Ask the Expert: Dan Mitchell

 Casey Metcalf from the Harvard's Kennedy School of Government asks:

"Which one of the proposed tax schemes from Senators McCain and Obama is better from a free market perspective and why?" 

Dan Mitchell, a Senior Fellow at the Cato Institute, answers:  

Tax proposals should be assessed on whether they either, 1) deprive government of revenue in hopes that this may restrain the growth of spending, and 2) move the tax system closer to a single-rate consumption-base system to increase economic growth. By these standards, Senator Obama has a very bad tax plan. He would increase the net tax burden and he would do this in a very damaging way by boosting the top tax rate and increasing the double taxation of income that is saved and invested. He also makes the tax code more complex with a wide array of special-interest provisions and he increases the number of people who pay no tax, thus creating a "moral hazard" situation since people with no tax liability often view government as a "free" good. Senator McCain has a generally positive tax plan. On the positive side, he claims that he wants to make most of the pro-growth tax rate reductions from 2001 and 2003 permanent. Most impressively, he wants to reduce America's anti-competitive corporate tax rate (the second highest in the developed world) by 10 percentage points. On the negative side, he does propose a few gimmicky tax cuts, such as tax-free unemployment benefits.