McCain Plan for Budget: Fiscal Hawks vs. Tax Foes

Michael Cooper|The New York Times

As Senator John McCain kicked off a week of economic-themed campaigning here on Monday, it was apparent that some of the underlying tensions between the two schools that guide his economic thinking — the supply-siders who want to cut taxes and the deficit hawks who want to balance the budget — remain unresolved.

Mr. McCain has promised once again to balance the budget by the end of his first term in 2013, his advisers said Monday. They were reverting to an earlier pledge that Mr. McCain abandoned in April, when he proposed a series of costly tax cuts and, citing the ailing economy, said that it might take two terms to balance the budget.

“American workers and families pay their bills and balance their budgets, and I will demand the same of the government,” Mr. McCain said at a campaign stop here. His top advisers went further, saying he would balance the budget by the end of his first term.

But it is unclear how Mr. McCain intends to balance the budget. Fiscal analysts who have examined Mr. McCain’s plans say his calls to extend President Bush’s tax cuts and cut corporate and other taxes without calling for comparable spending cuts could increase the federal budget deficit significantly.

The tug of war between wanting steep tax cuts and trying to make sure the government spends no more than it takes in has been a theme this year as Mr. McCain’s economic thinking and policies have evolved.

In the Senate, Mr. McCain voted against the Bush tax cuts that he now wants to make permanent, warning that they were tilted toward the rich and were not offset by enough spending cuts. In doing so, he incurred the wrath, and suspicion, of many prominent supply-siders. But as a presidential candidate, Mr. McCain has had a circle of advisers that included both card-carrying supply-siders like Jack Kemp, the former New York congressman, and deficit hawks like Phil Gramm, the former Texas senator.

But Mr. McCain’s early enthusiasm for balanced budgets seems to have cooled slightly in this campaign, and he is much less specific about spending cuts than he is about tax cuts. Robert L. Bixby, executive director of the Concord Coalition, which advocates fiscal discipline, questioned how Mr. McCain’s current proposals could lead to balanced budgets.

McCain's Economic Plan

“It’s feasible to balance the budget by 2013, but very unlikely under the policies Senator McCain has proposed,” Mr. Bixby said in an e-mail message. “The spending cuts are far too vague to be counted on for significant savings and, even if they were more specific, I can’t see how they would come close to offsetting the level of tax cuts he recommends. Looking at this set of proposals, it doesn’t seem that McCain fits neatly into either the deficit hawk or supply-side camp.”

But Mr. McCain’s tax cut proposals have won over some of his erstwhile supply-side critics. Last year the Club for Growth, a prominent antitax group, issued a report under the headline “John McCain is No Supply-Sider” that faulted him for his earlier opposition to the Bush tax cuts. Now, Pat Toomey, the group’s president, said that Mr. McCain’s recent tax cut proposals indicated that supply-siders were getting the upper hand.

“Is John McCain a supply-sider in his bones?” Mr. Toomey asked. “I’m not sure he is. But I do support the positions he has been taking.”

When Mr. McCain spoke about his tax plan in April, he cited the faltering economy and said that it might take two terms to balance the budget, explaining that “economic conditions are reversed.” Since then he seems to have refined some of his earlier tax cut plans. While Mr. McCain’s campaign once spoke of repealing the alternative minimum tax, which is aimed at the wealthy but has increasingly ensnared middle-class taxpayers, his advisers now speak of “phasing out” the tax. And they now say that his plan to let corporations write off their equipment expenses more quickly would be temporary.

Mr. McCain, who has been dogged by his own past statements that he does not understand the economy as well as he should, has not always spoken fluently about economic policy during the campaign.

When he was asked at a town-hall-style meeting in Connecticut in April whether he wanted to “raise taxes, cut entitlement spending, cut defense spending, or have a deficit,” Mr. McCain spoke generally about emulating President Reagan, not mentioning that the deficit nearly tripled during the Reagan presidency.

And when Mr. McCain first outlined his tax cut proposals shortly before the South Carolina primary in January, he highlighted his new enthusiasm for supply-side economics. “Don’t listen to this siren song about cutting taxes,” Mr. McCain said then. “Every time in history we have raised taxes it has cut revenues.” Of course, history is full of tax increases that raised revenues, just as planned, and many economists deride the notion that broad-based tax cuts will spur enough economic growth to raise tax revenues over all.

The two pillars of Republican economic thought vying for supremacy in the McCain agenda do not always coexist easily.

Deficit hawks believe that keeping the budget balanced will put downward pressure on interest rates, helping the economy. Many supply-siders believe that balancing the budget is a misguided goal, except to the extent that it shrinks government, which is a somewhat different goal. Supply-siders believe that lower taxes will spur economic growth, and that while lower taxes may lead to bigger deficits in the short term, they will eventually produce more revenue and lead to balanced budgets.

But one of Mr. McCain’s top economic advisers, Douglas Holtz-Eakin, who said on Monday that Mr. McCain’s “plan is to balance the budget by the end of his first term in 2013,” suggested that the two arguments are not incompatible. “You’ll never have successful deficit reduction,” he said, “without strong economic growth.”