our government, I think that means-testing even the prescription drug benefit is likely to hit a brick wall. Progressives see this as a line in the sand, a sine qua non. Their point is strategic: they believe that people in the upper income quintiles are willing to take a handout if it's offered to them and are more likely to put their support behind programs that benefit them directly.
Washington is the land in which keeping the first derivative constant, i.e. freezing spending rates without reducing spending itself, counts as a cut. In the absence of real, committed, sizeable, permanent spending cuts, tax cuts just push us farther down the road of fiscal insanity we've been on for some time now.