By Sebastian Mallaby
Monday, September 8, 2008
When it comes to fighting wars, John McCain stands up and calls for sacrifice. "We never hide from history; we make history," he declared in his convention speech. But when it comes to taxes, McCain is unwilling to demand even a teensy bit of sacrifice. In a McCain administration, Americans would not have to surrender a dime more of their money to a cause larger than themselves.
Why this bipolar attitude toward sacrifice? Start with the answer that McCain himself provides. "My tax cuts will create jobs. His tax increases will eliminate them," he said at the convention, offering one of the speech's few policy contrasts between Obama's platform and his own. In other words, McCain is not calling for tax sacrifice because he believes it would be counterproductive. On taxes, he is saying, you can selfishly avoid sacrifice -- and serve the public good.
This, unfortunately, is a convenient untruth. Tax hikes taken to an extreme can indeed backfire, harming growth and job creation. But it's a stretch to assert that Barack Obama's tax plan would do that. And it's downright scandalous to pretend that the economy can be strengthened in anything other than the short run by unaffordable tax cuts.
Obama is not proposing to raise taxes for most Americans. To the contrary, he would triple the earned-income tax credit for low-wage earners, increasing work incentives at the bottom. He would cut taxes on people in the middle -- indeed, he would do so more aggressively than McCain would. It is only the wealthiest Americans who would face higher tax bills under Obama. According to the nonpartisan Tax Policy Center, Obama's plan would require the richest 1 percent of Americans to sacrifice a modest 1.5 percent of their after-tax income in 2012. By contrast, no-sacrifice McCain would award America's elite a 9.5 percent increase.
How might this impact jobs and the economy? Under Obama's plan, top earners would pay a marginal federal tax rate of maybe 46.5 percent (that includes the Medicare tax and Obama's proposed hike in Social Security taxes), considerably more than the 37.9 percent they would pay under McCain. There's no doubt that Obama's higher tax rates would mean weaker incentives to work, take risks and innovate; and stronger incentives to waste time and effort on avoiding the tax man.
But those bad effects must be weighed against a good one: Higher tax rates mean a lower budget deficit. According to the Tax Policy Center, over the course of a decade Obama's plan would result in a national debt $1.2 trillion smaller than you would get under McCain's plan. Less government borrowing ultimately means lower interest rates and more private investment. This positive effect may well outweigh the blow to growth and jobs from weaker work incentives.
Tax hikes, in other words, are not automatic job destroyers. Joel Slemrod of the University of Michigan, a top expert on this subject, says bluntly, "There is no compelling evidence that a low-tax strategy is better for the economy over the medium or long run." Just look at the Clinton era. In 1993, the top marginal rate (income tax plus Medicare) was raised to 42.5 percent -- the same rate that Obama proposes but minus the candidate's proposed increase in the payroll tax. During the rest of the Clinton period, the economy generated millions of new jobs, and careful academic postmortems find that the 1993 tax hike caused little to no damage to the incentives of top earners.
So McCain's swipe at Obama's tax plan was something other than straight talk. As a share of the economy, Obama's plan would create an overall tax burden similar to the one that existed in Ronald Reagan's time. It would not choke off job creation; rather, it would slow the growth of the deficit and soften inequality. But the really depressing thing is that McCain himself once knew that. He opposed the Bush tax cuts before he supported them, saying that they would deepen inequality. But now he touts a tax reduction that is larger and more radical than even President Bush proposed, and he slams his opponent for holding the view that he himself held until recently.
McCain used to be a real straight talker. On campaign finance, spending earmarks, Iraq and immigration, he has fought bravely for his principles; and that record might have been a trump against an opponent who has taken almost no such risks. But we are now witnessing what might be called McCain's Palinization. McCain once criticized Christian conservatives as agents of intolerance, but he has caved in to their intolerance of a pro-choice running mate. McCain claims to be devoted to his country, yet he would saddle it with a vice president who is unprepared to serve as commander in chief. In the same sad way, McCain has caved in to his party's anti-tax fanatics. The man of principle has become a panderer. The straight talker flip-flops.