McCain Emerges as Master Economic Flip-Flopper: Gene Sperling

Commentary by Gene Sperling

June 6 (Bloomberg) -- Back in 2005, a friend asked if I should be careful about praising John McCain for his votes against George W. Bush's upper-income tax cuts in 2001 and 2003. After all, he warned, he might become the next Republican presidential nominee.

My reply was, suppose McCain maintained his position that, as he put it in 2001: ``I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief.''

Suppose he did hold to his 2003 opposition to increasing the deficit through tax cuts during a time of war. On what grounds could I criticize him?

In spite of the advice from my friends, I went ahead and applauded McCain for both stands in my 2005 book ``The Pro-Growth Progressive.''

This is now a non-issue. McCain, who would like us to see him as holding a consistent and principled stance on tax cuts and fiscal discipline, is engaging in the mother of all economic policy flip-flops.

If McCain's opposition to Bush's tax cuts was based on the unseemliness of letting deficits balloon for the benefit of top earners in a time of war, then his opposition should have grown stronger. Instead, it grew weaker and then collapsed. Since McCain's votes, we have witnessed budget surpluses turn into projected $400 billion annual deficits.

How do those intervening developments lead McCain, the presumptive Republican presidential nominee, to now support permanently extending more than $100 billion in high-income tax cuts he once opposed?

Just the Beginning

And that is only the beginning. With the public debt expanding, corporate profits near records, and family incomes down since 2001, McCain has made his signature economic proposal a corporate tax-relief package that will cost $2 trillion to $3 trillion over 10 years.

In the New York Times on June 1, former Bush economic adviser Greg Mankiw defended this indefensible fiscal policy by pointing to two purely theoretical studies to posit that lowering the corporate-tax rate by a third is really about helping typical workers.

He didn't mention that the Congressional Budget Office, Treasury Department, and Joint Committee on Taxation all assume that the owners of capital get the benefit of a corporate-tax cut. He also neglects to mention that the CBO estimates that a whopping 59 percent of the benefits of such a reduction would go to the top 1 percent of earners.

Distorted Picture

This is more regressive than the policies that led McCain in 2000 to blast Bush for having ``38 percent of his tax cut go to the wealthiest 1 percent of Americans.''

Mankiw paints an even more incomplete and distorted picture of the fiscal impact. He says McCain's plan to cut the corporate- tax rate from 35 percent to 25 percent will cost only $100 billion a year in lost revenue, but benefits to the economy will cut that cost in half.

Yet, even the Bush Treasury Department suggested that the costs of a smaller corporate-rate cut -- from 35 percent to 28 percent -- would cost at least $130 billion annually.

Most profoundly, Mankiw ignores the explosive costs of McCain's proposal to have 100 percent immediate expensing -- instead of depreciation -- for business investment while maintaining the deductibility of interest. This would make it possible for companies to deduct far more than they invest and thus shelter income. Put another way, this amounts to a negative tax rate.

Do the Math

Bush's Advisory Panel on Tax Reform stated that this would ``result in economic distortions and adversely impact economic activity.''

While the Urban Institute's Len Burman estimates this would cost only $75 billion per year, University of Michigan economist Reuven Avi-Yonah figures that the rate cut and expensing together ``would open up almost unlimited opportunities for sheltering income'' and reduce corporate tax revenue by 75 percent. Jason Furman, head of the centrist Hamilton Project, calculates the combined costs of the rate cut and income sheltering at more than $300 billion a year.

So let's do a little math: Start with $100 billion for extending current tax cuts for the highest earners. Add to that an additional $50 billion it would cost to eliminate the alternative minimum tax for the highest earners, another McCain proposal. Throw in $200 billion to $300 billion in corporate-tax cuts and you have a cost of $350 billion to $450 billion a year. That works out to $3.5 trillion to $4.5 trillion over 10 years.

National Debt

This isn't even the full cost of the McCain tax agenda. Rather, these huge additions to our $5.3 trillion national debt are on top of the cost of extending the Bush tax cuts for families earning less than $250,000 -- a policy that McCain and Senators Barack Obama and Hillary Clinton all support.

``Straight talk'' from McCain would acknowledge these proposals would swell the national debt or cause painful spending cuts to pay for them. The McCain camp instead offers vague and unrealistic promises to cut unspecified spending and eliminate earmarks. McCain makes a lot of this last point, even though banning earmarks would only pay for less than a half of 1 percent of his high-income tax-cut proposals.

Where have you gone, fiscally responsible John McCain?

(Gene Sperling, formerly President Bill Clinton's top economic adviser, is a Bloomberg News columnist. He is a senior fellow at the Center for American Progress Action Fund and advised Hillary Clinton in her bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Gene Sperling in Washington at gsperling@cfr.org

Last Updated: June 6, 2008 04:14 EDT

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