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Wednesday, April 23, 2008

McCain's Budget Plan

Douglas Holtz-Eakin, John McCain's top economic advisor, says not to worry about the fact that John McCain's budget plan is out of balance by hundreds of billions of dollars, they have a plan to increase revenues and take care of the problem:

As Mr. McCain’s plan currently stands, The Economist magazine concluded that it “will not come anywhere close to paying for the tax cuts.” Most telling, I spoke over the past week with several other economists who admire Mr. McCain and have advised him over the years. None would defend his current fiscal package (or be quoted).

Mr. Holtz-Eakin says the mistake that people are making is treating the McCain platform as if it were a finished piece of work. “It’s April,” he said. “We have until November.” The campaign will later unveil “base broadeners” in the corporate tax code — that is, loopholes it will eliminate — that will pay for the faster investment write-offs, for example.

If you weren't paying a tax before, but you are paying a tax now because McCain broadened the base, that's a new tax. Isn't it? It's a new tax for somebody, even if taxes are lowered elsewhere. Wonder what happened to:

Republican John McCain says there will be no new taxes during his administration if he is elected president.

"No new taxes," the likely GOP presidential nominee said during a taped interview broadcast Sunday.

O.K., in a technical sense, it's a tax shift, a tax cut one place, and a tax increase in another, and some shifts are desirable, others aren't. But does anyone doubt that Republicans would call this proposal a new tax if it came from Democrats? Cue the deep, scary voice: "Democrats have a plan to impose new taxes to pay for their wasteful spending. Instead of making the hard decisions and cutting spending, they want to take money out of your pockets -- they want to raise taxes on businesses, and that costs jobs and lowers economic growth. Republicans understand that, as times get tougher, Washington shouldn't be imposing new taxes that make it harder for people to keep afloat in this economy."

Here's more from the article:

Weighing a McCain Economist, by David Leonhardt, NY Times: When Douglas Holtz-Eakin took over in 2003 as the director of the Congressional Budget Office ... he walked right into a firestorm.

For years, Republicans had been pushing the budget office to change the way it estimated the cost of a tax cut. Rather than looking only at the revenue lost, they argued, the office should also consider how tax cuts would change behavior. With lower tax rates, businesses would invest more, workers would work more — and the government would thus get a tax windfall. This, in a nutshell, is supply-side economics. ...

Mr. Holtz-Eakin ... did indeed begin using dynamic analysis... Yet he used it as it should be used. What the budget office found, as study after study has shown, was that any new revenue that tax cuts brought in paled in comparison with their cost. This is why the deficit jumped under the last two tax-cutting presidents (Ronald Reagan and George W. Bush) and fell under the last two tax-raising presidents (George H. W. Bush and Bill Clinton).

As Mr. Holtz-Eakin told Congress in 2003, a dynamic analysis of the White House’s tax and spending proposals made essentially no difference. ...

Today, Mr. Holtz-Eakin again finds himself in a firestorm. He is the top economic adviser to John McCain’s presidential campaign, and some fiscal conservatives have begun wondering what happened to ... the John McCain who was a fiscal conservative...

“We’ve been taking some hits,” Mr. Holtz-Eakin acknowledged.

Last week, Senator McCain laid out his economic vision... He talked about wasteful spending, but the newest, most detailed part of the speech dealt with a package of tax cuts that would cost about $300 billion a year. They would come on top of $350 billion a year in Bush tax cuts that Mr. McCain wants to make permanent. To put these numbers in perspective, the Iraq war has been costing roughly $200 billion a year. ...

To deal with the deficit, Mr. McCain has said that he will get tough on year-to-year spending, both in military programs and domestic ones. Then he will try to remake Medicare and Medicaid...

The problem is that the campaign has been far, far more detailed about its tax cuts ... than its spending cuts... Mr. McCain has proposed the elimination of the alternative minimum tax (at a cost of $60 billion a year), new child tax deductions ($65 billion), a corporate tax cut ($100 billion) and faster write-offs for corporate investments in new equipment ($50 billion to $75 billion). ...

It’s easy to imagine how Mr. McCain could be laying the groundwork to run as a true fiscal conservative, now that he has locked up the Republican nomination. He could present himself as the one candidate who believes that the nation can afford neither Mr. Bush’s endless tax cuts nor the Democrats’ big new government programs. He has the perfect adviser to help him make that case.

But it’s not the case he’s making, at least not yet. Instead, when you add up the numbers that have been released so far, you’re left wondering...

I have a question. At first, John McCain was promising to balance the budget his first year in office, he said it was straight talk, so I guess he meant it. But then he said he really didn't mean it, now it's at the end of his second year [Update: I can't read, apparently - a year is not a term]:

Sen. McCain has backed off his earlier promise to eliminate the budget deficit by the end of his first term and now says it may take two terms.

Here's the question. If we are heading into or already in an economic recession, what kind of economic plan is it to cut spending and/or raise taxes by hundreds and hundreds of billions of dollars? How is that supposed to help the economy recover from its troubles? He can talk about short-term economic stimulus packages all the wants, but if he plans to balance the budget over a two year time-frame, with some of that surely coming in the first year, the talk of short-term stimulus is meaningless. The economy is not stimulated when spending is cut or new taxes are imposed, and that's what he says he plans to do. [continuing the update, the question, then, is whether he will increase the deficit his first year to stimulate the economy. If he does, it won't be on the spending side, he plans a one year moratorium on new spending which is a cut in real terms. And the talk of base broadeners, etc., is a way of denying that they plan to increase the deficit through tax cuts, though that denial is part of the reason the plan is not viewed as being credible.]

Of course, his promises aren't possible even in the best of times. He won't be able to cut as much from government programs as he says he will, and he claims he won't raise taxes. I can't think of any credible analyst who thinks his plan comes anywhere close to adding up. But he says it anyway, with his supposed straight talk, in the face of a potential recession, and nobody seems to mind, nobody seems willing to think hard about what this says about his character. After all, it's just the economy, it's not something important like only eating half your waffle.

Update: More from pgl and Brendan Nyhan.

Update: The Economist's blog, Free Exchange, adds:

Now, it's possible that Mr McCain thinks his critics are wrong, and that supply-side orthodoxy holding that tax cuts always raise revenues is correct. Whether or not this is what Mr McCain thinks, it's absolutely what he says. Brendan Nyhan has collected a long list of statements to this effect.

Of course, as Mark Thoma points out, now might not be the best time to seek a balanced budget. By the time Mr McCain gets around to crafting his first budget, economic conditions may be quite a bit different, but for now, at least, a package of tax increases and spending cuts is not what the economy needs.

Whatever is going on inside Mr McCain's head, it would be very helpful if he could begin elucidating one clear message, so that the public can weigh it against alternative proposals. As things stand, with the candidate preaching supply-side voo-doo to partisan audiences while his economic advisor maintains that it's all an election ploy or an episode of "misspeak," it's impossible to determine how good or bad an economic leader he might be.

And pity the economic advisor, whose official role is now seemingly to tell the world that his candidate is lying to get elected, and all will be well once he's safely ensconced in the oval office.

I wish I'd made the last point in reference to the character issue.

    Posted by on Wednesday, April 23, 2008 at 01:35 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (105)


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