McCain's Tax Plan

UPDATE: Please also see our more recent post on the candidates' tax plans.

Over at the Tax Policy Center blog, Len Burman and Greg Leiserson's posted an analysis (on April 17) of McCain's cut-all-the-taxes-and-blow-up-the-deficit fiscal policy; Andy Samwick has another excellent discussion over at Capital Gains and Games. I'll discuss McCain economic adviser Douglas Holtz-Eakin's reply in a subsequent post, but here's an excerpt from Burman & Leiserson's post:

[McCain's] proposals would reduce federal revenues by about $5.7 trillion over ten years if they could be enacted immediately. Under a more realistic assumption that they don’t take effect until October 2009, the cost would be about $5.4 trillion. (Details of our calculations are in TPC table T08-0071.)

Cuts this size would pare government back to levels not seen since the Eisenhower administration. In FY 2012, tax revenues would be reduced by about $550 billion compared with current law (with the tax cuts expired). That is roughly equal to CBO’s baseline projection for all nondefense discretionary spending.

McCain’s proposal is $300 billion bigger than all of President Bush’s FY2012 tax cut proposals. Tax revenues would be about 16.8 percent of GDP. By comparison, spending this year is about 20 percent of GDP.

They note that McCain's campaign hasn't provided sufficient details concerning his proposed optional simple alternative tax, so they haven't scored that. Burman and Leiserson conclude by writing that

These estimates make one thing clear. Senator McCain plans a radical downsizing of government. Slashing pork, earmarks, and underperforming programs would offset only a fraction of the revenues. Cuts the size of those he proposes will require slashing discretionary spending and entitlements, and probably even reining in defense spending. Small wonder he has backed away from his earlier pledge to balance the budget—meaning that these tax cuts, like the ones signed by President Bush, will be paid for by our children.

I'd note further that, via Holtz-Eakin, McCain has already had to change his "definition" of those nasty earmarks he'll eliminate (somehow, without a line-item veto). According to this story by the Politico's Ben Smith, Holtz-Eakin initially claimed that there were $100 billion in earmarks in the current budget, the idea presumably being that eliminating all of these earmarks would give McCain $100 billion to work with in paying for his tax cuts. After a former senior Democratic staffer, Scott Lilly, pointed out that many of these earmarks included stuff McCain supports, like money for Israel, Egypt and U.S. military construction, Holtz-Eakin stated that in fact the real amount of money associated with earmarks McCain would not fund (again, magically preventing them without a line-item veto) was only $16-18 billion.

Supposing that US GDP for 2008 will be roughly $14.5 trillion, $16-18 billion amounts to a bit more than 0.1% of GDP. To say the least, that doesn't do much to dent the gap of 3.2 percentage points of GDP between today's spending share and the Burman & Leiserson scoring of McCain's plan (which, again, does not count the optional alternative tax provision).

It'd be hard to take McCain's economic plan seriously if it weren't for the 8 years of the Reagan Administration and the last 7+ years of the Bush Administration.

In light of that history, though, voters and reporters should start asking McCain some really hard questions. If this plan is ever enacted in anything like its proposed form, it will lead to a major deficit crisis, one that could easily spill over into exchange markets. The only conceivable way to finance it, as Burman & Leiserson note, would be via a radical change in what the U.S. government actually does. To my knowledge, McCain has not proposed specific and major structural cuts in Medicaid, Medicare, Social Security or--heaven forbid--military spending. No member of the media worthy of the title "journalist" can let McCain promote this fiscal plan without asking him which programs he will cut, massively.