John McCain's performance in the Super Tuesday primaries, coupled with the release of President Bush's fantastical budget on Monday, may have doomed the extension of the Bush tax cuts on income, capital gains, and dividends, which are slated to expire after 2010.
The proposed budget for fiscal 2009, which starts in Oct. 2008, confirmed that the Bush fiscal performance will end, as it began, as a clown show. The administration expects that if its proposal is enacted into law, the next president will confront a $409 billion deficit next year. And that's the rosy-scenario version, assuming that GDP will grow 2.7 percent in 2008, compared with a consensus estimate of about 2.2 percent, and that discretionary nondefense spending will barely budge, to cite two examples. And it fails to include the full cost of operations in Iraq and Afghanistan. Even Republicans had a hard time stifling a laugh. Sen. Judd Gregg called it an "academic exercise." The upshot: Given existing trends, by 2009 and 2010 it will be impossible for Bush's successor—Republican or Democrat—to extend the tax cuts without either adding substantially to the massive national debt run up during the Bush years or proposing politically untenable cuts in social services and entitlements. Interest costs alone in fiscal 2009 are expected to eat up $260 billion, or nearly 10 percent of total projected revenues.
And recent trends in election results mean that Bush's successor is not likely to privilege extending tax cuts over fiscal responsibility. On the Democratic side, both Obama and Clinton would be delighted if the Democratic majorities in the House and Senate see fit to let the tax cuts expire.
For their part, Republican primary voters have slowly weeded out the candidates most committed to tax cuts and left behind the candidate(s) whose commitment to extending the Bush tax cuts is weakest. To be sure, all the candidates have sworn that they would make the Bush tax cuts permanent. (How they would square that with boosting spending on defense and restoring the mythic Republican value of fiscal conservatism has gone unaddressed.) But among them, John McCain has the least conviction and is the one least likely to expend political capital to save the cuts. Fred Thompson was a big 'ol tax-cutter. Mike Huckabee proposed replacing the system, which favors the wealthy, with the Fair Tax, which also favors ... the wealthy. Giuliani's plan, released late in the game, called for extending the Bush tax cuts, plus cutting the corporate income tax, further reducing the capital gains tax, indexing the Alternative Minimum Tax to inflation, and giving every child under the age of 12 a pony. Mitt Romney was reluctant to endorse the 2003 tax cuts, but, naturally, has enthusiastically embraced their extension.
For his part, McCain is making the right noises in the primary. In the tax section of his platform, he commits to making the Bush income and investment tax cuts permanent. But it's not particularly convincing. After all, he's one of the few Republicans with Washington experience who can legitimately claim to be a fiscal hawk. In 2001, McCain and Republican apostate Lincoln Chafee were the only two Republican senators to vote against the first Bush tax cut. In 2003, he was one of three Republicans to vote against the second round, which is one of the reasons the Club for Growth hates him so much. McCain correctly noted that it didn't make sense to cut taxes in a time of war, especially in ways that benefited the wealthy to such a large degree. He voted against the Medicare prescription drug benefit, recognizing it as a massive unfunded entitlement. His top economic adviser is the reality-based Douglas Holtz-Eakin, former head of the Congressional Budget Office, and one of the Republican economists least complicit in the intellectual chicanery behind the Bush fiscal policy.
Let's say McCain wins the election in November, is confronted with a Democratic Congress, and is faced with a short-term and long-term budget scenario that is worse than the Bush fantasy. Extending the tax cuts in anything approaching their entirety will be an impossibility. Will McCain go to the mat and spend his political capital urging the public to back an extension of the cuts? Would he make bargains with Democrats on subjects about which he has far deeper convictions (say, Iraq) for the sake of extending policies he didn't vote for? Or will he bow to reality and let most of the tax cuts sunset, as they were designed to do?
In fact, there's a degree to which many of the wealthy have more to fear from McCain than from Obama or Clinton. McCain isn't a creature of Wall Street. Clinton, Obama, and Giuliani have received far more cash from the financial-services industry than McCain has. Mitt Romney made his fortune in private equity. Of the three (or four) remaining serious candidates, McCain is probably the most likely to call bull on the loophole that lets private equity and hedge fund managers pay a 15 percent capital gains tax on wages they're paid for managing other people's money.
So, plutocrats, call your accountants!