It’s Time to Think Big on Tax Cuts

McCain should revive his support for an alternative flat-tax system.

John McCain needs to show the nation that he has the economic recovery plan to restore long-term economic growth. To do that, he needs to refocus his campaign with a new tax plan. Mr. McCain should come out for an alternative, optional flatter tax system, which he has already supported.

Under this proposal, Americans could file their income taxes under the existing tax code or they could choose instead to pay taxes under a simpler code with fewer deductions but lower tax rates. Building on work already done by Steve Forbes and House Budget Committee member Paul Ryan, a Wisconsin Republican, Mr. McCain could propose an optional tax system with just two rates, 10% and 25%, compared to the six rates of the current code ranging from 10% to 35%.

What’s more, such a proposal would include a cut in income taxes, and tax rates, for every American who pays taxes. The alternative system would impose no income taxes on the poor and what is often called “the working class” (the bottom 40% of income earners who don’t pay federal income taxes now). This proposal would also eliminate federal income taxes on the middle class, the middle 20% of income earners who pay only 4.4% of all federal income taxes today.

The new tax system would allow most Americans to file their taxes on a single sheet of paper, saving them the hundreds of dollars they spend today to have their taxes professionally prepared.

And such a tax reform would be an antidote to the class warfare, neocollectivist tax policies of Barack Obama. If implemented, it would also jump-start the economy. Under this optional tax system, savings would increase and investment would soar as capital around the world is drawn to a suddenly more confident U.S. economy.

This new surge of capital would end the credit crunch, and allow old businesses to expand and new ones to start. Wages would grow, along with the overall economy. And as the world invested in America, the dollar would strengthen, as happened in response to the tax cuts that generated the 1980s Reagan boom. This would ease inflationary fears and pressures on the Fed.

With a strong dollar, the Fed would be under less pressure to try to revive the economy through monetary policy. That would give Mr. McCain the flexibility to push for a new “price rule,” which would base monetary policy on prices of a basket of commodities, including gold.

Mr. McCain has already proposed a freeze on nondefense, discretionary spending, and to limit overall federal spending growth to 2.4%, about one-third the annual increases since 2000. Along with his trade policies, the pro-growth tax rate cuts in this alternative tax system would give Mr. McCain all the major components — lower taxes, freer trade, a strong dollar — of Ronald Reagan’s 1980 recovery plan.

Mr. McCain already has proposed several promising pro-growth tax reform plans that would lower taxes on investment and the middle class. With American companies suffering the second-highest corporate tax rate in the industrialized world, Mr. McCain would cut the federal corporate rate to 25% from 35%.

This would create jobs and increase wages, while boosting the dollar and raising revenue. A 2007 Treasury Department study found that Ireland, with a 12.5% corporate rate, raises almost 50% more revenue as a percent of GDP than the U.S. does with a 35% rate.

Mr. McCain is also already proposing to cut taxes on savings and investment through expensing for capital equipment and technology investments — allowing such expenses to be deducted in the year they are incurred, like all other expenses, rather than over several years under arbitrary depreciation schedules as today. This would do more for Detroit automakers than government loans.

He would prevent increases in individual income tax rates, capital gains tax rates, and dividend tax rates by making the Bush rate cuts permanent, and cut the death tax to below pre-Bush levels.

Mr. McCain wants to increase the dependent exemption to $7,000 from $3,500 per person today. This would reduce taxes for middle-class families in the 25% income tax bracket by $875 per dependent. It would probably eliminate most of the remaining federal income tax liability for the middle class by itself.

Mr. McCain also proposes to abolish the Alternative Minimum Tax (AMT), which is currently slated to grow to impose a trillion dollar tax increase on the American people in just a few years, burdening 25 million middle-class families. Abolishing the AMT would save middle-class families $2,700 on average per year, a cut of $60 billion each year from current law.

Mr. Obama, by contrast, offers tax increases on savers, investors, small business, employers, and other job creators, a trillion dollar plus spending increase, and new regulatory burdens. That has no prospect of restoring economic growth. It will only do the opposite.

Mr. Kemp, chairman of Kemp Partners, is a nationally syndicated columnist. Mr. Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation and general counsel of the American Civil Rights Union.

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