Politics & Policy

Economics for Middle America

Competitiveness, prudence, and growth: These are the watchwords of John McCain’s economic policy. He would reduce the corporate tax rate to a level comparable to those of our major trading partners, making American businesses competitive. He promises to balance the budget by 2013 and to eliminate earmarks immediately. He would keep taxes on investment low so that the economy will flourish.

The sophisticates in the press will of course scoff that it is impossible to cut taxes while balancing the budget. But let’s not overestimate the difficulty of getting rid of the deficit. Earlier this year Kevin Hassett simulated what would have happened had President Bush and Congress kept discretionary spending to the level envisioned by the Congressional Budget Office in 2001. The result: “[W]e could have had the prescription-drug plan, the Iraq war and the war against terrorists. We could have kept all the Bush tax cuts, made them permanent, repealed the AMT and added the stimulus package and still ended up with a balanced budget from 2008 to 2017.” If Hassett is in the right ballpark, we should be skeptical about the predictions that McCain’s plan cannot work.

Our own worries about the McCain plan are different. It offers very little in the way of direct benefits to Americans in the middle of the income scale. Controlling spending and cutting corporate tax rates may benefit them a great deal — but only indirectly and eventually. Republicans have won on the tax issue when they have also put money in people’s pockets.

The McCain campaign points out that Barack Obama voted for a Democratic budget resolution that would have raised taxes for people making as little as $32,000 a year. In this campaign, however, Obama is promising to hold middle-income voters harmless and raise taxes only for people much richer. McCain needs to cut middle-class taxes, not just keep them from rising, to get to Obama’s right.

One element of McCain’s plan will help middle-class families directly. He would double the exemption for dependents from $3,500 to $7,000. It is not much: For a household in the 15 percent tax bracket, the increase would be worth only $525 per child per year. A more direct approach to reducing the overtaxation of families would be to expand the child tax credit, and to make it applicable against payroll as well as income taxes. But what McCain has proposed is a beginning.

For Sen. McCain to raise the country’s long-term growth rate he must first get elected. Our advice to the senator: Improve the voters’ bottom line, and they will be much more likely to listen to what you have to say about growth, competitiveness, and prudence.

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