McCain's Tax Plan Just Won't Cut It

Republican presidential candidate Sen. John McCain, R-Ariz., acknowledges the applause while he delivers a speech during a campaign event at Carnegie Mellon University, Tuesday, April 15, 2008, in Pittsburgh.
AP
This column was written by Robert Gordon and James Kvaal.
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.
By Robert Gordon and James Kvaal
If you like this article, go to www.tnr.com, which breaks down today's top stories and offers nearly 100 years of news, opinion and analysis