The Wonk Room

Wonk Room’s Robert Gordon To Serve In Obama White House

The Wonk Room would like to congratulate Robert Gordon, who will serve in the White House Office of Management and Budget. The Obama transition team announced today that Robert will be Associate Director for Education, Income Maintenance and Labor at the OMB.

Robert was an original and frequent blogging contributor here at The Wonk Room, and his posts helped establish us as a leading policy rapid-response blog. You can read all of his blog posts here.

We wish Robert the best of luck and thank him for his contributions.

Reynolds’ Rant

Our guest bloggers are Robert Gordon and James Kvaal, senior fellows at the Center for American Progress Action Fund.

In this weekend’s Wall Street Journal, Alan Reynolds accuses us of being lawyers, not economists. We are guilty as charged. But the rest of Reynolds’ rant is wrong.

Reynolds disputes our organization’s estimate that John McCain’s tax plan is worth $3.8 billion to the five largest American oil companies. He claims that we excluded the oil companies’ deductions and credits from our analysis. But we did include deductions. And though we excluded credits — because they are not publicly available — they would have only increased the size of our estimate.

Our estimate is conservative in other ways as well. It used 2007 profits, even though oil companies are breaking all the records this year. It did not count McCain’s big expansion in deductions for business investment. And it did not include oil companies’ foreign profits.

We analyzed 200 companies last spring, and our results have been featured in millions of dollars worth of advertising. None of these companies have disputed our results. In fact, no one did until Reynolds wrote his column three days before the election.

Reynolds gets the big things wrong as well. There is little reason to think corporate taxes put American businesses at a competitive disadvantage. Corporate tax collections are among the lowest in the world because our code is riddled with special interest deductions, credits and exemptions that shield corporate profits from tax. While corporate tax reform is overdue, John McCain’s plan would drive up the deficit, shift the tax burden onto middle-class wages, and harm the economy.

McCain Offers Top Social Security ‘Privatization’ Advocate As Surrogate

Our guest blogger is Robert Gordon, Senior Fellow at the Center for American Progress Action Fund.

Today, the McCain campaign is putting forward economist Martin Feldstein as a surrogate.

Feldstein is widely acknowledged as the “chief intellectual force behind privatization” of Social Security. That’s Feldstein’s own term. He wrote “The Case for Privatization” and “Privatizing Social Security: The Ten Trillion Dollar Opportunity.”

McCain personally endorsed Bush’s privatization plans as recently as March, but yesterday, he said “there is nothing I would demand” in a Social Security package and even said that tax increases are not “off the table.”

“Social Security privatization may be another example of the McCain campaign’s private agenda — the agenda the campaign keeps to itself.

John McCain’s Budget Requires Massive Withdrawal from Iraq By 2013

Our guest bloggers are Robert Gordon and James Kvaal, senior fellows at the Center for American Progress Action Fund.

John McCain’s balanced budget plan relies on steep cuts to U.S. spending in Iraq, according to a memorandum written by economic policy advisor Douglas Holtz-Eakin and published in the Washington Post today. The plan calls for $150 billion in savings in 2013, which is only possible with the kind of timed mass withdrawal from Iraq he has criticized.

Here is what the plan says:

“Balance the budget requires slowing outlay growth to 2.4 percent. The roughly $470 billion dollars (by 2013) in slower spending growth come from reduced deployments abroad ($150 billion; consistent with success in Iraq/Afghanistan that permits deployments to be cut by half — hopefully more) …”

Whatever McCain says about cutting deployments in half, achieving $150 billion in savings would require a massive withdrawal of American troops from Iraq and Afghanistan.

First, U.S. spending in Iraq and Afghanistan totaled $171 billion in 2007, according to the Congressional Budget Office – and that includes money for Iraqi security forces, foreign aid, and veterans benefits. If current policies continue – and spending grows with inflation – the war might cost $200 billion in 2013. Cutting the cost by three-quarters, especially when other costs (like veterans benefits and foreign aid) will remain, would require a sharp, perhaps nearly complete withdrawal of troops.

The numbers from CBO look even worse. According to CBO, rapidly reducing the number of troops in Iraq and Afghanistan to 30,000 would save only $55 billion in 2013. So CBO is saying that a much bigger troop reduction than McCain wants would save barely a third as much money as McCain claims.

Finally, Obama’s own, more aggressive plan to withdraw forces from Iraq will save only $90 billion a year, according to his campaign.

McCain has previously said that an Iraq withdrawal timetable would mean “disaster” and “chaos, genocide.” But his own budget documents contain a plan not merely for withdrawal, but for mass withdrawal.

McCain, A Man Of Many Contradictions

Our guest bloggers are Robert Gordon and James Kvaal, senior fellows at the Center for American Progress Action Fund.

Even while John McCain attacks Barack Obama for “changing positions,” he is pioneering the art of running on multiple contradictory positions – or so we argued yesterday over at the New Republic.

McCain says he’s for Social Security privatization, but his website says he isn’t. His website says he’s for repealing the Alternative Minimum Tax and sweeping corporate tax cuts, but his aides apparently told the Tax Policy Center he isn’t. His aides embrace a $3.6 trillion tax increase, except when it’s pointed out that middle-class households will pay more in taxes too. And so on.

Our timing was good: the McCain campaign continued the pattern yesterday. In a written statement, McCain criticized cuts to Medicare subsidies for insurance companies – subsidies his policy advisor said he opposed. And McCain aides reportedly told Larry Kudlow that McCain is backing away from climate change legislation – something other McCain aides denied.

Most likely, these contradictory positions reflect the contradictory political priorities faced by the McCain campaign: shoring up the base while reaching out to independents. As a result McCain is sometimes a supply-sider and sometimes a deficit-hawk. He wants to transform our health care system and Social Security at no cost to anybody. He wants to clamp down spending, just not any specific program with a constituency.

National Review Gets It Right

Our guest bloggers are Robert Gordon and James Kvaal, senior fellows at the Center for American Progress Action Fund.

The National Review today correctly notes that John McCain’s tax plan “offers very little in the way of direct benefits to Americans in the middle of the income scale.”

The Review then go on to suggest that the only McCain provision with any middle-class relief — doubling the dependent exemption — “would be worth only $525 per child per year. A more direct approach to reducing the overtaxation of families would be to expand the child tax credit.” We made that point back in April.

The Review finally suggests that McCain should make the child credit relief “applicable against payroll as well as income taxes.” Progressives regularly push for much the same thing, increasing the refundability of the child credit. “Refundability” is a word that dare not speak its name among conservatives. But this is also a good idea.

Kudos to the National Review.

McCain’s Trickle-Down Economics

Our guest bloggers are Robert Gordon and James Kvaal, senior fellows at the Center for American Progress Action Fund.

Sen. John McCain calls his new economic policy Jobs for America, but its centerpiece remains help for corporations, not workers. Apparently McCain’s theory is that cutting corporate taxes by $175 billion will (1) make American corporations more competitive, which (2) will help American workers. But — as Gene Sperling and Jared Bernstein pointed out at McCain University last week — both of these steps are on shaky ground.

First, U.S. corporate taxes are in line with the rest of the world’s, according to a recent U.S. Treasury report. The effective tax rate on equipment financed by equity is 24 percent, the same as the G-7 average. The rate on equipment financed by debt is minus 46 percent, meaning that the government actually subsidizes these investments rather than taxing them.

Second, corporate gains are not trickling down to workers. Corporate profits are now near all-time highs: In 2005, they exceeded 13 percent of the economy for the first time since 1966. But the median household income fell by $963 between 2000 and 2006, even after inflation. And the long-term trend suggests that profits and earnings often don’t move together: from 1997 to 1999, earnings rose while corporate profits fell, and from 2000 to 2004, the reverse happened.

McCain’s economic policy is aimed at promoting American businesses. But it’s workers, not companies, who are struggling in the Bush economy.

On Taxes, McCain Was A Solid Conservative First

Our guest bloggers are James Kvaal and Robert Gordon, senior fellows at the Center for American Progress Action Fund.

John McCain is campaigning for president on a platform of budget-busting tax cuts for the rich. In fact, he would cut taxes for the top 1 percent of taxpayers by nearly $150 billion a year.

But McCain opposed Bush’s tax policies before he supported them. So would he govern as the moderate on taxes he was in 2001 or the enthusiastic tax-cutter he is today? McCain’s true intentions were one issue discussed by Gene Sperling and Jared Bernstein at McCain U earlier today.

The easiest way to know what McCain would do as president is to ask him – and he says he wants deep, regressive tax cuts.

But his voting record also matters. And it’s true that, on taxes, McCain was a moderate before he was a conservative. But he was also a conservative before he was a moderate. According to Grover Norquist’s right-wing tax group, Americans for Tax Reform, McCain’s record has three stages:

– Between 1994 and 1997, McCain voted with ATR 100 percent of the time, demonstrating a “Reagan-like” record on taxes.

– Between 1998 and 2003, McCain’s ratings were lower, reaching a low of 55 percent in 2001.

– Since 2004, ATR writes, “McCain has slowly tried to reinvent himself as a taxpayer friendly senator.”

It’s not McCain’s current right-wing tax agenda that is the exception to his career-long record. Instead, it’s his opposition to the Bush tax cuts that was the break from his past.

Did Senator McCain Change His Mind On Taxes Again?

Our guest bloggers are Center for American Progress Action Fund fellows Robert Gordon and James Kvaal.

The highly respected Tax Policy Center (TPC) has posted a new side-by-side analysis comparing the McCain and Obama tax agendas. If accurate, this post indicates that the McCain team has described to TPC policies that differ dramatically from policies that remain on McCain’s website and, in one instance, were reiterated by McCain just yesterday.

Alternative Minimum Tax. Yesterday, McCain said he supports “a phase-out of the Alternative Minimum Tax.” His website still says he will “permanently repeal the AMT.” TPC says, however, that McCain wants to “[e]xtend and index 2007 AMT patch, further increase exemption by 5 percent in excess of inflation after 2013 (temporarily).” That’s relief from the AMT, but well short of “permanent repeal” or “phase out.”

Corporate Expensing. McCain’s website still features his proposal “to permit corporations to immediately deduct the cost of equipment investment, providing a valuable pro-growth investment incentive.” That is enormously costly. In a fact sheet also still available on the website, the McCain campaign compares this proposal to a “modest” partial expensing measure scored by the Treasury Department as costing $1.2 trillion over 10 years. But TPC says that McCain is now proposing only to “allow first-year deduction of 3 and 5-year equipment,” and that McCain also wants a complementary repeal of the interest tax deduction. The TPC also says that McCain’s proposal “expires.” With these modifications, the proposal’s cost will be less than 2% of the proposal that McCain once deemed “modest.”

Substantively, these changes are mostly (modest) moves in the right direction — although they also show McCain manipulating phase-ins and phase-outs just as President Bush has done for the last eight years. But our first question is: What is the McCain policy–what’s on their website, or what they seem to have told TPC?

McCain Flip-Flops On The Estate Tax

Our guest bloggers are Center for American Progress Action Fund fellows Robert Gordon and James Kvaal.

Sen. John McCain, in September 2005:

I follow the course of a great Republican, Teddy Roosevelt, who talked about the malefactors of great wealth and gave us the estate tax. I oppose the rich passing on fortunes.

McCain today:

The estate tax is one of the most unfair tax laws on the books.

McCain also continues to claim that full repeal of the Alternative Minimum Tax will be a tax cut for “25 million middle-class families.” This is false. Compared to existing policy — the comparison McCain always makes when he tallies up the cost of his program — McCain’s proposal will provide a tax break for fewer than 3.6 million taxpayers, and nearly half of them make more than $500,000 a year.

McCain Adviser Holtz-Eakin Ludicrously Asserts Obama Would Be A Third Bush Term

Our guest bloggers are Center for American Progress Action Fund fellows James Kvaal and Robert Gordon.

Apparently the McCain campaign is feeling the sting of comparisons to George Bush. McCain describes himself as the strongest support of the war in Iraq. His answer to $4.00 gasoline is to cut oil company taxes by $4 billion a year. And McCain has embraced a Bush proposal to radically change our health care system. (These and other similarities are described in a memorandum released today by the Center for American Progress Action Fund.)

Swimming upstream, McCain policy advisor Douglas Holtz-Eakin now argues that it is Senator Obama – not McCain – who wants to continue Bush’s fiscal policies. Obama’s budget “is dedicated to the recent Bush tradition of spending money on everything,” he said.

This is exactly backwards. Consider:

– Like Bush, McCain has proposed massive tax cuts that primarily benefit high-income households. McCain’s $300 billion a year in tax cuts – over and above the cost of extending the Bush tax cuts when they expire in 2010 – would essentially double the size of the Bush tax cuts and make them even more regressive.

– Like Bush, McCain’s massive tax cuts and spending on security leaves little for other priorities. Over the past eight years, other types of discretionary spending have remained essentially unchanged after inflation and population growth. McCain would continue the pattern of putting huge tax cuts and defense spending ahead of other needs, like preschool and renewable energy.

– Like Bush, McCain rails against wasteful spending in the abstract but fails to target any actual programs. His promises to eliminate earmarks and freeze spending could save $30 billion a year or even less. That leaves him short the quite noticeable sum of $270 billion a year. (Holtz-Eakin told Bloomberg that McCain has a secret plan to balance the budget, but he hasn’t shared it with the Concord Coalition — or those of us at the Center for American Progress Action Fund, for that matter.)

– Like Bush, McCain is likely to drive up the national debt by trillions of dollars. Bush took a debt of $3.4 trillion – and headed down – up to $5.4 trillion. McCain’s budget plan would drive the deficit to $12.7 trillion.

Obama also has expensive proposals, such as his health care coverage plan and middle-class tax cuts. But he is clear where the money is coming from: higher taxes on high-income families, ending the war in Iraq, selling the right to emit greenhouse gases, and cutting subsidies to oil and gas companies, health insurers, drug companies, and the student loan industry.

That’s why the Wall Street Journal concluded that Barack Obama’s budget “adds up, probably.” But McCain’s plan, it concluded, “would either cause the federal deficit to explode or would require unprecedented spending cuts.”

Digg It!

NYT Editorial Board ‘Divorced From Reality’ On Taxes

Our guest bloggers are Robert Gordon and James Kvaal, fellows at the Center for American Progress Action Fund.

New York Times editorial, April 24: This is the reality: To restore the health of the budget, let alone keep ambitious campaign pledges for spending more money, the next president, regardless of which party wins, will have to tax the American people more than any of the candidates has been willing to admit. Senator John McCain’s tax talk is particularly divorced from reality.

New York Times editorial, today: Senator John McCain scored some points on Thursday merely by acknowledging how much has to change. Mr. McCain said in a speech that if elected, he will … eliminate a tax meant for the rich that is crushing the upper-middle class.

The Times today praises John McCain for his proposal to repeal the Alternative Minimum Tax. The McCain campaign itself estimates that proposal will cost $60 billion a year, with no plan to pay for the cut. With 47 million people uninsured, with 37 million people living in poverty, with a “war and economic crisis” (in the Times’ words), a $60 billion tax cut for the upper-middle class surely is not a national priority.

And who will really benefit? John McCain says that his plan will benefit 25 million middle-class families, and Factcheck.org buys into the logic of that claim. But this would be true only in a world without the AMT “patch” that Congress has repeatedly enacted to shield the middle class. Although Congress each year enacts only a one-year patch, the patch is supported by large majorities of both Democrats and Republicans. There is a debate about whether to pay for the patch, but Douglas Holtz-Eakin is right to say that it is only in “fantasyland” that would Congress fail to extend it.

So, by a sensible logic—and by the McCain campaign’s own logic in pricing this proposal at $60 billion—the guts of McCain’s proposal is to go beyond the patch and fully repeal the AMT. And as between the patch and full repeal, according to the Tax Policy Center, more than 90% of the benefits would go to taxpayers making more than $200,000 a year, and nearly 50% of the benefits would go to taxpayers making more than $500,000. Only 3.6 million taxpayers would benefit, not 25 million. Here’s the distribution of winners:

As the Times instructed in its April editorial, “anyone making anywhere near a quarter-million dollars a year is in the top 3 percent or so of taxpayers.” It would be nice to give these families another tax break, above and beyond the patch. Of course, it would be nice to eliminate taxes for everybody. But leaders need to have priorities. And editorial boards too.

McCain’s Slippery Notions Of Judicial Activism

Our guest bloggers are Robert Gordon and James Kvaal, fellows at the Center for American Progress Action Fund.

In his speech today on the federal judiciary, Sen. John McCain promised to nominate more Supreme Court justices like John Roberts and Samuel Alito. But as George Will has pointed out, Roberts and Alito “consider his signature achievement” – campaign finance reform – “constitutionally dubious.”

In the past, McCain has suggested in private that Alito was too conservative, at least according to John Fund and Robert Novak. But today he said:

I have my own standards of judicial ability, experience, philosophy, and temperament. And Chief Justice Roberts and Justice Samuel Alito meet those standards in every respect. They would serve as the model for my own nominees if that responsibility falls to me.

Last year, Roberts and Alito helped strike down a key portion of the McCain-Feingold law in a 5-4 decision, F.E.C. v. Wisconsin Right to Life, Inc. The right-to-life group ran ads calling on Wisconsin’s two senators, by name, to stop filibustering judges – ads prohibited by McCain-Feingold shortly before elections to prevent thinly veiled attack ads.

But the Supreme Court ruled that the ads were constitutionally protected as free speech. As Justice Stephen Breyer told the Wisconsin Right to Life lawyers, “If we agree with you in this case, goodbye McCain-Feingold.”

In another part of today’s speech, McCain criticized “judicial activism,” where judges “shut down debates by order of the court” rather than undertaking the “inconvenience” of the democratic process. But one of the “abuses by the courts” he cites is actually the opposite of judicial activism.

In Kelo v. City of New London, a city bought homeowners’ property through eminent domain and then resold it to a private developer. The Court’s majority declined to “second-guess” city’s determination that the plan was needed for its redevelopment and therefore was a valid public purpose. It was the conservative minority which wanted to overrule the city and impose its own policy preferences.

McCain Tax Plan Gives Nothing To Families In Poverty

Our guest bloggers are Ben Furnas, Robert Gordon, and James Kvaal, who are a research associate and fellows at the Center for American Progress Action Fund, respectively.

Later this morning, Sen. John McCain will visit New Orleans’ Lower 9th Ward as he continues his tour of impoverished America. His rhetoric is great, but so far the scorecard for his “poverty tour” is four days, one new idea: another corporate write-off, this one allowing “companies to write off the cost” of providing high-speed Internet in low-income communities.

Sen. McCain is proposing $3 trillion in tax cuts that would offer nothing to people living and working in poverty. More than half would go to corporations, and much of the rest to high-income taxpayers in the form of AMT relief.

Even McCain’s one tax cut that really will help the middle class — doubling the personal exemption for dependents from $3,500 to $7,000 – will do little or nothing for working poor families. These families usually do not pay any income taxes and thus will not benefit, even though they pay thousands of dollars in sales and payroll taxes. Meanwhile, the largest tax cuts will go to families at the top.

Read more here.

Will McCain Balance His Tax Cuts For The Wealthy On The Backs Of The Poor?

Our guest bloggers are Ben Furnas, Robert Gordon, and James Kvaal, who are a research associate and fellows at the Center for American Progress Action Fund, respectively.

To his credit, Sen. McCain has begun to talk about the need to address America’s “forgotten places” that have been “ignored for long years by the sins of indifference and injustice.” But what would Sen. McCain’s agenda mean for these forgotten places?

Sen. McCain has proposed more than $300 billion in tax cuts and said that, unlike President Bush, he will pay for these tax cuts by “cutting spending.” But he has “failed to give details about what, exactly, [he] would cut.” According to an analysis released today, he would need to cut more than $250 billion from spending, above and beyond the spending cuts he has already identified.

Sen. McCain could cut approximately 20 percent from all discretionary programs. Alternatively, he could protect defense spending and cut 40 percent from domestic programs. Either scenario would result in massive cuts in key anti-poverty programs.

Of course, it may be that no president and no Congress would make such dramatic cuts. But if Sen. McCain campaigns on massive tax cuts for the wealthy, he should also acknowledge the enormous harm to “forgotten places” that these tax cuts would ultimately cause.

Read the full analysis here. (Also check out the Wonk Room’s Resource Library for a list of other reports we have published so far.)

Douglas Holtz-Eakin Vs. Douglas Holtz-Eakin On Corporate Expensing

Our guest bloggers are Robert Gordon and James Kvaal, fellows at the Center for American Progress Action Fund.

John McCain has proposed to let corporations immediately deduct (or “expense”) the full cost of equipment and technology purchases, rather than deducting the costs over time. We analyzed this proposal several weeks ago and concluded that it would cost $745 billion over the next 10 years.

The McCain campaign and its top economic advisor, Dr. Douglas Holtz-Eakin, are now saying that this central provision of his corporate tax cut will cost taxpayers nothing. But the Congressional Budget Office, when led by Dr. Douglas Holtz-Eakin, reached the opposite conclusion.

The McCain campaign is claiming this measure is free because Treasury will lose money at first, then recoup it over time.

On its face, this doesn’t make a lot of sense. We all know $100 today is worth more than $10 a year for 10 years. And McCain is saying his plan will increase investment — how could that be if his plan has no cost to the Treasury?

In the past, Holtz-Eakin has recognized that expensing costs money. He signed a cost estimate for making permanent a provision of the 2002 stimulus package that allowed companies to expense 50% of their costs. The estimate is the last line on page 92 here, reproduced below:

This estimate shows that allowing companies to expense 50 percent of new investments would cost $440 billion over 10 years. And the costs are still very high, nearly $30 billion, 10 years after the provision is made permanent. McCain’s proposal for 100 percent expensing would be even more expensive.

If Holtz-Eakin was right then, how can he be right now?