McCain Offers New Tax Cuts, Incentives

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Sen. John McCain (R., Ariz.) at last unveiled plans for new tax cuts Tuesday. His campaign surrogates announced over the weekend that tax-cut plans were coming, but in his "new" stump speech Monday, McCain made no mention of any cuts, leaving the media to wonder who was in charge of the campaign.

The proposals released early this morning outline new tax cuts to help seniors, investors and workers receiving unemployment benefits. McCain argues his new plan would attract investors to capital markets, unlike Sen. Barack Obama (D., Ill.), who has proposed rules easing tax restrictions on 401(k) withdrawals.

McCain said in a campaign appearance Tuesday:

"It is essential that we avoid an exodus of capital from the market. Senator Obama yesterday offered up a proposal that would have the effect of encouraging early withdrawal of funds from 401(k) accounts, by suspending penalties through 2009. This is an invitation to capital flight, and therefore to continued instability in the market, at a moment when exactly the opposite is needed."

Last week he said he would change rules that force seniors to liquidate 401(k)s at age 70.5 and allow them to stay invested.

McCain's new plans would go further, reducing the capital gains tax for 2009 and 2010 to 7.5% from its current 15%. He would also cut the capital gains taxes from redemptions on 401(k)s to 10%. Furthermore, he would increase the tax deduction on losses from long-term capital gains vs. ordinary income from its current $3,000 to $15,000 for the years 2008 and 2009.

But would McCain's plans actually attract capital to the market? His plan for seniors would definitely preserve some capital in the market for a short period. However, his plans to lower capital gains taxes (on regular investments and 401(k)s) and increase the tax losses might have unintended consequences. Those portions of his plan could encourage investors to make one-time sales to capture lower capital gains and increased tax write-offs. Such equities sales would facilitate capital flight.