Responding to Douglas Holtz-Eakin

Our guest bloggers are Robert Gordon and James Kvaal, Senior Fellow and Domestic Policy Advisor, respectively, at the Center for American Progress Action Fund.

One of Sen. John McCain’s economic advisers, former Congressional Budget Office Director Douglas Holtz-Eakin, has responded to this Center for American Progress Action Fund study of the McCain tax plan:

On the question of tax cuts Gordon and Kvaal had a point, he conceded, though he added voters should wait until the senator fleshes out his tax proposal before passing judgment.

“It will make deficits expand up front, no question,” Holtz-Eakin said, adding that helping corporations ultimately helps workers because it ensures their employer remains internationally competitive. “That place has to be economically viable, otherwise they have a problem.”

Apart from the signal that Senator McCain may change his economic agenda yet again, this candid response raises four questions:

1) Why is it necessary to cut taxes for corporations to make them “economically viable” when the United States already has the fourth-lowest corporate tax revenue as a share of the economy in the industrialized world?

2) Why are deficit-financed corporate tax cuts likely to increase growth when (a) in the short-run, Moody’s ranked them the least cost-effective stimulus among 13 options, and (b) in the medium or longer-run, the effect on growth of deficit-financed tax cuts “tends to be small?”

3) How do massive tax cuts for the most fortunate further shared prosperity when income inequality is at its highest level since before the Great Depression (or earlier)?

4) Given the admission that this plan will immediately increase federal budget deficits, how will Senator McCain meet his own goal of balancing the budget by 2012?

UPDATE: Center for American Progress Action Fund Senior Fellow Jeanne Lambrew responds below to Holtz-Eakin’s comments on the criticism of McCain’s health care plan:


On health, Holtz-Eakin said, “it was unfair to judge McCain’s health care plan by Bush’s record because McCain is offering a refundable tax credit, which is more progressive.”

He is right that a refundable tax credit is more progressive than the standard deduction proposed by the President. But two other aspects of his plan that are identical to that of Bush:

McCain and Bush’s plans are bigger and more radical than Democrats’ plans:

McCain’s website says his plan would, “Reform the tax code to eliminate the bias toward employer-sponsored health insurance….” This is virtually identical to what President Bush said in his 2008 State of the Union: “So I have proposed ending the bias in the tax code against those who do not get their health insurance through their employer.”

Assuming that McCain, like Bush, would use the revenue from repealing the employer tax breaks to fund his new health tax credits for all, this means that the cost of the tax credits would be $206 billion in FY 2009 and $3.6 trillion over 10 years according to the Joint Committee on Taxation. Both plans would change the tax subsidy for health insurance for every one of the 160 million Americans with health insurance today, creating “winners and losers.” And, irrespective of whether this is spent on a standard deduction or tax credit, this amount of spending is double that proposed by Obama or Clinton’s plan.

McCain and Bush’s plans would make it harder for people with health issues to obtain affordable health insurance:

Both plans provide new tax incentives for individual-market health insurance. And both promote cross-state insurance purchasing. The McCain plan says: “Families should be able to purchase health insurance nationwide, across state lines….” The White House says, “The President supports permitting the purchase of health insurance policies across state lines.”

Cross-state insurance shopping is code word for deregulating health insurance. If all sick people could purchase in well-regulated states, then no insurers would offer coverage there. Instead they would find a state with the least regulation and set up business there — a virtual “Cayman Islands” for health insurers. It would lead to fewer choices, according to an analysis by the Congressional Budget Office during Holtz-Eakin’s tenure as director: “The shift of individuals expected to have relatively low health care costs to out-of-state insurance coverage would increase the price of coverage offered by insurers licensed in-state, and could lead to erosion of the availability of such coverage by insurers located in secondary states.”

The bottom line is that even though tax credits would help some uninsured gain coverage, the McCain plan, like Bush’s plan, would take away employer coverage without replacing it with a viable alternative for many. Health reform requires more than tax reform.