Presidential candidates often run claiming to be the most qualified to be commander-in-chief. But in the current economic environment, it's more important that they be able to manage the fiscal army and in their current proposals, Sen. John McCain (R., Ariz.) and Sen. Barack Obama (D., Ill.) both seem lacking in marshalling the economy.
The two presumptive candidates have proposed to increase government spending by trillions of dollars, which would sharply increase the national deficit. The new name for the presidency: Spender in Chief.
A study by the Tax Policy Center, an offshoot of the Brookings Institution and the Urban Institute, analyzed the recent budget implications of each candidates' proposals. The news from the report is bad:
"Senator Obama's plan would add $3.3 trillion to the national debt (including additional interest costs) while Senator McCain's plan would add $4.5 trillion. This does not include the cost of expanding health insurance coverage and assumes that Senator McCain's proposals phase in and phase out on schedule. It also assumes that all of the candidates' optimistic revenue offsets materialize."
The analysis fails to include health-care proposals, which would likely set both candidates back even further due to generous tax credits, and assumes a 10-year effect on the budget. The study is preliminary, so I wouldn't be shocked if the campaigns tried to push back on the analysis. Nevertheless, the big numbers adding to the deficit remain worrisome.
These numbers directly contradict statements made by the candidates this week. Obama said on Monday: "Now, contrary to what John McCain may say, every single proposal that I've made in this campaign is paid for -- because I believe in pay-as-you-go."
McCain said on Tuesday: "All of these challenges, and more, will face the next president, and I will not leave them for some unluckier generation of leaders to deal with."
The report revealed the truth however: Both candidates promise policies that will be paid for by future generations. Clearly, the deficit will increase along with the national debt.
In theory, an increase in the national debt wouldn't be all bad. Presently, the national debt ranges around 66% of GDP, and interest payment as a portion of the federal budget remains lower than in the mid-1990s according to the Concord Coalition, a nonpartisan group advocating for fiscal responsibility.
In reality, a growing national debt will force the federal government to raise more money through borrowing. Two negative results could occur.
First, the Treasury might have to offer better prices for its debt, which in turn could lead to higher interest rates and higher cost of money, meaning less demand for it. Second, the government would compete with the private sector for investment dollars. This reduces the amount of money available for the private sector and could lead to lower investment, productivity and possibly employment.
The candidates should be held accountable for their spending. The U.S. will find it hard to maintain its financial and political leadership in the world with an economy based on reckless government spending.
Both of the candidates manage to pander on the tax issue.
McCain has suggested a gas tax holiday for the summer, which would have a minimal effect on businesses and consumers, while depriving the Federal Highway system of needed funds that employ workers and fix roads. Economists have roundly panned the idea.
Obama proposed that seniors, an important voting bloc that Obama needs to improve on in order to beat McCain, earning under $50,000 pay no taxes, though they already receive favorable rates on Social Security income. Seniors earning over $50,000 would pay dramatically more. This would create incentives for seniors not to work, and the Tax center described it as "poorly designed."
The study also examined who benefits from the tax cuts. The study breaks it down into two time periods, before the expiration of the Bush tax cuts in 2010 and after with new laws proposed by the candidates in effect.
The Tax center compared the two plans and found the following, after all the candidates proposals had been put into place by 2012:
"If enacted, the Obama and McCain tax plans would have radically different effects on the distribution of tax burdens in the United States. The Obama tax plan would make the tax system significantly more progressive by providing large tax breaks to those at the bottom of the income scale and raising taxes significantly on upper-income earners. The McCain tax plan would make the tax system more regressive, even compared with a system in which the 2001-06 tax cuts are made permanent."
The results should not be particularly surprising. McCain's tax cuts -- similar to Bush's -- favor those who benefit from corporate income: lower corporate taxes and lower capital gains. It's much better for shareholders than workers. Under McCain, Warren Buffet would pay an even smaller share of taxes than his secretary. Under Obama, shareholders can expect capital gains to return back to the levels under Bill Clinton, 20% percent, and could go as high as 28%.
It is important to understand the implications of the tax plans proposed by the candidates. Both candidates run up the deficit, whether they'll admit it or not, and their proposals must be watched.