Response to "Scoring McCain's Tax Proposals" by the McCain Campaign
by Doug Holtz-Eakin, Senior Policy Advisor, McCain 2008
On April 17, the Tax Policy Center posted “Scoring McCain’s Tax Proposals”. Although I remain a fan of efforts by organizations like the Tax Policy Center to analyze taxation issues, the analysis is misleading on the whole and wrong in some particulars.
At the broadest level, the problem is that the Center focuses on taxes in isolation, while the impact of Senator McCain’s proposal must take into account changes on the expenditure side as well. He has proposed specific discretionary cuts to offset the historic practice of waste and earmarks, a one-year discretionary “pause” (freeze) of spending outside of necessary military and veterans accounts, an overall program review that would encompass defense procurement plans and methods and non-defense programs, and a comprehensive health care reform that is the foundation for addressing the budgetary stresses from entitlements. More generally, the federal government now raises 18.8 percent of Gross Domestic Product in taxes, a figure which is above the average of the past several decades. Yet the fiscal outlook remains challenging. Why? Because of the projected growth in spending. In short, Washington has a spending problem—not a revenue problem. Putting our fiscal house in order is primarily a matter of controlling spending growth.
Turning to the particulars, the Tax Policy Center analysis is flawed in several ways:
It incorrectly attributes a proposal by Fred Thompson to Senator McCain. Senator McCain does support the general idea of having the voluntary choice between the current system and a simpler alternative with a broad exemption and a simple, two-bracket rate structure. As the campaign proceeds he will have the opportunity to flesh out his vision, including how such a system can be revenue neutral. To score a proposal as losing hundreds of billions of dollars when it isn’t even Senator McCain’s is simply wrong and should be corrected immediately.
It assumes immediate implementation of a set of proposals that constitute a vision for a tax code that is simpler, fair, pro-growth and aids international competitiveness. Senator McCain has described this vision over the past 15 months and will continue to develop it in the future. No major transformation of this sort has ever been undertaken without realistic timetables to phase-in new provisions. No major improvement to the corporate tax code would fail to consider—to pick a few examples—the future of the deduction for U.S. manufacturing activities when the rate is already much lower, the treatment of corporate interest in the presence of expensing, the inventory property sales source rules, and other business credits.
The scoring is dramatically influenced by the adoption of unrealistic congressional budgeting conventions. An analysis grounded in sound economics would evaluate the impact of tax and spending proposals that change the current course of policy. Current policy in the United States is an income tax that has a research and development tax credit, a top rate of 35 percent, taxes dividends and capital gains at a top rate of 15 percent, and each year provides a “patch” on the Alternative Minimum Tax. Senator McCain would reform but not change the magnitude the R&D tax credit. He would continue with the current tax rates. In short, there is no change and nothing to “score”. Senator McCain would eliminate the AMT, so it is appropriate to recognize the revenue reduction above and beyond the existence of the patch but no more.
In contrast, the Tax Policy Center uses the congressional baseline, which reflects current law and not current policy. Notice, for example, that the AMT gets patched every year—regardless of which party holds power in Congress—but a current law baseline assumes that it will revert to its full-blown form in the future. In addition, this approach is biased in favor of more spending and higher taxes. Any spending program—even a supplemental appropriation—is assumed to exist forever and rise at the rate of inflation; spending never declines. In contrast, an AMT patch or the current tax rates are assumed to expire and taxes rise. Senator McCain’s approach puts taxing and spending on equal footing by assuming that on both sides of the budget current policy continues in the absence of a proposal. This is not a mere technical quibble—the Congressional budgetary conventions simply defy common sense. If households followed this practice, anytime a spouse planned to go back to work but changed his or her mind, the family would have to cut their spending to “offset” the planned future rise in income.
While the budgetary implications of Senator McCain’s proposals are important, we need to keep our eye on the real goal, which is a tax code that better serves America workers by ensuring that they are not burdened when they invest in their children, move to the middle class, and compete in a global economy. Adoption of the Senator’s proposals would certainly move us in the right direction.
report, I will post the same time this post
We must not spend our money for things that are not very necessry these days. When the economy will start to grow again we will can to think about spending more on other things. But not until then.
thank you for sharing! I really enjoyed reading this!
So, for each $1 saved by the average working class American family in reduced federal taxes, they are likely to pay more than $1 for the added cost of their children's education, and medical care. Businesses will love their lower tax rates and the reduced federal regulatory burden, and will pass the resulting higher profits to their mostly wealthy investors in the form of increased dividends. These fat cats will, no doubt, express their appreciation by increasing their contributions to the Republican party. It is no secret that the basic Republican party philosophy is to “starve the beast.” However, one man's beast is another man's safety net. Every attempt to reduce waste and fraud in government usually results instead in reduced government services. If Senator McCain knows how to eliminate waste and fraud, why didn’t he have it enacted into law when the Republicans controlled Congress, the White House, and the courts? What did Senator McCain do to prevent or stop the massive amounts of waste and fraud in Iraq? To say it another way, to reward Mr. McCain's wealthy benefactors will require the “Average American Workers who want to invest in their children” to tighten their belts further, and to hope that their uninsured children: 1) never get sick and 2) are so smart that they all get full scholarships. If Senator McCain knows how to increase the income of the average American worker while also rewarding his wealthy benefactors, why didn't he have it enacted into law when the Republicans controlled Congress, the White House, and the courts?
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its incredibly frustrating to me how much $ McCain claims these discretionary spending cuts will actually generate. Also, the (nonpartisan) CBO has clearly outlined in a clear essay that the proposed extensions of Republican tax cuts will not be paid for, and will only add to the deficit. Republicans talk so much about fiscal responsibility, but apparently know nothing of the sort.
Well businessman and consumer should be lucky enough because the senate are more interested in tax cut or tax reform program to maintain the revenue while not giving to much burden to both businessman and consumers. As I read some accounting essays before, it would be better to have reform of taxation system rather that changes due to increase of professional and business taxes.
So the goal is, “… a tax code that better serves America workers by ensuring that they are not burdened when they invest in their children …”
But won't the downsizing of government as envisioned by McCain involve:
1) The elimination of most, if not all, federal aid to higher education, including subsidized student loans, resulting in higher college costs,
2) the elimination of most, if not all, federal aid to secondary education, resulting in higher state taxes, higher local property taxes, and/or further decreases in quality education by increasing class size, deferred maintenance in school buildings, etc.
3) the elimination of most, if not all, federal aid for children without health insurance, resulting in higher out of pocket costs for families who want to provide medical care to their children,
4) the elimination of “costly” federal regulations which ensure the safety of children's food and medicine. Who will see to it that there is no lead paint in children's toys? The elimination of these regulations, which McCain describes as “burdensome” on American businesses, will increase costs for American families for the increased sickness and accidents suffered by their children from defective food, medicine, and toys.
So, for each $1 saved by the average working class American family in reduced federal taxes, they are likely to pay more than $1 for the added cost of their children's education, and medical care.
Businesses will love their lower tax rates and the reduced federal regulatory burden, and will pass the resulting higher profits to their mostly wealthy investors in the form of increased dividends. These fat cats will, no doubt, express their appreciation by increasing their contributions to the Republican party.
It is no secret that the basic Republican party philosophy is to “starve the beast.” However, one man's beast is another man's safety net.
Every attempt to reduce waste and fraud in government usually results instead in reduced government services. If Senator McCain knows how to eliminate waste and fraud, why didn’t he have it enacted into law when the Republicans controlled Congress, the White House, and the courts? What did Senator McCain do to prevent or stop the massive amounts of waste and fraud in Iraq?
To say it another way, to reward Mr. McCain's wealthy benefactors will require the “Average American Workers who want to invest in their children” to tighten their belts further, and to hope that their uninsured children:
1) never get sick and
2) are so smart that they all get full scholarships.
If Senator McCain knows how to increase the income of the average American worker while also rewarding his wealthy benefactors, why didn't he have it enacted into law when the Republicans controlled Congress, the White House, and the courts?
Hey Doug:
A novel idea for ya. Why not effect all those spending Valhallas and after securing all those savings and creating surpluses – for which we have a myriad of options – then consider tax cuts after the savings become a reality? We've tried it the other way and it never quite seems to equal out.
If your basic theory is correct then getting a handle on spending would seem the first priority. Any household would approach it that way. When considering whether a wife should quit her job, and therefore reduce the family income, they would first get spending under control.
Private industry would do it the same way, notwithstanding a competitive urgency to cut revenues.
Dear Mr. Holtz-Eakin:
The fundamental belief underlying your proposed tax cuts is that smaller government results in more prosperity.
However, as your fellow economists have shown quite conclusively (as I think you must be aware), that belief is faith-based, not grounded in facts.
In developed countries like the US, with tax burdens ranging (hugely) from 23 to 49% of GDP (federal, state, local combined), over the last twenty, thirty, forty years, there is *no correlation* between government size and growth.
See in particular Barro 1996 (and ensuing), and Nijkamp and Poot's 2003 meta-analysis. I'm sure you're familiar with these. Both linked and discussed here:
http://trueconservative.typepad.com/trueconservative/2008/02/small-governmen.html
Many countries prosper, and proffer generous social support systems, with tax rates that far exceed those in the US.
With the lowest tax burden in the developed western world, it is actually more conceivable that lowering taxes further–with the government evisceration and/or debt burdens that would result–would push us below the level at which a modern, advanced society can thrive.
If there is a threshold effect, dropping below that level could be devastating to American prosperity–and power.