McCain weighs new tax strategy

ARLINGTON, VA. —  As he struggles to convince voters he is the best candidate to handle the economy, John McCain is considering whether to issue a new set of economic proposals, possibly including lower taxes on dividends and capital gains.

Sen. Lindsey Graham (R-S.C.), one of McCain’s closest allies, said on CBS’ “Face the Nation” that the Arizona senator was weighing a plan “along the lines that now is the time to lower tax rates for investors -- capital gains tax, dividend tax rates -- to make sure that we can get the economy jump-started.”

At the Virginia Victory Headquarters, which is near his campaign headquarters, McCain declined to comment on his plans, but, in a pep talk with volunteers, he acknowledged the economic troubles have hurt his candidacy. “We’re a couple points down, OK, nationally, but we’re right in this game,” the Republican presidential nominee said.

Economists and market watchers, while thrilled with the idea of cutting taxes on investment income, were generally in agreement Sunday that it would do nothing to help solve the current financial crisis and might actually exacerbate the problem.

Changes in tax policy typically take years to have a substantial effect on the economy. And the credit logjam would not be solved by a tax incentive, several economists said.

Still, such a move might encourage people with long-term investments that have retained gains to sell, accelerating the flight from the stock market, they said.

John Cochrane, an economist at the University of Chicago, said he liked the idea of cutting capital gains taxes over the long term, but that for now the idea is a distraction.

“I think we need a 48-hour moratorium on new plans to fix the mess we’re in,” he said. “I’m a little worried about this business of having a new plan every day.”

McCain has said previously that he would maintain the 15% tax rates on dividends and capital gains. Aides cautioned Sunday that, while discussions were underway, McCain was weighing many options and had not settled on any specific new proposals.

Graham said the campaign would discuss a plan Sunday, and he expected McCain to offer “a very comprehensive approach to jump-start the economy by allowing capital to be formed easier in America by lowering taxes.”

The economic crisis has created an extraordinarily difficult environment for McCain; he is trying to succeed a Republican president with very low approval ratings at a time when most voters believe the nation is on the wrong track. McCain on Wednesday has a final prime-time opportunity to outline his economic proposals during his final debate with Barack Obama; he promised volunteers Sunday he would “whip his you know what in this debate.”

But McCain has gotten little traction with the proposal he laid out in the last debate -- to spend $300 billion buying troubled mortgages and resetting the terms more favorably for struggling homeowners. The plan drew skepticism from conservatives and was criticized by Obama as a taxpayer bailout for irresponsible lenders.

There was also little attention paid to a McCain proposal this week to protect seniors by suspending a rule that requires them to begin selling off their retirement assets when they reach the age of 70 1/2 , which is onerous “at a time when the market is hurting the most,” McCain said. The Obama campaign expressed support for that proposal and called on Treasury Secretary Henry M. Paulson to act on it.

Andrew Atkeson, a UCLA economist, said recent data suggest investors and lenders are overreacting to a temporary, though dramatic, credit freeze. He said the Treasury Department is on the right track by taking steps to buy shares in banks and help them clear out bad debt.

“I am coming from a standpoint of having consistently voted for Republicans, and I have to say that I am disappointed in what the Republicans are putting forward,” he said. “This is just the same old stuff that has nothing to do with the crisis we’re in.”

William Dunkelberg, the chief economist for the National Federation of Independent Business, said reducing taxes on capital gains and dividends would not attract new investors and could drive out current investors.

“It could be that some people who have stayed in the market will decide to sell now and take the gains while they can have them tax-free,” Dunkelberg said. “That’s not what we need. We need people to see what a deal the market is right now and start buying again.”

A potential reduction in the capital gains and dividends tax rates would build on McCain’s already robust plans for tax cuts. He has proposed lowering the corporate tax rate from 35% to 25%, and would target middle-class families by doubling the exemption for dependents from $3,500 to $7,000 while phasing out the Alternative Minimum Tax.

Once an opponent of Bush’s tax cuts, McCain now says he would make them permanent.

Obama would keep the corporate tax rate at 35% and raise the highest tax rate on dividends and capital gains from 15% to 20%. He would raise taxes on American families making more than $250,000 a year while offering tax cuts for everyone under that threshold.

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maeve.reston@latimes.com

william.heisel@latimes.com

Reston reported from Arlington, Va., Heisel from Los Angeles.