McCain or Obama: Who's Pro-Growth?

Each candidate has ideas that could slow the economy.


" Barack Obama is the pro-growth candidate," declares columnist Sebastian Mallaby in today's Washington Post. (Now I am assuming that Mallaby means this as a good thing. The growing anti-economic-growth movement, made up of extreme environmentalists, hand-wringing technophobes, and turn-back-the-clock globalization bashers, might well see it as an indictment.) Here are Mallaby's reasons for his Obama endorsement:

1) The GOP—and thus John McCain by extension—has little to offer but tax cuts. And, says Mallaby, given "the yawning budget deficit and the coming demographic crunch, tax cuts aren't affordable anyway."

2) Deregulation, another GOP favorite, has reached its limits. "We are left with government rules to protect the environment, check the safety of medicines, and prevent systemic financial crises," Mallaby writes. "These rules are generally helpful."

3) McCain says he's a free trader, but there are few barriers left to eliminate: "Today, most trade barriers have been removed; although the remainder certainly ought to be abolished, there's not much prospect of that because the Doha trade talks have stalled."

Mallaby then gives his version of being pro-growth. "So the real litmus tests on growth lie elsewhere: in policies toward education, basic science, skilled immigration, infrastructure, and the grotesque tort system. Tax reform, not cuts, would help."

And on this basis, Mallaby thinks Obama gets the nod:

Obama wants to double federal spending on basic scientific research. He wants to make broadband access universal. He has proposed an infrastructure bank to pump $60 billion into broken-down highways, ports, and so on.... He wants a big push on early-childhood education, which researchers believe can have an excellent payoff in terms of later achievement; he wants to address key gaps in teacher quality with higher pay; he wants a new tax credit to make college more affordable.

My take is as follows:

1) To not mention America's sky-high corporate tax rate—only slow-growth Japan's is higher—puts the logic of the whole article in doubt. McCain wants to cut the rate from 35 percent to 25 percent.

2) Mallaby ignored capital gains taxes. Think taxes don't matter? How about eliminating investment taxes on incomes under $250,000 and indexing cap gains for inflation. Look for stock values—and thus the value of all that retirement dough in millions of 401(k) plans—to surge. McCain wants to keep investment taxes low.

3) Don't think we can afford tax cuts, as Mallaby does? Let's assume for a moment that the cuts I just mentioned will have little effect on growth, a dubious assumption indeed. We could more than "pay for them" by extending the retirement age on Social Security and indexing benefits to inflation rather than wages. That would free up trillions of dollars over the long term. McCain wants to reform entitlement spending.

4) Mallaby ignores Obama's push to raise income taxes, investment taxes, and payroll taxes. Obama has shown no interest in trimming future Social Security benefit growth while at the same time pushing more government spending, which Mallaby approves of. Now here, courtesy of the Congressional Budget Office, is what would have to happen to tax rates to pay for rising entitlement spending, not including all of Obama's spending plans:

The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent. Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.

5) Mallaby also ignores how both Obama and McCain want to impose a huge tax on the American economy in the form of mandated caps on carbon emissions. But Mallaby is a believer in the environmental myth that says, "Sure, it costs money—it costs money because it saves us money." Time will tell on that. Yet even the most optimistic analysis shows the Obama-McCain carbon plans would make the economy smaller than it would otherwise be. Both gentlemen could ameliorate the downside by using money from carbon allowance auctions to cut taxes.