Analysis of John McCain's Economic Plan
In a speech, and in subsequent interviews last week, presumptive Republican presidential nominee John McCain rolled out his economic plan. While there are certain aspects of the plan that will no doubt please the GOP’s growth wing, McCain mostly stuck to the conventional in revealing what he might try to achieve once in office.
When asked last Tuesday on CNBC’s Kudlow & Co. what government could do to bring our economy out of what some deem a slowdown, McCain’s initial, some would say Pavlovian response of “Bring spending, obviously, under control” was to some degree worrisome. More inspiring would have been an answer along the lines of “let’s reduce taxes on income and investment so that there are greater incentives for individuals to work and invest with greater frequency.”
In McCain’s defense, it’s certainly true that heavy spending is an economic retardant. This is so for government taking earned income that could be saved and consuming it, not to mention that when governments compete with the private sector for funds to spend, they reduce the amount of capital that would otherwise be made available to job-creating businesses and entrepreneurs. Still, the fact that McCain led with spending cuts as the answer to a flagging economy speaks to his discomfort when it comes to talking up tax cuts.
McCain’s vision for spending cuts is mostly good, however. He’s proposed a one-year spending freeze on non-defense discretionary spending, and as a military man himself, it can be safely assumed that he’ll credibly seek to reduce a lot of military waste too.
What’s unfortunate is his desire to make wealthier seniors pay more for prescription drugs under Medicare Part D. While this writer would desire near abolishment of Medicare altogether, penalizing the very people (the rich) who have and continue to fund the federal government speaks to a creeping version of socialism that has infected both parties. Indeed, how can politicians credibly ask the top 1 percent of earners to fund the unfortunate behemoth that is the federal government while regularly seeking to reduce the alleged benefits they receive? Politics are doubtless at work here, but it would be nice if rather than these implicit slights imposed on the wealthier among us, politicians would begin to acknowledge how much worse off we’d all be absent the economic blessings that reach us thanks to the vital few.
On the tax front, McCain’s plan is a mixed bag of good and bad. The positives include his stated desire to make the 2003 tax reductions on income and capital gains permanent, a cut in the corporate tax from 35 to 25 percent, and somewhat good, abolition of the alternative minimum tax (AMT). What’s presently unknown, however, is how much his seemingly newfound support of marginal rate cuts is rooted in real belief, as opposed to being pure politics.
Sometimes forgotten is that McCain voted against the aforementioned 2003 tax cuts given his fears of deficits and wealth gaps. Many commentators, including Cato Institute senior fellow Alan Reynolds, worry his present tax stance is somewhat political in nature and that he’ll surely revert to deficit-oriented austerity once in office. McCain’s appointment of noted deficit hawk Douglas Holtz-Eakin as his chief economic advisor is another negative signal that if elected, tax cuts will be pushed aside. In the aforementioned Kudlow & Co. interview, McCain did make the important point that, “It is not taxes that are insufficient, it’s spending that’s out of control,” but it would be nice if he defined his terms on taxes far more to show that he’s truly on board with the essential good that results when work and investment are penalized less.
Regarding corporate taxes, it should be said that so long as trade is free (McCain is very much in the free-trade camp), it really doesn’t matter where corporations are formed. Indeed, New York and New Delhi are no worse off for Microsoft having incorporated in Seattle. What makes corporate tax cuts truly necessary is the basic truth that entrepreneurs enjoy the greatest success in the United States.
When we consider this reality, a cut in corporate rates is arguably one of McCain’s best policy positions for making it easier for corporations to form stateside. What’s a near certainty is that Bill Gates could not have created what became Microsoft in Paris or Bombay, so anything that makes incorporations easier here will accrue to both ours and the world’s economy. Notably, McCain gets immigration right too, so the ideal scenario for him over the long-term would be to push liberalized immigration rules that make efforts to work in the U.S. legal. A combination of corporate tax cuts and legalized work would in time lead to a revitalized entrepreneurial sector that would once again make the U.S. economy the envy of the world.
Looking at the bad in McCain’s tax plan, U.S. News & World Report’s James Pethokoukis wrote last week that the problem with tax “relief,” as opposed marginal cuts that increase the desire to work and save is that “it would mean even fewer people paying any income taxes at all.” Unfortunately, McCain seeks to double from $3,500 to $7,000 the personal exemption for dependents. This act alone would enable many more Americans to avoid paying income taxes, thus making broader reform of the tax code an even more distant object.
The above is why abolishment of the AMT is presently questionable policy. Indeed, with more and more Americans not paying much in the way of income taxes at all, abolishment of the AMT would make taxes on the federal level even less onerous such that major reform would be more difficult politically. A better strategy from the GOP considering the AMT hits blue-state voters the most would be to tie AMT abolishment to broad reform, or at the very least, tie it to making the 2003 cuts permanent.
As for McCain’s desire to allow immediate expensing of business-equipment purchases, this is faulty industrial policy run amok made even worse considering McCain's stated aversion to aiding special interests. Put simply, we shouldn’t be complicating the tax code even more with rules that favor one business-constituent group over others. Secondly, it’s bad policy. The reality is that American business success stories from Google to FedEx to Goldman Sachs are successes of the mind, as opposed to equipment. Rather than pushing a Keynesian plan meant to stimulate equipment purchases, politicians should be closing special-interest loopholes in favor of reform that reduces the success penalty without regard to the kind of commerce engaged in.
Asked by CNBC’s Larry Kudlow about executive pay, McCain opined that “there are bad corporate executives and corporate greed that has to be checked.” While it says here that free markets constitute the ultimate check on alleged corporate greed, that quality executives are priceless, and that CEO pay when it comes to company successes and failures reflects their potential value, even those who agree with McCain should be concerned with his stance.
Indeed, even if it were true that markets are wanting when it comes to punishing business failures, if the executive branch can somehow have a controlling stake in CEO pay, it will surely aggregate to itself powers those concerned about executive pay won’t like. One area to look is anti-trust given McCain’s idolization of Teddy Roosevelt. Despite the fact that anti-trust rules arguably weigh on our economy more than the most governmental policies, if as president McCain were to nose his way into pay, he logically wouldn’t stop there. The desire of some to let the executive branch rein in occasional mistakes on the pay front will reveal itself in ways many won’t like.
Lastly, when asked by Kudlow about the falling dollar, McCain’s response was concerning for his mention of the trade “deficit” somehow factoring into the weak greenback. That there’s no causal relation between the two was a red light, plus McCain’s desire to give drivers a “summer holiday” from federal gas taxes speaks to a fundamental misunderstanding about why gasoline is presently expensive. McCain, like seemingly every candidate in this cycle, has not picked up on the basic truth that oil and gas are expensive precisely because the dollar is weak.
That no one with a shot at the White House has addressed this basic issue speaks to how uninspiring this election will be. With no candidate aware of the strong correlation between inflation and recession, we on one hand have a candidate like McCain who presently embraces certain market-friendly ideas that he’s historically been uncomfortable with. On the other, we have two candidates from the Democratic side of the aisle who frequently seek to outdo each other in terms of showing they’re good on tax “fairness;” meaning they’ll reduce the wages of those not yet rich by taxing the rich.
So in assessing our future economic prospects under all three candidates, whatever their true policy instincts, we thankfully have the existence of the stock markets to make sure none cause too much damage. Indeed, while it’s presently fashionable to question the markets and the signals they provide, as a nation of investors we can rest assured that no matter who’s elected, the often harsh message of the markets will presumably restrain any of our choices from causing too much harm. Other than that, buyer beware.