A Family-Friendly Idea for McCain
The solution is in the tax code.
Jun 30, 2008, Vol. 13, No. 40 • By RAMESH PONNURU
John McCain's June 3 speech in New Orleans was widely panned by his fellow Republicans, who criticized both his delivery and his timing, as it was a day dominated by Barack Obama's finally clinching the Democratic nomination. But some Republicans were heartened by the content of the speech, because McCain embraced the theme of reform that they believe is his only path to victory in November.
Yuval Levin made the argument well in an essay in these pages ("A Theme for McCain's Pudding," May 26). The "change" the public wants in politics, he observed, is for the government to respond to the swift and sometimes disconcerting alterations in American life. So, for example, we have a health care system shaped by rules enacted decades ago, when health care was cheaper (since it couldn't do much) and labor was less mobile than it is today. Levin's prescription is a set of conservative reforms to modernize the system to meet today's needs. McCain is temperamentally suited, as Levin also notes, to the role of the restless reformer.
Levin is, perhaps, too diplomatic to note two political advantages to the reform theme. The first is that a credible conservative reformism would distance McCain from Bush without alienating the president's remaining supporters. Instead of carefully picking areas of agreement and disagreement with the last seven years, McCain would be able to change the subject to tomorrow. The second is that an emphasis on modernization would undercut the ongoing Democratic campaign to depict McCain as old and out of touch. His proposed reforms would be the programmatic equivalent of the vigor he needs to project.
There is little to disagree with in this analysis, but there is a point to be made a bit more strongly: If McCain is to run as a conservative reformer, then serious tax reform is an issue he cannot duck. The tax code must rank high in any list of the dysfunctional institutions in American life. Yet tax reform would present McCain with a series of challenges.
The first is that he cannot simply repackage his existing tax-policy proposals as a reform. Those proposals are, in the main, worthwhile. Cutting the corporate tax rate to be more in line with the rates of other developed nations would promote growth. So would making the Bush tax cuts on dividends, capital gains, and estates permanent. Abolishing the Alternative Minimum Tax (AMT) would simplify the tax code. Doubling the dependent exemption would modestly reduce the antifamily bias of existing federal policies.
But that is a hodgepodge of nice ideas, not a coherent reform. It ties McCain too closely to Bush and the policy debates of the last eight years. It does not offer enough to the lower middle class voters McCain needs. And it is unrealistic, given current budget projections.
The McCain campaign appears to recognize the inadequacy of its platform on taxes. McCain has said that he will outline a bigger reform at some point this year. From what he has said, it does not sound as though he is going to push for a flat tax or a national sales tax. That's a good thing: Either of these conservative hobbyhorses would raise taxes on a lot of lower middle class families.
A Tax Trap
McCain's website says that he will propose a new, alternative tax system, adding, "When this reform is enacted, all who wish to stay under the current system could still do so, but everyone else could choose a vastly less complicated system with two tax rates and a generous standard deduction."
That makes it sound as though McCain is planning to go with some version of the tax-reform proposal that such conservative stalwarts as Rep. Paul Ryan, former presidential candidate Fred Thompson, and the Republican Study Committee have been promoting over the last year. That proposal has many good points. It brings the top tax rate way down to 25 percent (from the current 35).
But the combination of the low rates, the elimination of the AMT, and the introduction of a choice of tax codes for taxpayers would yield a big revenue hit for the government. To advocate it honestly, McCain would either have to abandon his concern about the deficit or specify many more budget cuts than he has so far. Worse, the alternative, reformed code achieves its low rates in part by scaling back the tax credit for children. The tax burden would be reduced, but families would be paying a larger share of it. Does McCain really want to campaign on a platform of shifting the tax burden from corporations to families?
An Alternative Alternative
It may seem impossible for a tax reform to have all the qualities that McCain should be looking for: one that simplifies the code, levies only two tax rates, and encourages growth, but also provides significant tax relief to the lower middle class and avoids widening the deficit. But there is a way out.
A vastly expanded child tax credit, applicable against both income and payroll taxes, would reduce the tax burden quite a bit for lower middle class families. To promote growth, the reform could keep taxes on investment low while modestly reducing the top marginal tax rate. To take in as much money as the current tax code, meanwhile, this reformed, pro-family system would have to do two main things. First, it would eliminate or at least cap the deduction for state and local taxes. Second, its top rate, though lower than the current one, would apply to a lot more people.
The big winners from the Thompson/RSC proposal--the people for whom McCain would be taking significant political risks--would be affluent, childless households in high-tax states. The AMT, which has hit more and more of these households because it does not allow a deduction for state and local taxes, would be gone. Their tax rates would go down. And they don't take the child tax credit as it is. These same households would lose money under the pro-family reform. Their marginal tax rate would go down, but it would apply to a larger share of their income, and they would not be able to deduct as much of their state and local taxes.
In 1980, 1988, and 2000, Republicans won presidential elections in part by promising to tax a lot of middle-income voters significantly less than the Democrats would. If McCain wins this election without making such a promise, he will be the first Republican to do so in more than three decades. Or he can embrace a pro-family plan, and thereby go a long way to showing that he intends to reform our institutions to facilitate the pursuit of the American dream.
Ramesh Ponnuru is a senior editor at National Review.