Politics & Policy

A Middle-Class Tax Cut for McCain

A spoonful of tax credits will help average voters swallow the corporate tax cuts.

Senator John McCain has proposed one of the most unambiguously pro-growth tax cut plans since the Kemp-Roth-Reagan tax cuts of 1981. He wants to slash the U.S. corporate tax rate from 35 to 25 percent, provide immediate 100 percent expensing for business investment, and make the Bush pro-growth tax rate cuts permanent. If implemented, the McCain plan would lead to higher economic growth, higher living standards, and increased employment opportunities.

The McCain plan has only one shortcoming: It does not provide enough direct tax relief for working middle-class families struggling with the high and rising cost of living. Yes, McCain’s plan calls for doubling the personal exemption for children and other dependents to $7,000, but as Rich Lowry pointed out: “people down the income scale don’t pay enough in income taxes for the deduction to make much of a difference, and for everyone else, McCain fully phases it in only in 2016.” By contrast, Senator Obama’s redistributionist tax plan — with its hodgepodge of special tax breaks for specific groups of taxpayers and specific activities — provides more tax relief for the middle-class than McCain’s plan.

McCain could trump Obama and provide more tax relief to middle-class families by significantly increasing the child tax credit. Created by the Taxpayer Relief Act of 1997, the child tax credit started at $400 per qualifying child and was increased to $1000 per child by the Jobs and Growth Act of 2003. The tax credit is non-refundable, which means that it cannot be used to offset the payroll tax burden.

Specifically, Senator McCain should propose doubling the current child tax credit from $1,000 to $2,000, and providing tax relief to lower-income working families by making it refundable. To help families deal with the immediate pain of slow growth and rising costs, the increase ought to be temporary — perhaps for one or two years. This would also keep the tax revenue loss — about $40 billion per year — temporary and manageable.

Doubling the child tax credit would make a huge difference for American families. The typical married couple with two children would get a tax cut of $2,000.

Pro-family advocates have long-argued costs of raising children, including forgone income, represent investments in human capital — investments that are currently overtaxed. Some supply-siders oppose large pro-family tax exemptions or tax credits on grounds that it is a waste of tax revenue because it does not spur growth, and that it takes too many people off the tax rolls, thus increasing the public’s appetite for government services.

Sure, tax credits do little if anything to increase economic growth because they don’t boost incentives to work, save, produce and invest. But what supply-side theorists fail to recognize is that pro-family tax relief provides the political boost needed to carry the other pro-growth elements in McCain’s plan. Remember, the child tax credit was an essential ingredient in the 1997, 2001, and 2003 tax reduction laws, which included significant pro-growth tax provisions.

On the argument about taking too many people off the tax rolls each year, the fact is that workers move across income classes over time, which is why static tax distribution tables are often misleading. Given this dynamism, we should not be concerned with some workers falling off the tax rolls in a particular year, based on where they are in their life cycle. Parents with more after-tax income are less likely to demand government services.

In the long-run, conservatives should consider fundamental tax reform that flattens tax rates, abolishes double taxation, and provides a sizeable exemption for families with children. But for now, conservatives must focus like a laser beam on keeping the current marginal tax rates low — and that means electing John McCain as our next president. Cutting the corporate tax rate to 25 percent, as McCain proposes, is fabulous economic policy, but it doesn’t make for the best bumper sticker.

Armed with a big middle-class tax cut, McCain would be better able to compete for the independent working- and middle-class voters in swing states like Michigan and Ohio who hold the keys to the White House.

— Cesar Conda was Assistant for Domestic Policy to Vice President Cheney and a Senior Economic Advisor to Governor Mitt Romney during his presidential campaign.

Cesar Conda — Mr. Conda, formerly assistant for domestic policy to Vice President Cheney, is a founding principal of Navigators Global, a Washington, D.C.–based public-affairs firm.

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