McCain Plans for $3.3 Trillion Tax Cut, Balanced Budget at Odds

By Ryan J. Donmoyer and Matthew Benjamin

April 18 (Bloomberg) -- John McCain's plan to cut taxes and balance the budget wins praise from fellow Republicans. Economists and nonpartisan analysts say his numbers don't add up.

McCain's proposal, outlined April 15, would extend President George W. Bush's tax cuts, reduce the top corporate rate, repeal the alternative minimum tax and double exemptions for dependents. Price: $3.3 trillion by the end of a President McCain's second term in 2017, according to figures from his campaign and the Treasury.

The Arizona senator said that would be offset by eliminating pork-barrel spending, freezing a portion of the budget, and Medicare savings. He could cut the budget by $100 billion a year ``in a New York minute,'' he said in a Bloomberg Television interview yesterday.

``The huge imbalance'' in McCain's plan ``is that the tax cuts are specific and large and the spending cuts are small and vague,'' said Robert Bixby, executive director of the Washington- based Concord Coalition, a nonpartisan group that advocates budget restraint.

Once, McCain was a deficit hawk, Bixby said, but ``strange things happen when people run for president.''

Extending Bush's tax cuts would cost $1.5 trillion through the end of a hypothetical second McCain term, according to Treasury Department figures. His proposal to reduce the corporate tax rate to 25 percent would cost $100 billion a year, McCain's campaign estimates. Doubling the exemption for dependents to $7,000 a year would cost another $65 billion annually and the AMT repeal adds another $60 billion a year, his campaign said.

Adding to Deficit

McCain's spending cuts, combined with increased revenue from economic growth, total $1.5 trillion over eight years, leaving a $1.8 trillion net increase to the national debt.

``This is really a massive increase in the deficit,'' said Joel Slemrod, an economist specializing in tax policy at the University of Michigan.

Two Washington research groups said McCain's plan would cost more. The Center on Budget and Policy Priorities estimated his tax cuts would total $5 trillion over a two-term presidency. The Tax Policy Center, run jointly by the Brookings Institution and Urban Institute, said they would cost at least $5.7 trillion.

McCain senior economic adviser Douglas Holtz-Eakin dismissed such estimates as ``fantasy-land budgeting.'' McCain's proposals, Holtz-Eakin said, would balance tax and spending cuts to meet his balanced-budget goals.

Romney's Reaction

``The numbers add up,'' former Republican presidential candidate Mitt Romney said in an interview.

To help pay for the tax cuts, Holtz-Eakin said he would save $30 billion a year by eliminating so-called ``rifle shot'' provisions. Those include items such as tax breaks for small insurance companies.

A Treasury Department report Holtz-Eakin cited as the source of his estimate states $27 billion could be raised by eliminating narrowly used tax preferences spread over a decade, not a single year.

McCain, 71, said he would offset the costs of lower corporate tax rates by freezing spending growth for a year on items unrelated to defense, veterans or entitlement programs like Medicare. So-called discretionary spending, which includes programs such as medical research and space exploration, makes up 18 percent of the budget. McCain said the freeze would save $15 billion.

Carter's Precedent

There's a precedent. Former President Jimmy Carter attempted to implement ``zero-based budgeting'' that would have forced each agency to undergo an annual review and start from scratch. The idea ``didn't really work,'' Bixby said.

To balance the rest of the cost of the corporate tax reduction, McCain would eliminate spending on lawmakers' pet projects, known as earmarks, added in the last two years. That would save $35 billion. McCain also assumes $20 billion in additional tax revenue stemming from stronger growth.

The senator said he would also eliminate $65 billion worth of federal programs, including $2 billion in savings by charging affluent Americans more to participate in Medicare's prescription drug program.

McCain's campaign said a 10 percent tax credit for research for businesses and a provision which would allow companies to expense equipment purchases in the first year of use would come at no added expense.

Treasury Report

A Treasury Department report said those come with a cost. Extending a permanent research credit would cost the government about $13 billion a year, and a less generous form of his expensing provision would cost more than $34 billion annually, according to the report.

And McCain's AMT repeal estimate falls short of an analysis prepared last year by the nonpartisan congressional Joint Committee on Taxation, which put the cost of repeal at $100 billion a year. The AMT was created in 1969 to prevent 155 wealthy Americans from avoiding federal income tax and now ensnares about 4 million people.

McCain's plan doesn't address the cost of the wars in Iraq and Afghanistan, which now total more than $12 billion a month.

Ultimately, said Stan Collender, a former analyst for the House and Senate budget committees, it would take substantial cuts to Medicare and Social Security to balance the budget with the tax cuts McCain is proposing.

Even then, ``there's no way McCain could balance it by the time he leaves, unless he doesn't leave for 25 years,'' Collender said.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Matthew Benjamin in Washington at mbenjamin2@bloomberg.net;

Last Updated: April 18, 2008 00:01 EDT

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