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Pandering to the Middle Class

The four flaws in John McCain's four-point economic plan

Jan 24, 2000, Vol. 5, No. 18 • By DAVID FRUM
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WHAT IS JOHN McCAIN UP TO? Until now, McCain has appealed to voters and wowed the press by presenting himself as something bolder and better than an ordinary politician: a man beholden to nobody, a risk-taker, a truth-teller. The tax plan he unveiled last week, however, is the work of quite a different character: The plan is a conventional, poll-driven assemblage of special offers to key constituencies. "It looks like something that would emerge from the Senate finance committee after three weeks of deal-making," quips Stephen Moore of the Cato Institute. The McCain campaign may shrug off worries that their plan lets George W. Bush get to McCain's right ideologically. Their candidate's appeal, after all, is not ideological. But the plan also allows Bush plausibly to present himself as the more daring, imaginative, and principled candidate -- and that puts the entire rationale of the McCain candidacy at risk.

McCain's plan promises to accomplish four grand aims: (1) to shore up the Social Security system; (2) to increase savings and investment; (3) to keep the budget in balance by holding the line on spending and closing loopholes; and (4) to provide middle-income Americans with a measure of tax relief. On all four counts, though, the plan raises troubling questions about who John McCain really is and what he really seeks to do.

Start with Social Security. McCain proposes to save the endangered retirement system by funneling close to half a trillion dollars in general revenues into the Social Security trust fund over the next 10 years. In addition, he would permit Americans to direct about 20 percent of their payroll tax money into a personal retirement account.

What McCain and his advisers seem not to recognize is that these two policies are entirely contradictory. If bulking up the Social Security trust fund is an intelligent way to cope with the looming retirement of the Baby Boomers, then his individual retirement account idea makes no sense. If, on the other hand, the personal retirement idea is a good one, then funneling general revenues into Social Security is a waste of money.

Here's why: The pensions of all of today's retirees cost a sum approximately equal to 10 percent of America's payroll. Social Security, however, collects 12.6 percent. The 2.6 percent difference between what's needed and what's collected is paid into the trust fund, which has run a huge surplus since the early 1980s. McCain is now offering to let Americans pay that 2.6 percent into an IRA. If they accept, then the Social Security surplus will vanish.

Is that a problem? It would not be a problem if the surplus disappeared. Most economists agree that the surplus is a fiction, the fiscal equivalent of eating a huge lunch today to protect yourself against being hungry a week from Thursday. When the Baby Boomers are retiring in droves in the 2020s and 2030s, the fact that the U.S. government ran big surpluses in the '00s will be remembered as a historical curiosity, but not much more.

Now, if the surplus is a fiction, then McCain's plan to permit today's workers to keep the excess portion of their payroll tax is not irresponsible. Yet this would also mean that McCain's plan to pour the regular budget surplus into the Social Security trust fund is pointless.

Internal contradictions plague the McCain camp's suggestions for stimulating savings as well. McCain would permit middle-income wage-earners to put up to $ 6,000 a year in a tax-sheltered savings vehicle, Family Security Accounts. The money would be taxed when and if it was withdrawn. McCain's economic advisers hail the plan as the first step toward a more consumption-based tax system. But if it's a consumption-based tax system they want, why is another centerpiece of their plan a commitment to keep the Internet free of tax forever? The day is not far off when appliances, cars, and even groceries will be commonly sold over the Net. A promise to keep it tax-free is a promise to move toward the abolition of all sales taxes -- exactly the opposite of what sincere proponents of a consumption tax should want to do.