The central question in this election is, Which candidate can most improve our wobbly economy? Here, the McCain-Obama contrast could not be sharper.
Obama has proposed increases in every major federal tax. He has proposed to increase individual income taxes, with the top rate to rise to almost 40 percent. He has proposed to increase the top capital-gains tax rate by 33 percent. He has proposed the same for the top tax rate on dividends. He has proposed to increase payroll taxes, with a rate increase of 16 percent to 32 percent for workers earning over $250,000 a year. He has proposed to reinstate the death tax (estate tax), now phasing out under current law, with a top rate of 45 percent. He has proposed several increases in corporate taxes, including a so-called windfall-profits tax on oil.
Nobel Prize-winning economist Robert Mundell has written that if such tax increases are adopted, the U.S. economy will suffer “a deep recession, a nosedive,” and the dollar will decline further. Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression, claims Obama has proposed the exact same policy mix that led to the depression of the 1930s. During the primaries, Obama railed against free trade, proposing even to renegotiate free-trade agreements with our top two trading partners, Canada and Mexico. He has opposed the Columbian Free Trade Agreement, even though it primarily removes tariffs on American exports to that country, with barriers to Columbian exports to America already almost all removed under the Andean Trade Preferences Act.
In sharp contrast, McCain has promised tax cuts to promote economic growth and strengthen the U.S. dollar. The federal corporate tax rate today is 35 percent, and McCain suggests cutting it to 25 percent. This would mirror rates elsewhere: The average corporate tax rate in the European Union was slashed from 38 percent in 1996 to 24 percent by 2007. The rates in India and China are lower as well. American companies are not going to produce more jobs and higher wages with this crippling competitive disadvantage.
McCain also proposes immediate expensing for capital investment, which means that capital costs can be deducted in the year they are incurred, like all other business expenses, rather than spread over many years under arbitrary depreciation schedules. And making the Bush tax cuts permanent, as McCain has pledged to do, would leave the top individual income tax rate at 35 percent, and the capital gains and dividends tax rates at 15 percent, while eliminating the death tax. He would also double the personal exemption for children and other dependents to $7,000.
McCain proposes as well to abolish the Alternative Minimum Tax, originally adopted to ensure that a small number of the richest Americans pay at least some tax. Because it was never indexed for inflation, today it increasingly imposes sharp tax increases on the middle class in the highest-tax states. Since it was never intended to be a big tax increase on the American people, McCain argues it should be eliminated. McCain also pledges to ban taxes on the Internet and on cell phones, consistent with his longstanding record.
McCain also promises to maintain his longstanding support for free trade. He favors the Columbian Free Trade Agreement, and pledges to repeal the 54-cents-per-gallon tariff on sugar-based ethanol, as well as sugar import quotas, which should help to lower prices for gas and food.
In 1962, Democratic president John F. Kennedy said, “The purpose of cutting taxes now is not to incur a budget deficit but to achieve the more prosperous, expanding economy which can bring a budget surplus.” Today it is the Republican John McCain who is proposing these policies, which led to the economic boom of the 1960s.
On federal spending, Obama and McCain could not be farther apart, either. Obama promises to use his tax increases for a raft of new spending programs, estimated to cost almost $1.5 trillion over the four years of a presidential term, and quite possibly more. These include national health insurance, a new global war on poverty costing $65 billion per year in increased foreign aid, $150 billion to put people to work building new “green technologies,” $72 billion more for education, $60 billion for an “energy plan,” $60 billion for a new National Infrastructure Reinvestment Bank, and $14 billion for a national-service plan. Obama proposes as well to increase “assistance to state and local governments so that they don’t slash critical services like health care or education.” He also says, “I’ll double spending on quality after-school programs.”
McCain proposes to strictly limit overall spending, pledging to balance the budget by the end of his first term. He proposes a one-year freeze on all federal discretionary spending outside of defense and veterans benefits, and to limit overall federal spending growth to 2.4 percent, about one-third the average annual increase since 2000. He promises to reclaim the money committed to earmarks, eliminate broken, ineffective government programs, reform procurement policies to cut wasteful defense spending, and “veto every pork-laden spending bill and make their authors famous.”
On energy, both support cap-and-trade plans that would limit greenhouse-gas emissions and require companies to obtain rights to emit. (McCain’s plan would arguably be less costly.) McCain and Obama would also both provide extensive government assistance to the development of alternative energy sources, such as wind, solar, geothermal, and others.
But McCain would expand domestic oil and natural-gas exploration and production, which would ultimately reduce the price of oil, natural gas, gasoline, and heating oil. McCain would further lower energy costs by eliminating the tariff on imported ethanol, and by repealing the costly federal mandate requiring an increase in ethanol use throughout our economy.Obama makes no promise to try to reduce gas or oil prices. Rather, he has said that high gas and oil prices are good for the environment.
McCain has also pledged a revival of nuclear power, which would also sharply increase energy supply. He would seek 45 new nuclear plants by 2030, and 100 new plants over the long run. Obama says, “there is no future for expanded nuclear power without first addressing four key issues: public right to know, security of nuclear fuel and waste, waste storage, and proliferation.”
Frankly, we are going to need a new theory of economics to argue that Obama’s much higher taxes, much higher spending, protectionism, and much higher energy costs are going to revive the economy and promote economic growth. We don’t have to predict a new Great Depression to recognize that Robert Mundell and Amity Shlaes have a point. Obama’s policies would accelerate the economic downturn into a full-scale panic. They would not only likely crush investment, but would promote capital flight from the U.S. and worldwide flight from the dollar. This would collapse the dollar, and promote soaring inflation.
Except for the badly confused cap and trade plan, which he shares with Obama, McCain’s economic program of cutting taxes, restraining spending, balancing the budget, promoting free trade, and increasing energy production, seems to be exactly what our economy needs right now.
The election debate needs to focus on these issues. McCain in particular needs to press his strong advantage here, and to be more articulate than he has been in doing so.
— Jack Kemp is a former congressman from Buffalo and secretary of the U.S. Department of Housing and Urban Development. He founded and now serves as the chairman of Kemp Partners. Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, and formerly served in President Reagan’s White Office of Policy Development, and as associate deputy attorney general of the United States under the first President Bush.