McCain's Impotence on Tax Policy

Somewhat Republican (meaning RINO) nominee for the Office of President of the United States Senator John McCain (R - Arizona) has a tax plan that needs help from a little blue pill. Read a summary of the Candidates' intentions on page 5 of this document.

Rather than try to reform the tax code to achieve specific policy objectives, the Senior Senator from Arizona has put forward a lukewarm tax proposal that reflects his years in the Senate. His policy is to doodle around the edge with incremental changes or, in his most questionable policy moves, no changes at all.

The centerpiece of Senator McCain's proposal is keeping the status quo. He would sign legislation to make permanent the 2001/2003 tax cuts approved by the Republican majority in Congress and signed by President Bush. One wonders why they were made temporary anyway... but that is fodder for another article. He would also make permanent changes to the death tax and changes to the AMT (Alternative Minimum Tax) exemption. Other than that, his proposals mostly involve corporate taxation including a reduction of the corporate rate from 35% down to 25%.

As a policy this lacks coherence, particularly in as much as Principle and Policy believed the 2001/2003 tax cuts lacked coherence. The great issue in the wake of the internet bubble burst and the despicable events of 9-11-01 was capital formation. That is, there was great concern that the capital markets would be underfunded in the wave of defaults and bankruptcies in the tech sector. Reducing taxes on capital therefore made sense. But what about the $1000 per child tax credit that is "refundable" (refundable being Beltway speak for welfare payments to those with no tax liability)? Was baby formation a large problem after 9-11? What possible rationale is there for continuing such a policy?

Principle and Policy strongly supports reduction to corporate tax rates because 1) the U.S. rates are now among the highest in the world and 2) corporations don't pay taxes, people do. But other than that, there doesn't seem to be a solid reason for McCain's proposals other than he doesn't want tax increases. Senator Obama on the other hand seems to have such a guiding philosophy. He would continue to build in special breaks for the blessed groups at the expense of the others. He would turn the tax code into the welfare state that existed under President Carter.

The best tax proposals are those that see the tax code as a coherent whole and reform the code to achieve specific objects. Certain flat tax proposals probably meet this criteria. Senator McCain would implement an optional flat tax system with no deductions. Principle and Policy wonders why not continue to protect IRA/401k/HSA contributions to encourage these important savings vehicles? The U.S. has the lowest savings rate of all developed economies and capital formation continues to be in the long term interest of the country. Principle and Policy also questions why we should implement an optional flat tax when the AMT is a flat tax and already exists?

In the short-run McCain's resistance to raise taxes is likely preferable to Obama's tinkering. But Principle and Policy longs for a visionary tax reform plan that would dramatically alter incentives to encourage capital formation, investment, and wider stock ownership by the population.