McCain’s Economy Platform: Big Tax Cuts, With Caveats


WASHINGTON — Imagining how John McCain, the Navy war hero, would play the role of commander in chief has been easy. Imagining how John McCain, the policy maverick, would lead as chief executive of the U.S. economy has been tougher.

In a wide-ranging interview last week, Sen. McCain offered the most-detailed account to date of his thinking on economic issues.

The all-but-certain Republican presidential nominee cast himself as a defender of the Bush tax cuts he voted against, but added caveats to a “no new taxes” vow he made on a Sunday television talk show two weeks ago.

On Social Security, the Arizona senator says he still backs a system of private retirement accounts that President Bush pushed unsuccessfully, and disowned details of a Social Security proposal on his campaign Web site.

Sen. McCain said the Federal Reserve should cut interest rates now to bolster the economy, but added that as president, he couldn’t be so explicit on monetary policy. “Presidents have to be careful so they’re not perceived as putting undue political pressure on the Fed,” he said. “So I would certainly be more careful than I am today.”

With the U.S. economy softening, he said he might have “a couple of fireside chats with the American people because of what we see in the [consumer] confidence barometers.” But he added that the most potent economic stimulus would be to assure Americans that taxes won’t go up in the future and to “call for a meaningful — and I mean meaningful — approach to simplifying the tax code so that it’s fairer and flatter.”

Those who know him well expect that a McCain presidency would be hard to categorize — a conservative populist who acts by instinct rather than economic ideology. For businesses, that could make him hard to predict; for opponents, hard to pin down. In his 25 years in Congress, the Arizona senator has defined himself on economic issues more by his adversaries than by overarching economic principle.

“Sometimes he sees excesses in government and sometimes he sees excesses in the corporate world, and both make him sick,” says John Raidt, a longtime McCain policy aide.

As chairman or senior Republican member of the Senate Commerce Committee — which oversees old-line industries such as railroads as well as businesses such as the Internet — he has squeezed broadcasters to hand back valuable airwaves and cable companies to let consumers pay for individual channels, rather than having to buy an expensive bundle. Despite these fights, media industries now are among his biggest campaign contributors, realizing that even if he loses the presidency, he’ll still have a big say in their businesses as a lawmaker.

But his congressional assignments haven’t forced him to wrestle with broader issues of tax, monetary and Social Security policy.

Retirees’ Nest Egg

A centerpiece of a McCain presidential bid in 2000 was a plan to divert a portion of Social Security payroll taxes to fund private accounts, much as President Bush proposed unsuccessfully. Under the plan, workers could manage the money in stocks and bonds themselves to build a nest egg and, at retirement, also receive reduced Social Security payments from the government. Proponents say the combination of the nest egg and government payouts could give a retiree more than the current system, but opponents say the change would undermine the Social Security system.

Sen. McCain’s 2008 presidential campaign Web site takes a different view, proposing “supplementing” the existing full Social Security system with personally managed accounts. Such accounts wouldn’t substitute for guaranteed payments, and they wouldn’t be financed by diverting a portion of Social Security payroll taxes.

Mr. McCain’s chief economic aide, Douglas Holtz-Eakin, a former head of the Congressional Budget Office, says economic circumstances forced changes concerning Social Security policy. Vast budget surpluses projected in 2000 evaporated with a recession, the Bush tax cuts and the cost of responding to Sept. 11.

As a result, the McCain campaign says the candidate intends to keep Social Security solvent by reducing the growth in benefits over the coming decades to match projected growth in payroll tax revenues. Among the options are extending the retirement age to 68 and reducing cost-of-living adjustments, but the campaign hasn’t made any final decisions.

“You can’t keep promises made to retirees,” says Mr. Holtz-Eakin, referring to the level of benefits the government is supposed to pay future retirees. “But you can pay future retirees more than current retirees.”

Asked about the apparent change in position in the interview, Sen. McCain said he hadn’t made one. “I’m totally in favor of personal savings accounts,” he says. When reminded that his Web site says something different, he says he will change the Web site. (As of Sunday night, he hadn’t.) “As part of Social Security reform, I believe that private savings accounts are a part of it — along the lines that President Bush proposed.”

Sen. McCain says that as president he would start negotiations with Democrats to fix Social Security. The program’s trustees say by 2041, projected tax revenues will cover only three-fourths of currently promised benefits.

On the Democratic side, the two contenders have been far from clear what they would do also. Sen. Barack Obama has said he would raise the ceiling on wages subject to the Social Security payroll tax to boost revenue, but he hasn’t specified the size of the tax increase. Sen. Clinton calls for personal investment accounts on top of existing Social Security, similar to what the McCain campaign Web site suggests, but she hasn’t laid out how she would fix the program’s looming insolvency.

Fine Line on Taxes

On taxes, Sen. McCain is walking a fine line between courting keep-taxes-low Republicans while insisting he is the candidate of fiscal discipline. Two weeks ago, ABC’s George Stephanopoulos asked him on “This Week” if he were a “‘read my lips’ candidate, no new taxes, no matter what?” referring to a pledge made by President George H.W. Bush, which he later broke. “No new taxes,” Sen. McCain responded. “But under circumstances would you increase taxes?” Mr. Stephanopoulos continued. “No,” Sen. McCain answered.

Asked in The Wall Street Journal interview to clarify, Sen. McCain softened that stance. “I’m not making a ‘read my lips’ statement, in that I will not raise taxes,” he says. “But I’m not saying I can envision a scenario where I would, OK?”

Behind the scenes, his campaign is searching for ways to pay for Sen. McCain’s tax proposals. In addition to extending the Bush tax cuts, the 71-year-old candidate would slash the corporate income-tax rate from 35% to 25% at a cost to the Treasury of $100 billion a year, estimates Mr. Holtz-Eakin.

In all, his tax-cutting proposals could cost about $400 billion a year, according to estimates of the impact of different tax cuts by CBO and the McCain campaign. The cost will make it difficult for him to achieve his goal of balancing the budget by the end of his first term.

To pay for the cut in corporate tax rates, Sen. McCain is considering eliminating some corporate tax breaks listed by a bipartisan tax reform panel appointed by President Bush, who ignored its report. The panel outlined different ways to change the tax code to spur U.S. competitiveness.

Among the candidates for elimination are a 2004 break for manufacturers — written so broadly that it includes computer software makers, construction firms and architects — a low-income housing credit, and tax breaks for life-insurance companies, credit unions and exporters. Undoing those breaks would raise a maximum of around $45 billion a year, still leaving a big hole.

“There could be a fairer, flatter tax proposal that I might embrace, that you might look at the minutiae of it and say, well, that’s going to increase somebody’s taxes,” he says. “But they eliminate the inequities, the complexities, and all of the things that characterize our tax code today.”

Sen. McCain began to prepare himself for campaigning on economics late in 2005 when Mr. Holtz-Eakin and conservative Kevin Hassett, a veteran of the 2000 McCain campaign, started sending him four-page weekly briefing papers on tax reform, trade and other issues. Sen. McCain also consults with business and political leaders including Cisco Systems Inc. Chief Executive John Chambers; former Republican Texas Sen. Phil Gramm, a deficit hawk; and former Republican vice presidential candidate Jack Kemp, who hails from the deficits-don’t-matter side of the party.

Sen. McCain rarely makes a public appearance without supporters with strong business or economic pedigrees, such as former Hewlett-Packard chief Carly Fiorina or Mr. Kemp. At town-hall meetings earlier in the campaign, he sometimes turned over economic questions to them.

As a presidential candidate, Sen. McCain has faced hostility from the political right because he voted against two rounds of Bush tax cuts. “I voted against the tax cuts because of the disproportional amount that went to the wealthiest Americans,” he said on NBC’s “Meet the Press” in January. He also said the tax cuts weren’t matched by spending restraints, as he had wanted.

Now, given the worsening economic situation, he says it’s important to fight to extend the tax cuts, which are set to expire in 2010.

While other candidates were scrambling in January to put together stimulus plans to boost flagging consumer spending, he proposed long-term tax cuts which could take years to come into law. “In the shorter term, if you somehow told American businesses and families, ‘Look, you’re not going to experience a tax increase in 2010,’ I think that’s a pretty good short-term measure,” he says.

Sen. McCain also favors making corporate tax credits for research-and-development permanent and eliminating the alternative minimum tax. The AMT was designed years ago to keep the wealthy from using deductions to avoid paying taxes altogether, but, unless altered, will ensnare a growing number of middle-class taxpayers.

To show he can control spending, Sen. McCain cites his long record as a spending hawk, who battles sweetheart deals between the Pentagon and defense contractors, as well as projects that lawmakers of both parties cram into appropriations bills — “earmarks,” in budget lingo.

Congressional earmarks total $18 billion a year, according to the Taxpayers for Common Sense, a Washington, D.C., research group — and each has a member of Congress who will ferociously fight to keep that spending going. Mr. Holtz-Eakin, the McCain adviser, says that earmarks actually cost $60 billion a year, counting programs that started in earlier years and get funded year after year.

Another source of spending cuts eyed by the McCain campaign is a White House hit list of underperforming or redundant programs. But again, the numbers are relatively small — $18 billion annually — compared to the cost of Sen. McCain’s tax plans, and the programs include housing loans, education grants, and water projects popular with Congress.

The uncertainty involved in estimating the future costs of wars in Iraq and Afghanistan also could make it hard for him to make his budget targets. The CBO estimates spending on the wars at about $145 billion this fiscal year, which ends Sept. 30.

Sen. McCain’s admirers say that by running for president as a spending hawk, he will tilt the politics of Washington in favor of spending restraint, in the same way George W. Bush’s promotion of tax cuts during the 2000 campaign helped him build momentum for his plan. “If he proposes [a balanced budget] and doesn’t get it, that doesn’t mean it won’t have a positive effect of having a lower series of deficits that there otherwise would be,” says Barry Anderson, a former senior budget officer during Republican and Democratic presidencies.

Taking On Industry

Another question is how Sen. McCain would regulate business. He has fought with the drug industry to allow the importation of pharmaceuticals from Canada and permit the government to negotiate over drug pricing; tangled with broadcasters to force them to hand over transmission channels so they can be used by police and fire departments and other users; and taken on the airline industry over a consumer-rights bill, among other slugfests.

But some lobbyists in industries he has targeted are sanguine, figuring Sen. McCain won’t focus much on issues such as drug importation once he has a bigger stage. One member of Sen. McCain’s health-care task force, which endorsed drug importation, was a former McCain aide, Sonya Sotak, who lobbies against drug importation in her day job as an Eli Lilly lobbyist. “I don’t impose my professional views on the senator,” she says.

During his years at the Commerce Committee, Sen. McCain became the focus of lobbying from the telecommunications and health-care industries, given his focus on those fields. Now, health professionals, lobbyists, and individuals in the computer, television and movie industries are among his largest industry contributors, says the nonpartisan Center for Responsive Politics.

The law firm of Philadelphia-based Blank Rome LLP, which lobbies for cable company Comcast Corp. and drug company Abbott Laboratories, among others, is among Sen. McCain’s largest contributors. The firm’s employees have donated $188,000 to him, according to the center.

“My desire to support McCain has nothing to do with any client of my law firm,” says David Girard diCarlo, the firm’s chairman. Former Democratic vice presidential candidate Geraldine Ferraro, who backs Sen. Clinton, is a senior official at Blank Rome, which has raised $113,000 for the Democratic presidential candidate.

Climate Change

Sen. McCain’s biggest regulatory effort is likely to come in the field of climate change. Along with independent Connecticut Sen. Joseph Lieberman, who was then a Democrat, Sen. McCain introduced the earliest version of a cap-and-trade system in 2003, and the pair have refined their ideas since. Under their plan, the government sets emissions goals. Companies that can’t meet their targets must buy permits to produce carbon dioxide, either from companies that produce less CO2 than they are permitted, or from the government.

The system may require a large regulatory apparatus. In the latest McCain-Lieberman version, the government would auction off carbon-emission permits. According to Harvard economist Robert Stavins, such sales could raise $50 billion to $100 billion a year.

An Energy Department analysis says Sen. McCain’s plan raises energy prices so much that it would reduce economic growth.

“I hear this interesting argument that somehow this would cost more money to our economy,” says Sen. McCain. But, “I am absolutely convinced that innovation, technology, and using the entrepreneurship of America will come up with technologies which will save money, be a boon to our economy, and clean up our environment.” He’s unlikely to get much argument on this from his Democratic opponents; Sens. Obama and Clinton co-sponsored Sen. McCain’s legislation.

//wall street journal

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Posted in Economics, Money

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