by Doug Holtz-Eakin, Senior Policy Advisor, McCain 2008
On April 17, the Tax Policy Center posted “Scoring McCain’s Tax Proposals”. Although I remain a fan of efforts by organizations like the Tax Policy Center to analyze taxation issues, the analysis is misleading on the whole and wrong in some particulars.
At the broadest level, the problem is that the Center focuses on taxes in isolation, while the impact of Senator McCain’s proposal must take into account changes on the expenditure side as well. He has proposed specific discretionary cuts to offset the historic practice of waste and earmarks, a one-year discretionary “pause” (freeze) of spending outside of necessary military and veterans accounts, an overall program review that would encompass defense procurement plans and methods and non-defense programs, and a comprehensive health care reform that is the foundation for addressing the budgetary stresses from entitlements. More generally, the federal government now raises 18.8 percent of Gross Domestic Product in taxes, a figure which is above the average of the past several decades. Yet the fiscal outlook remains challenging. Why? Because of the projected growth in spending. In short, Washington has a spending problem—not a revenue problem. Putting our fiscal house in order is primarily a matter of controlling spending growth.
Turning to the particulars, the Tax Policy Center analysis is flawed in several ways:
It incorrectly attributes a proposal by Fred Thompson to Senator McCain. Senator McCain does support the general idea of having the voluntary choice between the current system and a simpler alternative with a broad exemption and a simple, two-bracket rate structure. As the campaign proceeds he will have the opportunity to flesh out his vision, including how such a system can be revenue neutral. To score a proposal as losing hundreds of billions of dollars when it isn’t even Senator McCain’s is simply wrong and should be corrected immediately.
It assumes immediate implementation of a set of proposals that constitute a vision for a tax code that is simpler, fair, pro-growth and aids international competitiveness. Senator McCain has described this vision over the past 15 months and will continue to develop it in the future. No major transformation of this sort has ever been undertaken without realistic timetables to phase-in new provisions. No major improvement to the corporate tax code would fail to consider—to pick a few examples—the future of the deduction for U.S. manufacturing activities when the rate is already much lower, the treatment of corporate interest in the presence of expensing, the inventory property sales source rules, and other business credits.
The scoring is dramatically influenced by the adoption of unrealistic congressional budgeting conventions. An analysis grounded in sound economics would evaluate the impact of tax and spending proposals that change the current course of policy. Current policy in the United States is an income tax that has a research and development tax credit, a top rate of 35 percent, taxes dividends and capital gains at a top rate of 15 percent, and each year provides a “patch” on the Alternative Minimum Tax. Senator McCain would reform but not change the magnitude the R&D tax credit. He would continue with the current tax rates. In short, there is no change and nothing to “score”. Senator McCain would eliminate the AMT, so it is appropriate to recognize the revenue reduction above and beyond the existence of the patch but no more.
In contrast, the Tax Policy Center uses the congressional baseline, which reflects current law and not current policy. Notice, for example, that the AMT gets patched every year—regardless of which party holds power in Congress—but a current law baseline assumes that it will revert to its full-blown form in the future. In addition, this approach is biased in favor of more spending and higher taxes. Any spending program—even a supplemental appropriation—is assumed to exist forever and rise at the rate of inflation; spending never declines. In contrast, an AMT patch or the current tax rates are assumed to expire and taxes rise. Senator McCain’s approach puts taxing and spending on equal footing by assuming that on both sides of the budget current policy continues in the absence of a proposal. This is not a mere technical quibble—the Congressional budgetary conventions simply defy common sense. If households followed this practice, anytime a spouse planned to go back to work but changed his or her mind, the family would have to cut their spending to “offset” the planned future rise in income.
While the budgetary implications of Senator McCain’s proposals are important, we need to keep our eye on the real goal, which is a tax code that better serves America workers by ensuring that they are not burdened when they invest in their children, move to the middle class, and compete in a global economy. Adoption of the Senator’s proposals would certainly move us in the right direction.
