McCain's Mixed Economics

Last week John McCain rolled out his economic plan. While there are certain aspects that will no doubt please the Republican Party's growth wing, Mr. McCain mostly stuck to conventions when he stated what he wants to achieve if elected.

When asked last Tuesday on CNBC's Kudlow & Co. what government could do to bring our economy out of what some deem a slowdown, Mr. McCain's response, some would say a Pavlovian one, of "Bring spending, obviously, under control" was worrisome. More inspiring would have been an answer along the lines of "let's reduce taxes on income and investment so that there are greater incentives for individuals to work and invest with greater frequency."

In Mr. McCain's defense, it's true that heavy spending is an economic retardant. This is so for government taking earned income that could be saved, but instead is consuming it. Moreover, when governments compete with the private sector for funds to spend, they reduce the amount of capital that would otherwise be made available to job-creating businesses and entrepreneurs.

Senator McCain's vision for spending cuts is mostly good, however. He's proposed a one-year spending freeze on non-defense discretionary spending. As a military man, it can be assumed that he'll seek to reduce a lot of military waste as well.

What's unfortunate is Mr. McCain's desire to make wealthier seniors pay more for prescription drugs under Medicare Part D. While this writer desires the abolishment of Medicare, penalizing the very people — the rich — who have and continue to fund the federal government speaks to a version of socialism that has infected both parties.

Indeed, how can politicians credibly ask the top 1% of earners to continue to fund the federal government while continuously seeking to reduce the alleged benefits they receive? Rather, politicians should acknowledge how much worse off we'd all be if the economic blessings, thanks to the vital few, did not reach us.

On the tax front, Mr. McCain's plan is a mixed bag. The positives include his stated desire to make the 2003 tax reductions on income and capital gains permanent, a cut in the corporate tax to 25% from 35%, and abolish the alternative minimum tax, which is somewhat good. What's unknown, however, is whether his support of marginal rate cuts is a real belief or just a political strategy.

Regarding corporate taxes, so long as trade is free (Mr. McCain believes in free-trade), it doesn't matter where corporations are formed. New York and New Delhi are no worse off than Seattle, where Microsoft was incorporated. What makes corporate tax cuts necessary is that entrepreneurs enjoy the greatest success in America.

Considering this reality, a cut in corporate rates is one of Mr. McCain's best policy positions. Bill Gates could not have created Microsoft in Paris or Bombay. So anything that makes incorporations easier here will accrue to both ours and the world's economy.

Looking at the bad in Mr. McCain's tax plan, U.S. News & World Report's James Pethokoukis wrote last week that the problem with tax "relief," as opposed to marginal cuts that increase the desire to work and save is that "it would mean even fewer people paying any income taxes at all." Unfortunately, Mr. McCain seeks to double the personal exemption for dependents to $7,000 from $3,500. This alone would enable many more Americans to avoid paying income taxes, thus making broader reform of the tax code an even more distant object.

The above is why abolishment of the AMT is presently questionable policy. Indeed, with more Americans not paying much income tax, abolishment of the AMT would make taxes on the federal level even less onerous such that major reform would be more difficult politically. A better strategy would be to tie AMT abolishment to broad reform, or, at the very least, tie it to making the 2003 cuts permanent.

As for Mr. McCain's desire to allow immediate expensing of business-equipment purchases, this is faulty industrial policy run amok. Put simply, we shouldn't be complicating the tax code even more with rules that favor one business-constituent group over others. Secondly, it's bad policy. The reality is that American business success stories from Google to FedEx to Goldman Sachs are successes of the mind, as opposed to equipment.

Asked by CNBC's Larry Kudlow about executive pay, Mr. McCain said, "there are bad corporate executives and corporate greed that has to be checked." Free markets check corporate greed so those who agree with Mr. McCain on his other policies should be concerned with his stance.

Lastly, when asked by Mr. Kudlow about the falling dollar, Mr. McCain's mentioned the trade "deficit" factoring into the weak greenback. This response is concerning since there's no relationship between the deficit and the dollar.

In addition, Mr. McCain's desire to give drivers a "summer holiday" from federal gas taxes speaks to a fundamental misunderstanding about why gasoline is so expensive right now. The Arizona senator has not picked up on the fact that oil and gas are expensive because the dollar is weak.

In fact none of the presidential candidates are aware of the strong correlation between inflation and recession. We have Senator McCain who embraces certain market-friendly ideas that he's uncomfortable with. And then we have two Democratic candidates who frequently seek to outdo each other in terms of showing they're good on tax "fairness;" meaning they'll reduce the wages of those not yet rich by taxing the rich.

So in assessing our future economic prospects under all three, we must be thankful for the existence of our stock markets. As a nation of investors we can rest assured that no matter who's elected, the often harsh message of the markets will hopefully restrain all three from causing too much harm. Other than that, buyers beware.

Mr. Tamny, editor of RealClearMarkets, is a senior economist with H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com.