THE PLANK OCTOBER 14, 2008
For all the criticism of John McCain’s internally inconsistent policies, today's tax proposals are consistent with the rest of his tax agenda. McCain is already running on huge regressive tax breaks that do little for the economy. Today's policies are more of the same.
Some of McCain's agenda, like exempting unemployment insurance from taxes, is fine. But the two most striking ideas are temporarily letting investors write off $15,000 in losses--up from $3,000--and cutting the top capital gains rate to 7.5 percent.
While these measures may help a handful of desperate families, their principal impact will be to shower windfall tax breaks on the most fortunate Americans. Most families have no gains or losses outside retirement accounts anyway. According to the Tax Policy Center, 94 percent of the benefits of lower capital gains rates go to the top five percent of taxpayers.
Indeed, McCain's plan is very good news for the top five percent. The provision for expanded write-offs is worth up to $4,200 to investors with incomes above about $400,000. And the rate reduction would lower the top capital gains rate to its lowest level in history, half the tax rate on most Americans’ salaries. High-income investors could write off their losses at 35 percent while paying taxes on their gains at only 7.5 percent.
A third major component of McCain’s plan--taxing withdrawals from retirement accounts at ten percent, rather than at rates up to 35 percent--is also problematic. Once again, the proposal leaves out families struggling the most: about half of all families have no retirement accounts at all. And among those with retirement accounts, McCain delivers the largest benefit to those with the highest incomes and the greatest wealth. It’s often said that our retirement incentives are “upside-down” because tax deductions are worth the most to taxpayers in the highest income brackets. McCain says, correctly, that he tackles a similar problem in the context of health insurance, but now he is making it worse for retirement savings.
The tilt to the rich might be excused if it would help the economy grow, but because of the way McCain’s plan is structured, it just won’t. Capital gains rates are not effective stimulus when they’re permanent, and they’re even more unlikely to encourage new long-term growth where, as here, they’re only available for two years. And these rate cuts do nothing to resolve the credit crunch caused by uncertainty over institutions’ financial health either. The plan could make the economy worse when the temporary tax breaks drive a wave of selling. As Len Burman warned about the similar House Republican proposal, “prices could free fall” as investors flee troubled sectors.
In recent months, conservatives like Ramesh Ponnuru, Bob Novak, James Pethokoukis, and Ross Douthat and Reihan Salam, have urged McCain to embrace tax cuts that would directly help most Americans. McCain now stands virtually alone with Grover Norquist in wanting tax cut after tax cut for wealthy investors instead. The natives are restless. Says Pethokoukis: “Right to McCain: Your New Economic Plan Stinks.”
--Robert Gordon and James Kvaal