I’m not entirely sure that tax cuts are what the country needs. But it makes sense for a Presidential candidate to propose them on April 15, which is exactly what John McCain has done today. This is part of his attempt to answer critics who are wary that he is weak on economic issues — a concern that I share, more now than before. McCain seems to offer fairly ambitious proposals but in fact they are not a big deal at all:
Temporarily suspending the gas tax for summertime seems like a good idea this year, not next. This will encourage tourism and transportation of goods and services, which would provide a stimulus to the economy. But it won’t “pay for itself” (an odd way of describing a tax cut, when you think about it) in generate payment of other kinds of taxes. So as a long-term solution, this is probably a bad idea. The government needs money to function and it’s got to come from somewhere. The gas tax is about the fairest one out there because it’s pay-at-the-pump, so only actual users of the highways actually pay the tax. My impression of the proposal, though, is that it is something McCain would want enacted during his Administration.
McCain would roll back and eventually eliminate the Alternative Minimum Tax (AMT). For those of you who don’t know what this is, it was intended to be a way of limiting the extent to which high-income earners can shelter their income from tax liability, but since being enacted the threshold for paying the tax has never been indexed to inflation. $100,000 is still good money to make in a year, but it isn’t as impressive as it used to be. The AMT is something people have feared for a while, but it has not yet begun to affect a lot of people in the middle class. It will start to do so in the next few years if it is not indexed to inflation or the cost of living. But we’re not quite… there… yet. So this is more of a preventative measure to prevent what will effectively be a tax increase. So that’s a good idea. But it’s probably going to happen anyway since people have been raising the AMT like a boogeyman for two years now.
I personally do not think that increasing exemptions for dependents is a particularly great thing. It won’t benefit me; I don’t have any dependents. But I realize that kids are expensive and the exemption now is probably too low to be fair to individual taxpayers who have them. Conversely, again, the money’s got to come from somewhere. There aren’t enough rich people for their tax rates to matter, and poor people don’t pay enough taxes for the revenue they generate to matter, so the burden of paying taxes of necessity always fall on the middle class (broadly defined). Within that group, we can argue about whether people who make $100,000 a year pay a disproportionate and/or unfair burden as opposed to people who make $40,000 a year or people who make $250,000 a year.
With that in mind, flattening the tax rates is more of a symbolic maneuver than anything else. It seems fair, but then again it seems that I’m an elite so it would. If I were economically disadvantaged, I would be highly suspicious that it would be a hike in my taxes. I don’t think people who are economically disadvantaged need a take hike right now, even less so than middle-class or wealthy Americans. Even where I’m at, I’m wary that a change in the overall tax code will produce an increase in my taxes, that the “leveling point” will be one of higher net revenue and therefore on average, most Americans will pay more, not less. Mitigating this is that the existing progressive scheme would still be available as an alternative for taxpayers to choose, for several years at least.
Finally, the “permanent” ban on the new communications taxes is again a symbolic gesture, since there really aren’t any now (other than regular in-state sales taxes) and cell phones are already taxed plenty. I think cell phone users can probably afford to pay more taxes – cell phones are a luxury, after all. Not so much that it depresses cell phone use, but if there were a 5% hike in user fees and other taxes, I would not think that was so awful and I’d pay them without a gripe. It would be nice, though, if the cell phone tax scheme were simplified. I cannot make heads nor tails of the ten or so taxes that appear itemized on my monthly cell phone bell (when I get it at all, thanks to those idiots at Verizon who have now ignored my address change five months in a row and have created an online login system that consistently fails to recognize me, but that’s a different gripe altogether).
So the McCain tax cut proposals actually leave me lukewarm. I enjoy the spirit in which they’re offered, but they really aren’t all that meaningful.
What is meaningful, and the issue he should be running hard on, is fiscal responsibility. The American people are not undertaxed, to be sure. But the real problem isn’t the amount of money the government is taking from its citizens, it’s what the government is doing with that money once it gets it. Restoring balance to the federal budget is not just the responsibility of the taxpayers. At least an equal burden rests on the leaders of the government to use that money wisely. McCain is right to crusade against Hillary Clinton’s earmark of money for a Woodstock museum – he’s also in the enviable position of having a clean record on earmarks himself. So prohibiting earmarks is a good start, but we’re not talking about enough money to make a real difference.
The last thing McCain proposes is freezing “discretionary spending.” What, exactly, is this? According to the writings about McCain’s broader economic policies, that would mean every program would spend, next year, what it spent this year, with the exception of military expenditures and veteran’s benefits. The problem is that there are some things that simply cannot be changed, by anyone, because they are entitlements or obligations. Not indexing Social Security and Medicare to inflation (as is the current practice) is the functional equivalent of cutting those programs. And we cannot stop servicing our national debt. More to the point, these are not what is meant by “discretionary” spending. So that’s really off the table in McCain’s proposal anyway — so he may not even be talking about not indexing the spending.
As the table to the left demonstrates (hat tip for the link to Andrew Sullivan), SSI, the existing (and allegedly inadequate) federal health care behefits, and debt servicing constitutes a majority of the budget. If McCain takes military spending off the table for growth in the bugdet, too, that leaves 27% of the budget — “safety net programs” and “everything else” as the only places where fat can be trimmed. I’m not averse to trimming in medical benefits and social security, and maybe not indexing is the way to smooth it through — although opponents will point out that a $400-per-month social security check in 2007 will simply not go as far in 2009, especially if we enter a period of significant monetary inflation, something which seems more and more inevitable to me.
More to the point, McCain needs to propose meaningful fiscal reforms that, by the end of his first term as President, would produce a government living within its means and still meeting its responsibilities. He doesn’t have to get down to line-item specifics, but he does need to indicate broad areas, beyond earmarking, where spending will be restricted. This is a pitch McCain can credibly make, one that will find an audience, but which has yet to be incorporated as a substantial part of his policy platform. There is yet time for McCain to assemble a team of economists and budget experts to put together a proposal to this end, but a trial balloon needs to get floated well before the Republican National Convention so that a more powerful economic platform can be offered.
