>The prospect of large tax cuts died last year. One sign is the
>current success of Senator John McCain in the Republican
>presidential primaries. His proposed tax cut is in the same ballpark
>as Clinton's. Evidently the conservative crusade for huge tax cuts
>is over. The public didn't buy it. According to polls, the same
>could be said for paying off the national debt, but in this case the
>politicians have not gotten the message yet. All of them favor
>paying off the debt, including the President.
But Max, in today's WSJ, James Glassman says McCain's tax plan is a major step down the road to a flat tax! What do you make of it? Is it as reliable as his masterful Dow 36,000?
The full text follows.
Doug
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Wall Street Journal - March 1, 2000
Who's the Flat-Tax Candidate? John McCain.
By James K. Glassman, a fellow at the American Enterprise Institute and host of the Web site www.techcentralstation.com.
John McCain will readily admit that economics is not his strong suit. But despite that -- or more likely because of it -- he's come up with a powerfully appealing way to sell something that we economic sophisticates have so far been unable to peddle: the flat tax.
He doesn't stress the usual rhetoric about spurring investment at the margin. He barely mentions economics at all. Instead, he talks about making the lives of Americans (especially those with low and middle incomes) more rewarding by letting them build wealth -- assets in stocks and bonds that they can use to enrich their retirements or pass on to their kids or churches or charities. His plan is both simple and straightforward.
No Fiddling
Taxes are at the center of the economic platforms of both Republican presidential candidates, and despite all the arguing, the results of both plans would be similar. Under Mr. McCain's plan, a family of four (married couple, two kids) making $50,000 a year would see its tax bill cut to $1,660 from the current $3,770 -- a 56% reduction. George W. Bush's plan would cut such a family's bill by 50%.
But the approaches are utterly different. Mr. Bush takes the traditional trail -- blazed by Ronald Reagan and Jack Kemp -- of reducing marginal tax rates. Under his plan, the five current brackets, ranging from 15% to 39.6%, would become four brackets, from 10% to 33%.
There's nothing wrong with this idea, except that Americans aren't buying it. They rejected it in 1996 when Bob Dole tried to sell a similar version, and surveys indicate they continue to slough it off -- or even actively oppose it -- today. Maybe that's because people are enjoying prosperity and don't want to rock the boat. Or perhaps they don't want more fiddling with the tax code.
Mr. McCain's approach doesn't look like fiddling because it's so simple: Expand individual retirement accounts and push up the bottom tax bracket. He also makes no apologies about cutting taxes "first for those who need it most." As for the rich, he intends to get around to helping them a little later.
But Mr. McCain's most important contribution is setting the country straight down the road to a flat tax within a single presidential term. Here's how he addresses each of the flat tax's four main characteristics:
*The flat tax is a consumption tax. In that regard, it taxes only income spent, not saved. Last year, Kevin Hassett, my co-author on "Dow 36,000," and I came up with a simple idea we called the Freedom Account -- essentially a universal, unlimited IRA. Americans would get a tax deduction for income they put into the account, while earnings and capital gains accumulate tax-deferred. The money could be withdrawn after a year for any purpose (not just those prescribed by government, as now) with no penalty.
The Freedom Account would create a consumption tax in one fell swoop (income minus savings equals consumption). As it happened, Mr. Hassett became Mr. McCain's chief economic adviser, and the Freedom Account (rechristened the Family Security Account) became part of the candidate's tax plan. Mr. McCain's account is in abbreviated form -- it applies only to those earning up to $70,000 and is limited in contributions to $6,000 -- but it is a start.
*Everyone pays the same rate. Everyone, that is, except lowest earners, who pay zero. Mr. McCain's plan goes a long way toward flattening rates. He does something very clever in that he expands the upper limits of the bottom bracket. Currently, the 15% bracket ends at $43,050 for married couples filing jointly; they pay 28% on income over that amount. Mr. McCain would raise the limit to $70,000. A couple making $60,000 would get a $2,200 tax cut and pay just 15 cents, instead of 28 cents, on each additional dollar earned. (For singles, Mr. McCain would raise the limit of the 15% bracket to $35,000 from $25,750.)
This step means that 85% of taxpayers would eventually fall into the same bracket (15%) or pay nothing at all. In effect, it's a flat tax for five out of six Americans. The aim is to raise the limit higher and higher until everyone is included, making it a bottom-up flat tax.
*Deductions and preferences are eliminated. Mr. McCain begins by closing what he calls "special-interest loopholes." He's heading in the right direction. He has the guts, for instance, to advocate ending the deductibility of appreciated property -- buying stock for $10,000, watching it rise to $100,000, giving it to charity without paying capital-gains tax on the $90,000 profit, and getting the entire $100,000 deduction. In a world of 15% tax rates, deductions and preferences wouldn't be nearly as important. We should get used to losing them.
*Income is taxed only once. Mr. McCain would offer a small exclusion for dividends and interest ($400 for couples), and he would boost the exclusion on estate taxes to $5 million from the current $650,000. (Mr. Bush would eliminate death taxes entirely -- a boon to the few thousand estates that each year exceed $5 million.) Again, these are good, measured steps toward a flat tax. So is Mr. McCain's proposed permanent moratorium on sales and access taxes on the Internet.
Could the plan be better? Sure. Mr. McCain is too concerned about paying down the debt and saving Social Security as we know it (though to his credit he does want to allow a portion of payroll taxes to go into private accounts). He is too worried about how much his tax cuts will "cost." He should have been far more expansive with Family Security Accounts.
But the good news is that Mr. McCain's tax plan is based on Congressional Budget Office projections made in July 1999, rather than its January revised estimates, which boost the projected surplus for the next five years by more than $200 billion. Mr. McCain can be expected to devote some of that unexpected money to new cuts. At the top of his list should be a reduction in the capital-gains rate to 15% from 20% -- bringing it in line with the flat rate for income. He should announce that cut, along with indexing of capital gains for inflation, immediately.
Still, as delightful as this capital-gains cut would be, we should remember that the biggest economic problem today is that so many Americans haven't enjoyed the benefits of this prosperity. Yes, unemployment is low and incomes are rising. But nearly half of all households have no wealth: no stocks or bonds or savings. It is not soft or sissified to want to help them.
Sharing the Boom
Mr. McCain's answer is not to have the government give such people gifts or force them to behave in state-certified ways (as it does now through restrictions on IRAs). His idea is to lift some of the tax burden that prevents people from saving and investing and to let them make their own decisions.
Mr. McCain frankly admits that he wants to concentrate on helping low- and middle-income Americans first. A couple with $45,000 in taxable income bears the burden of a 28% federal income tax on every extra dollar in earnings, plus more than 15% in payroll taxes, plus state taxes. Those are the people who need to share in this economic boom. Mr. McCain, quite properly, would give them the benefits of a flat tax first.