McCain’s Tax Plan Just Won't Cut It

The New Republic: His Current Proposal Represents Reasonable Ideas In An Unreasonable Form

(The New Republic)  This column was written by Robert Gordon and James Kvaal.

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George W. Bush has many faults, but he deserves credit for this: The man knew how to sell a tax cut for the rich. In his 2000 campaign, he carted out families like Mark and Vicki Skiles of Pleasant Hill, Iowa, who Bush said would get $3000 from his plan. He even gave their kind a name - "tax families" - and after his first tax cut passed, hosted a "tax family reunion" on the White House lawn. Democrats complained - correctly - that the families disguised the Bush tax cuts' overall tilt to the wealthy. But the complaints were washed away by Bush's clever stagecraft.

As things stand, Democrats won't face anything close to that challenge in the 2008 presidential campaign. There are virtually no middle-class families who benefit from the tax plan John McCain announced in January. "Tax corporations," maybe: Exxon-Mobil would get $1.2 billion a year. But not middle-class families. In fact, McCain's January plan is such a dud, both politically and on the policy merits, that he began rewriting it in the speech on economics he delivered in Pittsburgh, Tuesday.

In substance, McCain's current plan represents reasonable ideas given unreasonable form. McCain would reduce the corporate rate from 35 percent to 25 percent and let companies write off the entire cost of many investments immediately, rather over several years. These tax cuts total $2 trillion over a decade.

McCain correctly notes that the United States has the second-highest corporate tax rate in the industrialized world. But actual corporate taxes paid - after all the loopholes, shelters, and special tax breaks - are among the lowest in the world as a share of GDP. A somewhat lower corporate rate makes sense if we clean out these special tax preferences in equal measure. But a massive rate cut, enacted without a commitment to take on special-interest tax breaks, simply hemorrhages money to corporations.

Another problem with the corporate proposal: letting companies deduct the entire cost of many investments, while also retaining the deduction for interest they pay on their debts, would create a new generation of tax shelters. Companies borrowing money to invest will be able to double-dip, deducting both the full cost of the investment and the interest on the loan. This means they'll get extra tax breaks they can use to shield other income from taxes. That's an invitation for companies to engage in economically useless activity designed to lower their tax payments. When President Bush's tax commission proposed allowing immediate expensing, it also found it necessary to repeal the deduction for interest, to avoid exactly that scenario. McCain has said nothing about the interest deduction, even though advisor Douglas Holtz-Eakin acknowledges it is a "huge loophole."

McCain's second proposal, repealing the Alternative Minimum Tax, sounds good on the surface. Everyone hates the AMT, and McCain describes its elimination as "a tax break for 25 million families." In fact Congress has regularly exempted all but two to three million of those 25 million families. Everyone supports that "patch." You can go further and repeal the AMT altogether, but then you need to come up with another source of revenue for the government. Otherwise you've enacted a whopping $400 billion tax break, more than half of which goes to families earning more than $500,000. That's what McCain does.

Taken together, these measures cost as much as the Bush tax cuts in their first ten years and are even more regressive. The only question is how McCain ended up with such a dreadful combination of bad politics and bad policy. As Jonathan Chait noted in The New Republic in February, the answer seems to be that McCain needed to win approval of the Republican anti-tax base after he opposed the Bush tax cuts. McCain's specific proposals for both expensing and full AMT repeal have long been pushed by anti-tax guru Grover Norquist. Not so coincidentally, Norquist used to call McCain a "nut-job" but now praises him for having "moved very hard and far" on taxes.

McCain's current course looks an awful lot like Bob Dole's in 1996. Like McCain, Dole had a record of rejecting anti-tax dogmas that drew attacks from the Republican party's anti-tax wing. (Newt Gingrich called Dole the "tax collector for the welfare state.") As an election year ploy, Dole proposed a huge across the board tax cut and chose supply-sider Jack Kemp as his running mate. But his stance as a tax cutter never seemed natural, and polls found that voters viewed the whole idea with skepticism.

Having secured the Republican nomination, McCain now also seems uncomfortable with the huge tax cuts he proposed months ago, and the campaign seems to be searching for a course correction. Holtz-Eakin has said that McCain "is by no means done making tax proposals." Even some conservatives are urging McCain to add some populist planks to his tax plan. In the space of a week, Bob Novak proposed lower payroll taxes; Bill Kristol, higher hedge fund taxes. Without going that far, McCain may well remedy the shortcomings of his existing proposals with broad new tax relief for the middle class, financed by a sweeping initiative against corporate tax loopholes.

But can he really tack back to the center again without paying a price? As Chait rightly noted, "The amazing thing about McCain is that his reputation for principled consistency has remained completely intact." Time will tell if that judgment still holds true.

[blackspirit3]

TONY PERKINS A MCCAIN SUPPORTER - Tony Perkins is President of the Washington, D.C.-based Family Research Council Perkins addressed the Louisiana chapter of the Council of Conservative Citizens (CCC), America''''s premier white supremacist organization, the successor to the White Citizens Councils, which battled integration in the South. In 1996 Perkins paid former Ku Klux Klan Grand Wizard David Duke $82,500 for his mailing list. SHOULD MCCAIN DISTANCE HIMSELF FROM MR PERKINS?

[eskieville1]

Thanks for the correction flajoe1! I got my number from from a newspaper. I will amend my arguement to state that all foriegn debt should be paid the sooner the better. I guess I feel rather Hamiltonian these days.

[flajoe1]

we owe China $1,000,000,000,000
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Posted by eskieville1 at 07:41 PM

These numbers are from 07. Japan actually holds more of our debt. Not that it changes your argument. I just found it kind of interesting

"Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion)."

http://www.msnbc.msn.com/id/17424874/

[eskieville1]

Well with a $9,200,000,000,000 debt, in which we owe China $1,000,000,000,000 ,I don''t see tax cuts on the horizon - in fact for some I see tax increases. We need to get our debts paid off and quickly, particularly the one we owe China.The sooner that one is paid the better! McCain needs to be realistic and address this problem directly and clearly.

[xlib]

Thanks for the economic lesson there, element51. However, you did not answer my main question. What is your take on tax refunds to those who do not pay taxes? To me, that is redistribution of wealth, something I am not in favor of. The so called rich in our society pay the largest bulk of taxes, not the middle class. As for corporations, you know, I am getting a bit tired of the class envy that the left constantly drums. So, if a corporation, one that hires people etc, gets a tax break larger than, say you or I, is that wrong. Well,considering a corporation provides jobs, etc, nope, to me it is not wrong.
What I am against is the slamming of corporate America by the left when more Wall Street Companies are contributing more money to the dems than the Republicans. If we keep slamming corporations more jobs will be outsourced. Do successful corporations make money, sure hope so since a great number of Americans work for corporations.
I am absolutely against redistribution of wealth. That is soicialism and I do not want that.

[element51]

Xlib....You may be a little of the mark. Consider the following:

Today the top tax rate is 35%. Bush said during the third election debate in 2004 that most of the tax cuts he sponsored went to low-and middle-income Americans. That was not even close to true.
In fact, most of the savings --53%--will go to people with incomes in the top 10% over the first 15 years of the cuts, which began in 2001 and will have to be reauthorized to keep them in effect through 2015. More than 15% of the tax cuts will go to the top tenth of 1%, a group that is now 300,000 people.
(source: Free Lunch, David Cay Johnston 2007)
Tax cuts to corporations are even more one sided. I don''t think anyone is in favor of tax rates on the wealthy going back up to where they were 25 years ago but the slice of the pie for the middle class has only gotten smaller. In fact if you go back 25 years and look at the pay of privite production and nonsupervisory workers, which covers four out of five wage paying jobs, the increase was the equlivant of getting a raise each Janurary of about a penny an hour. About 33 cents an hour over the 25 year period. Do you think the playing field is level?

[xlib]

Yep, I think raising taxes is the way to go. Also, how about tax refunds for those who don''t pay taxes. And, the best idea yet,let''s tax those rich corporations (many of who contribute to the dem party)and then they''ll learn. Why, they may even outsource more jobs. That''ll teach''em.
As for Bush giving tax rebates ONLY TO THE RICH, we''ll we aren''t rich but we enjoyed ours. For those who didn''t want the money guess you could have sent it back. From what I knew of the orginal Bush tax cuts it was based on the amount of tax you paid. To me, that''s makes more sense then giving a return to those who don''t pay taxes.
So, let the tax cuts end in a few years and our country will have the largest tax increase in our history. Yep, that''ll teach''em