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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.


Double messages can be heard from McCain on the balanced-budget issue too. He scourges George W. Bush for offering an irresponsibly big tax cut: Bush's cut is so big, McCain charges, that it could actually push the federal budget back into deficit. But McCain's bona fides as a budget-balancer look increasingly doubtful. As a senator from libertarian Arizona, McCain had a good record as a spending hawk. But as he has moved into the national arena, he has begun -- as conservatives mockingly put it -- to "grow." Here for example is McCain thinking aloud about health care with a worshipful Joe Klein in the New Yorker: "I think we're just going to have to do it on a piecemeal basis. Start with health care for children, and prescription drugs for people who can't afford them now." Two vast new entitlement programs are a start towards "it." One has to wonder what else is included in this ominous little pronoun.


On the revenue side of the budget, McCain claims to have identified billions of dollars of corporate loopholes to be closed. Yet, he is ready to fling open a large loophole all his own: an exemption from income tax on the first $ 56,000 of pay for military personnel on overseas duty. That should have them clinking their glasses at NATO HQ in Brussels! But for a politician who denounces pandering, you have to wonder: What is the logic here? McCain rightly draws attention to the Clinton administration's neglect of the military. He wants to inspire Americans to appreciate the dangers braved by their soldiers, sailors, and airmen. Fair enough. But how does it make things better to say that men who live underwater on submarines for six months of the year have to pay an income tax while Marine guards at the Paris embassy do not? McCain justifies this special favor by complaining that it is unfair that civilians who live abroad get a tax exemption while military personnel don't. But of course those civilians must pay taxes to their host governments while military personnel don't. If McCain has his way, troops stationed abroad would pay no taxes at all. This is pandering at its most Goretesque.


The biggest question of all is raised by the fourth and last part of McCain's plan: his income tax cut. John McCain owes his spectacular political success of the last few months to the perception that he is the most un-Clinton-like candidate running. He served in Vietnam, he's brave, he's forthright, he's unmanipulative. That makes it all the more disturbing that his tax rhetoric seems to have been photocopied from Bill Clinton's first presidential campaign. Clinton defeated Paul Tsongas in 1992 by promising a tax cut for the "forgotten" middle class. And now here's McCain repeating the same trick. Nobody called this courageous then. How did it become a brave move in the interval?


McCain is making a blatant appeal to the deepest but also wrongest conviction of middle-class Americans: that they are being singled out for government maltreatment while the rich and the poor are cosseted and pampered. When McCain focuses his tax cut on families earning between $ 40,000 and $ 70,000 -- simultaneously ignoring those earning less (who don't vote in Republican primaries) and those earning more (how many of them are there anyway?) -- he is tailoring his cut not to those with the strongest claim, but to those with the greatest clout. It's Steve Forbes, in pushing his flat tax, and George W. Bush, in showing concern for the high marginal rates faced by the poor as they quit welfare for work, who are taking political risks for their economic convictions. John McCain, by contrast, is buying the maximum number of votes at the smallest possible cost.


It used to be said of Johnny Carson that he was better than his material. John McCain is widely seen as better than his career. Few even of McCain's most ardent supporters (in the party, anyway, if not the press) have a good word to say for his anti-tobacco crusade and his campaign-finance reform scheme. Now he has delivered an economic plan that is very nearly as bad. It makes you wonder whether the McCain campaign has not at long last found its true slogan: VOTE FOR McCAIN -- DESPITE EVERYTHING.




David Frum is a contributing editor to THE WEEKLY STANDARD and the author of How We Got Here: The '70s (Basic Books).