Economic Hold 'Em
John McCain and Barack Obama keep upping the ante on stimulus proposals. But not every idea is a good bet.

Wednesday, October 15, 2008

WITH FINANCIAL calamity on Americans' minds, the presidential nominees are engaged in something of a bidding war for voters: I'll see your jobs tax credit and raise you a capital gains cut. It is understandable and, within limits, sensible to try to take some steps to cushion the economic blow to ordinary Americans and to try to get the economy moving again. Sen. Barack Obama proposes letting Americans tap into retirement accounts without paying the usual penalty, launching a temporary tax credit for employers who create new jobs and bestowing another $25 billion in loan guarantees on the struggling auto industry. Sen. John McCain suggests cutting capital gains taxes in half for the next two years, lowering tax rates to 10 percent for those 59 1/2 and older who tap into retirement accounts, and increasing deductions for those who sell stocks at a loss.

We have concerns about both candidates' approaches, although Mr. Obama's seem better targeted to those who actually need help. Mr. Obama's suggestion to allow people with savings in individual retirement accounts or 401(k) plans to withdraw up to 15 percent, or a maximum of $10,000, without having to pay the ordinary steep penalty is problematic. This is not a time to encourage people to cash out of the stock market, and it is not good policy to make it easier for workers to raid retirement accounts on which they will have to rely in the future. The temptation to keep doing so, in the next economic downturn and the one after that, could prove irresistible.

Another of Mr. Obama's proposals is to give employers a $3,000 tax credit for every full-time job they add to their payroll in 2009 and 2010; the credit would carry a total cost of $40 billion over two years. While the track record of such programs suggests that they could have a modest positive effect, it is worth considering whether this is the most effective way to spend such a large sum. We have many more doubts about shoveling another $25 billion in loans -- on top of the $25 billion recently approved -- to automakers. The industry is struggling, but so are many others.

Mr. McCain's latest proposals concentrate, as is his inclination, on cutting individual taxes, skewed to higher-bracket taxpayers. The benefit of cutting capital gains taxes when there is not much in the way of capital gains is questionable. More questionable is the proposal to allow people age 59 1/2 and older to withdraw as much as $50,000 from retirement accounts and have it be subject to the lowest tax rate, 10 percent. This proposal, which would cost an estimated $36 billion, suffers from some of the same flaws as Mr. Obama's retirement withdrawal plan, but it also would allow wealthy retirees to reap a windfall by withdrawing money from their accounts before the higher rate returns.