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Rudman’s Revenge: Sinking John McCain


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Larry Kudlow

Surprise, surprise. Former New Hampshire Senator Warren Rudman, John McCain’s national chairman, has hit back against George W. Bush’s tax-cut offensive. Rudman’s harsh remarks will play big, but won’t help McCain — in fact, he couldn’t have a worse surrogate on taxes.

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Rudman has never been a friend of tax cuts, and has always been a root-canal austerity-minded policy advocate, obsessing over budget deficits throughout the 1980s and most of the 1990s. He has always had a gloomy view of federal finances specifically, and economic growth more generally — and has been consistently wrong on both counts.

As one of the co-chairmen of the Concord Coalition — whose spokesmen have repeatedly testified in Congress against tax cuts — Rudman has convinced McCain that the New Economy-federal surplus story is a fake. This will help lose the Republican presidential nomination for John McCain. Thanks a lot, Warren.

Today, Rudman argued that McCain’s tax plan would help working families, save Social Security, pay down the $5.5 trillion federal debt, and close $150 billion in corporate-tax loopholes. Rudman repeats the McCain line that the plan would allocate 62% of the non-Social Security surplus to save Social Security, 10% to Medicare, and 5% to paying down the national debt. He then charges that Bush’s plan would use “the entire surplus” to finance his tax cuts.

Rudman, of course, ignores the bottom-line problem with McCain’s approach, namely that there is virtually no growth-incentive impact. While Bush lowers the top personal rate from 40% to 33%, and the bottom rate from 15% to 10%, McCain leaves the top rate alone and makes no reductions in the marginal tax-rate structure. (McCain would widen the 15-percent bracket to prevent tax-bracket creep, but this would have only the softest incentive effect.) So under McCain, we will still have President Clinton’s 40% top rate and we will still have 5 tax brackets, so there is no flattening of the code, no simplification, and hence no incentive effect. More than any other point in this intra-GOP debate, this is the key issue: McCain departs from Ronald Reagan’s approach of lowering marginal tax rates to promote economic growth.

While McCain is absolutely right on the question of Internet taxes, the rest of his positions on taxes are riddled with problems:

  1. His $152 billion in so-called loophole closers — aimed principally at oil and gas and mineral sectors, but including restaurants and real estate — is nothing more than a huge tax hike on business. It’s no accident that it is nearly identical to the plan proposed by liberal Democrat Bill Bradley. There is merit in abolishing targeted business-tax provisions, but the point of the exercise should be to accompany loop-hole closers with a reduction in the overall corporate tax rate, which neither McCain nor Bradley is proposing. Remember: One man’s loophole is another’s tax cut. The reason businesses seek special tax provisions in the first place is to offset the burdensome corporate tax code, which McCain will simply leave at its current high levels.
  2. If McCain were truly interested in moving toward a consumption tax through expanded incentives for savings, he would have proposed universal, unlimited Roth IRA’s. Instead he proposed yet another, duplicative ordinary IRA. This will only confuse ordinary taxpayers; it moves away from reform and toward additional complexity in the tax code.
  3. The CBO is about to release new numbers showing that the so-called general revenue surplus, excluding Social Security, is now projected to rise another $1 trillion. This adds credibility to Gov. Bush’s plan. Indeed, it actually widens the potential scope for even deeper marginal tax-rate cuts — without touching the Social Security surplus. Rudman conveniently ignores this, as he’s tried to do with almost all good economic news over the last 15 years.
  4. McCain would use general operating-budget surpluses to finance Social Security reform, which would set a bad precedent. There’s no reason why policymakers shouldn’t use the Social Security surpluses to reform Social Security, while using operating-budget surpluses to reduce personal and business taxes. That’s the cleanest road to reform.
  5. Finally, the idea of paying down all federal debt is, to put it mildly, goofy. It will hinder Federal Reserve monetary operations. It will damage international trade payments, which are made in dollars. And it will undermine the value of the dollar itself. And this is just the start. Roughly $2 trillion of the outstanding debt is owed to the Social Security system by Uncle Sam. The cash proceeds of this non-marketable Social Security debt revert back to Uncle Sam by law, and therefore will undoubtedly be spent on general budget operations.

In short, this is just the sort of plan Warren Rudman WOULD endorse. When George Bush said in the Michigan debate that his Texas tax cuts lowered the state’s spending baseline, he had the story exactly right. As Ronald Reagan taught us a long time ago, the best way to limit government, and curtail special interests, is to use tax cuts to starve the beast. Rudman didn’t like it then, so there’s no reason to expect he would like it now.



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