The Shallow Roots of McCain's Economic Ideas

Although John McCain has backed off it lately, he has acknowledged that his views on economics are a work in progress.

Last week, he gave the fullest accounting to date of his thinking on the subject.
McCain is an instinctive rather than a paradigmatic politician. On economics, his instincts flow in three currents not always easy to reconcile:

* A belief in the small government conservatism of Barry Goldwater and Ronald Reagan.

* A suspicion and distrust of those who are at the top of the economic pyramid.

* A view of budget deficits as a moral offense as much as an economic issue.

Much has been made of McCain now supporting making Bush's tax cuts permanent, after opposing them to begin with. The sense of a change for political convenience has been exacerbated by McCain's various explanations for his initial opposition - not offset by spending reductions, gave too much to the wealthy.

McCain, however, seems to believe that there is a different burden of proof for a tax cut than a tax hike. The current tax rates, when first proposed, were a tax cut. But those tax rates are now the status quo. Reverting to the old, higher rates, as would happened if the Bush tax cuts were allowed to expire, would be a tax hike.

There is much economic wisdom in seeing the same tax rates as involving different policy choices and consequences depending on the trend they constitute. Private sector economic activity adjusts to the tax and regulatory environment. A tax cut not made is a benefit deferred. A tax hike is a cost imposed. They are different things.

McCain appears to have accepted the consensus among economic conservatives that pro-growth tax policies are more important than curbing deficits. But he's not yet comfortable with it, given his strong balanced-budget instincts.

A clamor has gone up about McCain's tax policies supposedly resulting in exploding federal deficits. This, however, is based upon fiscal forecasts that have proved laughably unreliable.

For example, McCain's tax policies are claimed to "cost" the federal government $650 billion a year in revenue. However, $475 billion comes from simply maintaining existing tax policy regarding income tax rates and the alternative minimum tax, rather than allowing the Bush tax cuts to expire or permitting the reach of the AMT to be extended.

So, these measures don't actually "cost" the federal government anything.

They simply prevent a huge tax increase from taking place.

Until the recent economic slowdown, existing tax rates were producing record growth in federal government revenues. In ordinary economic conditions, they should comfortably produce annual revenue growth in the five percent to seven percent range. So, only modest spending restraint is necessary for a movement toward a balanced budget to be compatible with existing tax rates.

Some of McCain's new tax cuts are also unlikely to "cost" the federal government what is projected. Reducing the federal corporate income tax rate from an internationally high 35 percent to 25 percent, the industrialized nation average, is likely to produce as much or more federal revenue, as global companies become more willing to realize income in the United States and repatriate foreign earnings.

There was a revealing exchange in the Democratic debate last week. Charles Gibson pointed out to Barack Obama that every time the federal government had cut the capital gains tax, revenues to the federal government from it had gone up. And the one time in recent history in which the capital gains tax had been increased, federal revenues had in fact gone done. So, why did Obama want to increase it? Obama said it was a matter of fairness.

So, for the Democrats, the tax code is an instrument through which to impose their view of social justice, not a way for the government to raise money while doing the least damage to the private economy.

McCain isn't where the Democrats are at, although he has his own tendencies to want to take a whack at the malefactors of great wealth.

In fact, where McCain is right now on economic issues, particularly tax policy, is quite sound, and provides a sharp contrast with the Democrats, the kind of choice voters should have.

The problem is that McCain's economic views are shallowly rooted. You don't know whether he's going to stay there.