The McCain Budget Plan

Monday, July 14, 2008 12:00 AM

The McCain campaign's senior economic adviser, Douglas Holtz-Eakin, provided this plan to balance the federal budget by 2013 to The Washington Post editorial board.

1. In FY2010, extend 2001/2003 tax legislation: the lower marginal tax rates, the marriage penalty relief, the $1,000 child credit, the lower capital gains and dividends tax rates, and numerous other tax changes enacted in 2001 and 2003. This proposal assumes an estate tax policy of a $5 million effective exemption per person, a statutory rate of 15 percent, replace the state death tax credit with a deduction for state estate taxes paid, and repeal of the 5-percent surtax, effective for taxpayers dying on or after Jan. 1, 2010.

2. Index and repeal alternative minimum tax: Extend the current "patch" for the AMT adjusted for inflation for the first five years and then increase it by 5 percent above inflation every year thereafter up to $143,000. Higher income taxpayers who would still be subject to the AMT under the existing tax code, could avoid the AMT by choosing to file under the Alternative Simplified Tax.

3. Double the dependent exemption. The exemption for dependents is $3,500 in 2009, and we are proposing to increase that to $4,000 in 2010. The exemption will then increase $500 per year -- $4,500 2011, $5,000 in 2012, $5,500 in 2013, $6,000 in 2014, $6,500 in 2015, and then finally $7,000 in 2016. Every taxpayer will get these amounts in these years, regardless of income.

Special provision for familes earning $50,000 or less: If married and filing jointly (similar rules would apply for other filers), the exemption is immediately doubled to $7,000 in 2010 for those with adjusted gross income at or below $50,000. For incomes above $50,000, the exemption is reduced by $100 for each additional $1,000, with the exemption not to be reduced below the schedule above. Thus, for example, a family with AGI of $70,000 would get an exemption of $5,000 in 2010 to 2012, and $5,500 in 2013.

4. Corporate rate reduction. In FY2010 immediately lower the corporate tax rate from the current 35 percent rate to 30 percent. The rate is then reduced to 28 percent in FY2012, 26 percent in FY2014, and 25 percent in FY2015 and thereafter. Current law provides a deduction against income that effectively lowers the tax rate by 3 percentage points for manufacturers. With this corporate rate reduction of 10 percentage points, the present deduction is no longer needed and would be repealed.

5. First year expensing of business equipment expensing. Permit expensing of all three-year and five-year business equipment. To avoid the potential for tax sheltering, the interest deduction on such expensed equipment would be disallowed. This expensing would apply only to business equipment purchased from 2009 through 2013. The policy will be reviewed and, if deemed effective, renewed thereafter.

6. R&D tax credit. Repeal current credit and replace with a flat, permanent tax credit equal to 10 percent of wages spent on R&D in the United States.

7. Eliminate corporate welfare in tax code. Repeal LIFO Inventory accounting.

8. Alternative Simplified Tax System option would allow taxpayers to choose between the present code and a simplified tax system with two rates, a generous standard deduction, and enhanced personal exemptions. The provisions of the Alternative Simplified Tax will be chosen to make it revenue neutral.

9. Eliminate preferential tax treatment of oil companies. Specifically:

a. Repeal expensing of exploration and development costs and replace with regular depreciation.

b. Eliminate 15 percent tax credit for enhanced oil recovery costs for tertiary wells.

c. Reform special foreign tax credit rules and limitations regarding foreign oil and gas extraction income to eliminate excessive use.

d. Eliminate the exception to uniform capitalization rules (allocation of costs to inventory) for intangible drilling costs with respect to oil and gas wells.

e. Eliminate special depreciable lifetimes for assets used in offshore drilling and domestic drilling (five-year depreciable life), exploration assets (seven-year life), refining (10-year life), and pipeline transportation (15-year life) and apply instead regular depreciation lives.

f. Subject working interests in oil and gas to the passive loss rules.

g. Encourage Bureau of Land Management to charge market royalty rates instead of the current minimum of 12.5 percent.

10. Gas tax holiday. From Memorial Day through Labor Day 2008 eliminate the 18.4 cent federal gasoline tax and 24.4 cent diesel fuel tax.

Budgetary Impact:

-- The Congressional Budget Office projects that taxes rise from 18.6 percent of GDP in 2008 to 20.8 percent in 2013 -- a difference of about $400 billion in 2013. Our estimates of these policies above keep taxes at roughly the same level -- 18.2 percent of GDP.

-- The CBO projects that spending -- including full funding of the current level of deployment of the military abroad -- will be 21.2 percent of GDP. McCain's policies will balance the budget by reducing spending across the board to reach 18.5 percent of GDP.

-- The starting point for deficit reduction is strong economic growth. These estimates assume simply the same growth as the CBO baseline -- under 3 percent between now and 2013. These estimates are conservative in that sense.

-- Balance the budget requires slowing outlay growth to 2.4 percent. The roughly $470 billion dollars (by 2013) in slower spending growth come from reduced deployments abroad ($150 billion; consistent with success in Iraq/Afghanistan that permits deployments to be cut by half -- hopefully more), slower discretionary spending in non-defense and Pentagon procurements ($160 billion; there are lots of procurements -- airborne laser, Globemaster, Future Combat System -- that should be ended and the entire Pentagon budget should be scrubbed) and reductions in mandatory spending ($160 billion) from a mix of excessive agricultural and ethanol subsidies, slower health care cost growth, Medicaid savings from the expansion of private insurance, and other reforms.

-- A McCain administration will provide the leadership to achieve bipartisan spending restraint at least equivalent in relative terms to the 1997 Balanced Budget Agreement between a GOP Congress and a Democratic President. The 1997 savings totals will be adjusted proportionately to reflect the fact that the federal government's budget is now 76 percent larger. In 1997, President Clinton and the GOP Congress agreed to balance the budget by cutting spending by $836 billion over ten years and cutting taxes by $242 billion over the same period. If the same bipartisan effort was enacted today, and savings were in the same proportion to a federal budget that is now 76 percent larger, we could achieve savings of $1.559 trillion over 10 years. When the budget was balanced in 1998, however, both the President and the Congress lost their will to enforce the spending restraint. Had they done so, we would have kept the budget balanced. A McCain administration will enforce the spending restraint to balance the budget and keep it balanced.

-- To achieve these savings, a McCain administration will perform a comprehensive review of all programs, projects and activities of the federal government, and then propose a plan to modernize, streamline, consolidate, reprioritize and, where needed, terminate individual programs.

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