Topic: Tax and Budget Policy

Mr. Regnery’s Advice to John McCain

In today’s Wall Street Journal (Feb 7), Alfred S. Regnery opines as follows (with my comments) on “How McCain Can Convince the Right”:

1. “Take a firm no-new-taxes pledge. Mr. McCain … needs to promise that he won’t increase Social Security taxes – especially by lifting the earnings cap – or increase hidden taxes in regulatory schemes, and that he will try to eliminate the death tax.”

That seems to be asking too much in some respects and too little in others. Regnery is suggesting that McCain do nothing to improve the tax system (as though it’s perfect as is) other than to try to do something he cannot possibly accomplish with this congress. The best defense is a good offense. That doesn’t mean taxing less, in terms of lost loot, but taxing smarter.

McCain’s top economist told me that McCain favors taxing estates (after a large exemption) at the same rate as long-term capital gains. If so, he should not be shy about that – it’s a great idea. That would be much more effective than tilting at windmills until 2011, when the estate tax comes back in full force.

Lifting the earnings cap is indeed a huge threat, adding about 10 percentage points to marginal rates for everyone earning more than $100,000. Expiration of the 2003 tax rates would add another 5 points to that. That would bring the top tax rate to 50%, not to mention state taxes and surtaxes Congressional Democrats have proposed to pay for more health insurance subsidies and easing the alternative minimum tax.

If Democrats want to raise the Social Security tax rate to pay for rising benefits, let them have the courage to propose that. In terms of potential damage to the economy, that would be better than tapping general revenues – which means switching from a flat-rate payroll tax that exempts income from savings to a progressive income tax that applies higher tax rates to both labor and capital.

2. “Get specific on spending. Mr. McCain talks a lot about pork barrel projects, earmarks and the need to get spending under control, but so does everybody. He needs to release a bold, Reaganesque proposal with specific reductions he would pursue as president, what programs he will try to eliminate, and how he will attempt to control a spendthrift Congress… .By getting specific, Mr. McCain would endear himself to a lot of fiscal conservatives.”

Absolutely right. And McCain would also endear himself to a lot of libertarians. It would be risky for Republicans to ignore how much money Ron Paul has pulled up from the grass roots, not to mention votes. That is not just because of Dr. Paul’s good looks and charming wit.

3. “Pick a fight with the press.” That’s bad advice. Let others start any fights. That rule also happens to be good foreign policy, as Ron Paul has observed.

4. “Pick a conservative running mate early. Mr. McCain needs a young vice president with stellar conservative credentials so that conservatives can know that an acceptable successor is being trained and waiting in the wings.”

The giant elephant in this room, the one polite people are not supposed to mention, is that McCain is a cancer survivor and no spring chicken. He is unlikely to serve a second term, and incumbent Vice Presidents have often won the next race. All voters will take his V.P. choice far more seriously than usual.

Regnery likes Gov. Mark Sanford of South Carolina, but national voters don’t know him and there is little time for an introduction. One name they are belatedly beginning to know very well is Mitt Romney. He came close enough in key places like California to have earned the V.P. nod if he’ll take it. In the campaign, I’d send Mitt on tour to focus on economics, where he’s more comfortable than McCain, but ask him to downplay that “competitiveness with China” stuff.

Romney has a few good ideas McCain could borrow, particularly exempting working seniors from the payroll tax. I have minimized the combined income and payroll tax by deliberately minimizing work and salary. But encouraging premature retirement ends up costing the Treasury a lot of income tax revenue, and deprives the economy of skilled labor.

5. “Conservatives … will never forgive him for what they perceive as his abuse of the First Amendment in McCain-Feingold, for his stand on immigration, and for his initial opposition to the Bush tax cuts.”

Regnery is right about McCain-Feingold, for reasons George Will explains better than anybody. But that fight can go on in the legislature and the courts, regardless of who is president. McCain’s positions on immigration and the 2001 tax law are not something that can so easily be dismissed by referring to some checklist of conservative orthodoxy (e.g., must we call a Catholic socialist a “conservative” if he or she wants to allow states to make abortion a crime?).

The American right is diverse, not monolithic or unchanging. In the 1970s I was on the masthead of the magazine Regnery now edits, The American Spectator, as well as those of National Review and Reason. Human Events ran my syndicated column in recent years. Yet that doesn’t mean I feel obligated to agree with Rush Limbaugh on every single topic, or that a Republican candidate has to measure up to some somewhat arbitrary standard of purity. If he’s good on A, B and C, but not so good on X, Y and Z, voters have to think clearly about how to set their own priorities among those issues. Since the president has no authority over “social issues,” and conservatives should fear granting such authority, such choices will often put more weight on good economics, without which costly military spending could soon prove highly problematic.

On complex topics like immigration and taxes, reasonable people can disagree and sometimes they should.

The U.S. labor force is getting old and growing slowly, which is just one reason I think McCain and George W. Bush were both right that we need many more temporary work visas to provide a legal alternative to illegal residence. Nearly half the illegal residents do not sneak across the southern border but arrive here legally by the millions as tourists, students and business travelers.

I was no enthusiast for the 2001 tax bill (although not because the measures threatened Iraq funding or were too kind to the rich). In a Wall Street Journal article on May 30, 2001 I wrote that “the primary objective of the $1.35 trillion cut … seems to have been to maximize revenue loss rather than to minimize tax distortions and disincentives.” I noted that only 31% of the estimated static revenue loss from original Bush tax bill was devoted to reducing the four highest marginal tax rates. Cutting all of the top four rates combined risked less revenue loss than the foolish gesture of reducing the lowest tax rate to 10% from 15% on the first few thousand. Not everything in that bill made sense, even after the worst glitches were fixed in 2003, and no tax law is ever perfect or permanent (least of all one that was designed to self-destruct in 2010).

Mr. Regnery ends by saying “John McCain needs conservatives more than conservatives need John McCain.” That sounds right.

Our Big, Fat Defense Budget

I suppose I should be happy to live in a country that can afford to spend nearly three quarters of a trillion dollars a year on defense even though we are relatively safe, historically speaking. But the defense spending that the President proposed to Congress Monday is so excessive that I can only manage outrage. Everyone complains about earmarks, but they cost $17 billion across the government last year. That’s just two months in Iraq; pocket change in the Pentagon.

Hawks, like Admiral Mike Mullen, the new Chairman of Joint Chiefs of Staff and Secretary of Defense Robert Gates, argue that, hey, it is only 4 percent of GDP. After all, they say, we used to spend far more of our wealth on the military, especially during wars – 35 percent of GDP in World War II and 9 percent in Korea.

That argument, popular as it is, baffles me. The US is about six and half times as rich it was in 1950, adjusting for inflation. Economic growth means that devoting a pegged portion of GDP to the Pentagon is to annually increase defense spending, whatever happens with foreign threats. That’s a silly way to spend tax dollars, to put it mildly. The sensible way to provide defense is look at your enemies’ capabilities and likely scenarios for defeating them and back spending out from that – whether that amounts to one percent of GDP or 30.

And it is not just the waste that offends. According to Steve Kosiak of the Center for Strategic and Budgetary Assessments, the budget will leave the Pentagon short – by $10 to 20 billion a year – of the cash it needs to meet its own requirements. That’s because the budget avoids choice, the essence of strategy. As Fred Kaplan noted the other day, instead of selecting a method of providing defense that would create winners and losers among military services and their platform communities, the non-war budget basically gives the services what they want under a topline. It also gives each service roughly the same relative share of the total as they received in each year since the Kennedy administration, with only a slight uptick this year for the ground forces. That tells you a great deal about George Bush’s claim to have transformed the military.

The worst thing about the budget is that it is bipartisan. No one influential complains. Congressional Republicans on the defense committees are either for it or want more. Democrats knock the Iraq funds, but accept the other $560 billion. History says that the defense budget – at least the non-war portion – that emerges as law next fall will deviate only slightly from what the President submitted.

Why is no one opposed? For one (and I could go on), both parties embrace brands of militaristic hegemony – the idea that that we are better off with massive military predominance over all other powers and that there is a military solution to most foreign policy concerns. Want a liberal world? Buy enough carriers and F-22s so that we can dominate it. China’s growing? Arm so heavily that they cannot compete. Pakistan troubles you? Draw up an invasion plan. Africa is disorderly? Create Africa Command.

But really you can’t blame politicians, who have to get elected. You have to blame the intellectuals who shape public opinion. Blame my field, political science, which has largely decided to avoid studying such unsophisticated questions as the requirements of our defense (and hiring those who do), leaving security debates short of truly independent experts. Blame the beltway pundits who avoid challenging the post September 11 explosion of militarism or lead the parade.

The good news is that bad things, the Iraq war and the growth of entitlements’ cost, are waking people up to the idea that maybe this isn’t the best use of tax dollars. DoD plans and insiders say FY 2009 will be a peak year for defense spending, and that we are about to hit a downward trend. Here’s hoping.

Larry Kudlow’s Question: “Is McCain Like Ike?”

Larry Kudlow, on last night’s CNBC show, remarked that I had e-mailed him comparing John McCain to President Eisenhower. One guest, Jerry Bower, realized this was not necessarily a compliment. He noted that Eisenhower Republicans kept tax rates extremely high on both individuals and business, viewing that as the “fiscally responsible” way to finance a big defense budget. The economy was in recession almost as often as not in those days – in 1953-54, 1957-58 and 1960. John F. Kennedy, Bower rightly noted, campaigned on slashing [Republican] tax rates to get the economy moving again. When tax rates were finally cut in 1964, it worked (as always).

The two parties switched sides recently, with Republicans adopting JFK’s approach by cutting the most destructive tax rates in 1981-86, and Democrats sounding and acting more like Ike since 1993. Similarly, FDR ran against Hoover’s protectionism in 1932, but Republicans and Democrats have taken turns being the most protectionist in recent years (the word “populist” in both parties often means advocating tariffs on necessities to further impoverish the poor).

The Eisenhower-Nixon years defined the phrase “fiscal conservative.” If Democrats spent too much, a “fiscal conservative” would regard it as his duty to do the honorable thing and raise tax rates as much and as often as required, if only to protect the military budget.

My quick e-mail to Kudlow is reproduced below, warts and all. It is obviously more opinionated and political than my public writing, yet not really partisan:

Larry,

McCain would be eager and enthusiastic to join with past co-authors – Kennedy, Edwards, Lieberman and Feingold – to raise tax rates on high incomes, capital gains, dividends and estates.

McCain could surely be persuaded to remove the cap on the Social Security tax. That move, added to a state-local marginal rate above 45%, would make the top tax in the U.S. much higher than in any other civilized country, including Sweden (which has the least progressive tax system of them all). Many European countries allow the payroll tax to be deducted from the income tax, but it’s a nasty add-on for us. It’s loosely tied to benefits, but Social Security would become a pure redistribution scheme if they uncapped the tax.

All the Democrats need to do in exchange for such higher tax rates on the rich is to offer to “fix” the AMT (to make sure it just hits the rich) and cut the nominal corporate tax rate (after “closing loopholes” like quick depreciation), and also to fund any and all U.S. troops in the Middle East.

In McCain’s view, this would be another bold act of leadership, like pushing McCain-Feingold after being tarnished as a member of the Keating Five.

It would show how marvelously bipartisan he is, how fiscally responsible, unlike that upstart George W. Bush. I can see the smug grin even now.

Recall Ike’s excess profits tax and 90% tax rates to bankroll the Korean “police action.” McCain is a reincarnation of Ike. He sees great national honor in (taxpayer) sacrifice, compulsory national service, etc. You may recall a WSJ column I wrote calling the Rubin crowd “Eisenhower Democrats” in contrast with Kemp and the “J.F. Kennedy Republicans.” It caused Bill to yell at his staff, but they still didn’t get it.

All that matters to McCain is a big military/VA budget. He does hope to be frugal on domestic discretionary spending, but can’t accomplish nearly enough with a Democratic congress to offset even 10% of military spending at the Bush pace (which he sees as inadequate).

Besides, he feels, big corporations and greedy investors need to sacrifice for the common good. He always said so., and he hasn’t changed. The only reduction in tax rates he supported in recent years was cutting payroll taxes for the poor (nearly all of whom don’t work, so that’s a cheap gesture).

In a WSJ interview with Tunku, Milton Friedman once said some people are natural economists. I spent a couple of hours with Mitt and large group of the best economists I’ve ever seen in one room, even the White House. Romney held his own quite well. Very credible, wise and tough on big spenders.

I didn’t sign on to any candidate’s team (Doug called too), partly because I want to remain an unpredictable maverick. McCain is 100% predictable – no maverick at all.

If it ended up being a contest between McCain-Huckabee populists on the Republican ticket versus a familiar Obama-Richardson shift from defense to nondefense spending (always popular, always overdone), Republicans would not view my writing as helpful.

The only comfort is that if the Dems controlled the White House, Senate and House, they’d go overboard quickly and lose control of Congress after 2-4 years.

The 2011 tax time bomb would actually explode beneath John or Hillary, leaving the market in shambles in 2010 and the economy in ruin in 2011. Mitt is not that suicidal – he’d like a second term.

Alan Reynolds

Wall Street Journal v. Romney

Two back-to-back Wall Street Journal editorials comparing “McCain’s Apostasies” (Jan. 31) to “Romney’s Convictions” (Feb. 1) rely on a double standard. Why does McCain’s suspicious flip-flop on the Bush tax cuts make him a mere maverick, while Romney’s tougher line on social issues is said to show a lack of conviction?

In the first, McCain is depicted as an admirably stubborn maverick, someone whose decidedly non-Republican legislative history is at least predictable: “Republicans have a pretty good sense of where he might betray them.”

The second editorial strongly implied that Romney has no convictions, but is simply driven by “expediency” and “pandering.” Romney stands accused of changing his message to suit “the audience to which he is speaking at the moment (Think $20 billion in corporate welfare for Michigan auto makers).” On the basis of that one parenthetical anecdote about Michigan auto makers, we are told this “risks a Presidency that would get rolled.”

The trouble is, Romney never proposed any bailout for automakers, much less just those in one state (relatively little of U.S. auto production is in Michigan). That key accusation was lifted uncritically from a McCain radio ad. As FactCheck.org noted, “Romney actually proposed a $16 billion increase in federal research into ‘energy research, fuel technology, materials science, and automotive technology… . Perhaps to McCain’s ears that’s a bail out. But the senator has been a strong proponent of pursuing alternative energies in the past – so strong that he proposed the improbable goal of making the country ‘oil independent’ within five years.”

FactCheck.org offered other examples where “John McCain is attacking Mitt Romney with some out-of-context or misleading statements.” In particular, “McCain is off base in the implications he has been making: Romney never advocated for a particular date for withdrawal or a public date for withdrawal.” Economist Thomas Sowell, among others, has taken McCain to task for such deceptions.

The overall impression from the Journal editorial is that electing Romney “risks a presidency that would get rolled” by Democrats in Congress. That is an ironic conjecture, since McCain has been famously eager to co-sponsor dubious legislation with Democrats – such as McCain-Feingold, McCain-Kennedy, and McCain-Lieberman.

Senator McCain blocked all the 2001-2003 tax cuts because (1) he wanted more revenue for the Iraq War, and because (2) he vehemently objected to granting the slightest tax relief to “the rich.” The editorial says “Republicans have a pretty good sense of where he [McCain] might betray them.” If so, they should realize that a McCain presidency would surely “get rolled” when Bush tax cuts expire in 2010, if not sooner. McCain would surely regard it is as a sign of honor, leadership and fiscal responsibility to trade higher tax rates on the rich for a large military budget and keeping troops in Iraq.

The Wall Street Journal editorial page has allowed itself to be rolled by one candidate’s bogus attacks against his opponent. The result was unfair and unbalanced.

Mitt Romney, Conservative Savior?

As voters go to the polls on this Super Tuesday, conservatives are reportedly rallying around former Massachusetts governor Mitt Romney in an effort to stop Arizona Senator John McCain. Now, there are certainly many reasons to dislike John McCain. I’ve blogged about them here, and my colleague John Samples has raised even more concerns here. But the idea that Mitt Romney is the conservative alternative baffles me.

For example, one would expect a conservative to be opposed to government-run health care. But, as governor, Romney signed—and still says he supports—a health care plan virtually indistinguishable from the one put forward by Hillary Clinton and Barack Obama. Romney’s plan, like the Democratic plans, includes an individual mandate, heavy insurance regulation, middle class subsidies, and a bureaucratic new pooling mechanism. Like the Democrats, Romney believes that goal of health policy should be “universal coverage.” So far, his plan has not only failed in that regard, but it has limited consumer choice, cut reimbursements to providers, driven up insurance premiums, and run deficits of $150-$400 million.

And, one would expect the putative conservative alternative to want to cut government spending. But Mitt Romney has called for spending an additional $20 billion in corporate welfare to bail out the auto industry. He wants to increase farm price supports. He supports George Bush’s Medicare prescription drug benefit and calls for more federal education spending. Indeed, he wants the federal government to buy a laptop computer for every school child in America. Like George W. Bush running in 2000, Romney has not called for cutting or eliminating a single government program—and we know what that meant for a Bush presidency.

Romney has also abandoned the conservative belief in free trade. As my colleague Dan Griswold has written, Romney has adopted a protectionist bent, taking up the “fair trade” mantra, and worrying about the threat to jobs from India and China.

And, while he now talks a good game on taxes, his record as Massachusetts governor was mediocre at best. The Cato Institute’s annual governors’ report card gave him only a “C,” noting that he raised business taxes and fees by some $500 million.

This is not to say whether McCain or Romney would be a better choice for conservative voters. But it does raise questions about what it means for the state of modern conservatism when Mitt Romney becomes the conservative savior.

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Bush’s Dishonest and Spendthrift Budget

Here are some notes on the federal budget released by the Bush administration today:

  1. Total outlays are scheduled to rise 7.4 percent in FY2008. But if the $100 billion in stimulus “rebates” were properly counted as added spending instead of tax cuts, FY2008 outlays would be up an even larger 11.0 percent.
  2. Bush proposes that FY2009 outlays be increased by 6.0 percent.
  3. This adminstration loves spending, and does not know how to actually cut the budget. According to the “Spending Discipline” section of the budget (page 7), the administration proposes ”the termination and reduction of 151 programs for a savings of over $18 billion, a step that will help channel resources to more effective programs.” The administration doesn’t have the backbone to say that spending will be cut — period. Instead, it nearly always promises that any savings will be spent elsewhere.
  4. In a continuation of its dishonest accounting for the alternative minimum tax (AMT), the administration again includes only one year of AMT relief. Yet the debate over the AMT in 2007 showed decisively that both Congress and the president, both Democrats and Republicans, will continue to pass AMT relief that is not offset. The administration should have included either full AMT relief through 2013 (or, better yet, AMT repeal) in the budget.
  5. And in a continuation of dishonest accounting for the “Global War on Terror,” the budget includes no funding for years after 2009. The GWOT cost roughly $200 billion in both FY2007 and FY2008, funded through “emergency supplementals.” In the new budget, the administration includes just $70 billion for the GWOT in FY2009, when in fact the cost will be likely much higher. The bottom line is that the FY2009 deficit will be well over $500 billion, not the $407 billion that the administration claims.

Let’s compare total outlays as a share of GDP over eight years in office for various presidents:

  • Over Ronald Reagan’s eight years, outlays decreased from 22.2 percent to 21.2 percent. 
  • Over Bill Clinton, eight years, outlays decreased from 21.4 percent to 18.5 percent.
  • Over George W. Bush’s eight years, outlays will increase from 18.5 percent to 20.7 percent.

Given that all spending is paid for by either current of future taxes, Bush’s spending increase of 2.2 percent of GDP is a roughly a $300 billion annual tax increase. (This year’s GDP is about $14 trillion).

The Latest on RomneyCare

Faced with rising costs that threaten to put the program $150–400 million per year over budget, the Massachusetts Connector Authority is now adopting a number of changes to RomneyCare. They include:

  1. Pressuring insurers not to increase premiums (ie. premium caps).
  2. Ordering insurers to cut reimbursements to hospitals and physicians by 3–5 percent.
  3. Reduce the choices available to consumers.

The Authority postponed a vote to increase co-payments and other payments by patients.

Ah, the wonders of government-run health care.