ISSUES: McGovernomics: A More Modest Proposal

GEORGE MCGOVERN’S primary campaign won him the Democratic nomination but left him with an intractable problem: an economic program that stamped him in the public mind both as a radical and a man who could not make his figures add up properly. Even before the convention, McGovern withdrew the program and promised to have a new one ready by Labor Day. Last week he kept his pledge. Venturing into Wall Street, where he had frightened more people more thoroughly than any Democrat since Franklin Roosevelt, he unveiled the new McGovernomics—a program much more modest and consistent than the old one, but still faithful to the candidate’s basic economic philosophy.

The program did contain one striking addition: a proposal to tax capital gains, such as profits on the sale of stock or real estate, at the same rate as wage or salary income. Otherwise, it was as notable for what was left out as for what was included. Gone was the plan to give every American $1,000 a year—a Utopian idea that had been designed to reduce poverty at the possible price of increased taxes on every family making more than $12,000 a year. Gone also was the proposal to tax incomes above $50,000 at 75% of the statutory rate on all kinds of income, regardless of how the money was earned or what deductions the taxpayer might have.

There were even some gestures to the rich and to corporations. The top tax rate on earned income would go down to 48%, from the present 50% to 70% (it varies according to a complex formula). Companies would keep the tax credit they now get for investing in new machinery—a provision of tax law that McGovern had earlier attacked—though the credit in effect might eventually be halved from the present 7%. For fiscal conservatives, there was a promise to name cautious House Ways and Means Chairman Wilbur Mills as Secretary of the Treasury. For blue-collar workers, there was a ringing pledge: under President McGovern, “no American whose income comes from wages and salaries would pay one penny more in taxes than he does now.”

That does not exactly make McGovern a penny pincher; his program would still cause a considerable change in national direction. The Senator proposes $44 billion in new annual federal spending by 1975, plus a one-shot $10 billion program to create public-service jobs for people who cannot find work in the private sector. Of the total, $30 billion consists of proposals to greatly expand federal aid to education, hospital construction, public transit, drug-control programs and the like. The remaining $14 billion represents the cost of a new “national income insurance” plan to aid the poor, replacing the old $1,000 grant. Through a combination of increased Social Security benefits, an expanded food-stamp program and higher public-assistance payments, McGovern aims to ensure the equivalent of about $4,000 a year to every family of four. (This is not quite the same as the old $ 1,000 for everybody. Under the old program, a family now earning $4,000 would have had its income raised to $8,000, some of which would have been remitted in taxes; under the new program that same family would get nothing, at least to start with.)

The money to finance this program would come from two sources: 1) $30 billion to $32 billion to be cut from the defense budget over three years, an earlier idea that McGovern is resolutely sticking to; 2) $22 billion to be raised by the most precise tax-reform program offered by any presidential candidate in memory. McGovern would accomplish this by closing a long string of tax “loopholes”; he offered a list of eleven, with detailed estimates of how much revenue would be gained by eliminating each. He would leave untouched the loopholes most used by the average person, such as deductions for medical expenses and interest on mortgage loans. Besides capital gains, the tax escapes he would attack benefit mostly wealthy people, as well as investors in such industries as oil and real estate.

Politically, the new McGovernomics is obviously designed to win the votes of Democratic workers; they are attracted by a soak-the-rich approach but were frightened by Mc-Govern’s earlier plan for a vast redistribution of income from the upper-middle class to the lower-middle class and the poor. McGovern staffers see blue-collar disaffection as a primary reason for Richard Nixon’s 34-point lead in the latest Gallup poll. “That $ 1,000-per-person sounded ridiculous to every blue collar in America,” says one campaign aide. “Most of them figured McGovern was going to tax them more to put more people—especially blacks—on welfare.”

Now McGovern is shifting his emphasis to tax reform and to creating jobs by more spending. The primary votes for George Wallace and McGovern himself indicated that there is political mileage to be gained by appealing to a vague sense among ordinary people that the tax laws are rigged to favor the rich. The strongest testimony to the potential political impact of the new McGovern program is the fact that many Republicans almost ignored it last week and insisted instead on continuing to assail the old one. For example, Treasury Secretary George Shultz blandly assured reporters that the $1,000 “Demogrant” program must still be in McGovern’s mind—even though McGovern Spokesman Gordon Weil had told the same reporters earlier that the idea was dead and that there was “no way” it could be revived.

McGovern has achieved the first essential: he has now got his arithmetic straight. Even such Republican economists as Alan Greenspan and Beryl Sprinkel, members of TIME’S Board of Economists, concede that McGovern’s proposals have a reasonable chance of raising most of the revenue that he says they will—if not of paying for the Senator’s spending schemes—assuming that the U.S. economy continues to expand rapidly. The larger question is whether swift growth would in fact continue under McGovern’s program. Republicans contend that by raising taxes on the wealthy, the program would so discourage investment as to slow the growth rate. McGovernites retort that people invest if they see an opportunity for profit and that the Senator’s program would prompt enough consumer spending to make sure that the opportunity for profit will be present.

The new program is the work of a team of 46 tax and welfare experts who have been examining and pricing scores of possible proposals for more than a month. They include several economists older and more orthodox than the authors of the program that McGovern unfurled last spring. For instance, since the primaries McGovern has recruited three members of TIME’s Board of Economists: Walter Heller, Arthur Okun and Joseph Pechman, none of whom had shown much enthusiasm for his earlier program.

Two weeks ago, the new team turned over a program to McGovern’s speechwriters. The wordsmiths then kneaded it through five drafts —befitting what Frank Mankiewicz called “the most important speech of the campaign”—before McGovern wrote the final version.

As far as taxes go, the thrust of the new program can be summed up in one sentence: income is income, no matter what its source. The most striking illustration of that idea is the proposal to tax capital gains at the same rates as wages. Traditionally, money earned by money has been considered different from money earned by labor, partly because the benefits from investments often do not show up regularly but take years to accumulate. Thus most income from the sale of property is now taxed at half the rate of wage-salary income, and the tax never goes over 35%. (Even that is strict by some foreign standards. Canada’s top tax on capital gains is 23½% and Britain’s is 30% after twelve months; France, West Germany and Italy do not tax long-term capital gains at all.)

Theoretically, this loophole is open to rich and poor alike, but since the rich own more property, they obviously reap the greater benefit. An analysis by Ralph Nader’s tax-relief study group shows that taxpayers in the $10,000-to-$15,000 annual income bracket now save an average of $16.31 in taxes on capital gains, mostly on the sale of houses and on income from investments in mutual funds. Taxpayers with an income of $100,000 or more a year average savings of $38,126.29.

McGovern figures to raise $7 billion a year from individuals and $1 billion from corporations by such reforms. He would allow many people to spread capital gains over a period of years for tax purposes, in order to avoid genuine hardship. A family selling a business that had taken a generation to acquire real value, for instance, would be able to reduce its taxes by averaging the gain in the same way that writers, actors and athletes can now cut taxes by averaging over several years an extraordinary jump in earnings in any one year. On the other hand, McGovern would tax gains that had accrued in the value of assets held by wealthy people up until death. At present, if an investor buys stock for $1,000,000 and it is worth $8,000,000 when he dies, the increase in value escapes taxation; McGovern would levy taxes on the $7,000,000 increase before separate taxes are assessed on the heirs. Estates of “moderate size” and spouses would be exempt. Estimated annual revenue from this change: $4 billion.

McGovern also would:

> Eliminate the accelerated depreciation write-offs that businesses have been able to take on their plant and equipment since 1971. Estimated new revenue from this change and the shaving down of the investment tax credit: $6.7 billion.

> Abolish the depletion allowances now granted to companies that explore for oil, gas and other natural resources, as well as some other tax breaks granted to these industries. Estimated new revenue: $2.2 billion.

> Wipe out special tax advantages—chiefly large interest deductions on construction loans and rapid amortization—now given to investors in real estate. In McGovern’s view, these advantages encourage excessive investment in office buildings, shopping centers and luxury apartments, to the detriment of more socially productive building. Anticipated new revenue: $1.1 billion.

> Tighten tax treatment of profits earned by U.S. corporations operating abroad. He would repeal last year’s Domestic International Sales Corp. (Disc) law that grants companies a special tax deferral on profits from export sales. In addition, McGovern would tax foreign profits of U.S. corporations whenever they are earned; at present such profits are taxed only when remitted as dividends to the American parent corporation. Estimated new revenue: $1.3 billion.

> Make a host of other tax changes. McGovern would, for instance, limit the deductions that wealthy city slickers can take on losses from farms that they own; prevent investors from deducting from their other income the interest they pay on money borrowed to make investments that produce no income; and provide subsidies to discourage state and local governments from issuing tax-free bonds.

On the expenditure side, McGovern’s program shows much less change from the one he unveiled during the primaries. The main difference is in uplifting the poor. He now would rely more on the job-creating programs, as well as an extension of Social Security benefits to 3,000,000 of the orphaned, disabled or elderly not now covered that would increase those benefits from $85 to a minimum of $150 monthly for everyone, and expand by $5 billion cash and food-stamp grants to unemployables.

The new McGovernomics sacrifices some of the ambition of the old. Guaranteeing an income of about $4,000 a year to a family of four, for example, would still leave the poor poor; by federal definition, the “poverty line” for a family of four is now $4,137. But the new program clearly is much more realistic and less expensive than the old—and also more specific. For example, last week Elliot Richardson, Nixon’s Secretary of Health, Education and Welfare, attacked McGovern’s tax proposals—but had to confess that he could not contrast them with Nixon’s tax-reform ideas, because he does not know what those ideas might be.

However, the fact that McGovern has had to come up with a new economic program at the start of the campaign constitutes an admission that the old one was faulty, and could reinforce the public impression of the Senator as a waverer. Republicans last week cheerfully seized on that idea. Clark MacGregor, Nixon’s campaign manager, sneered that McGovern’s new policy “is the September plan. I’m sure that when its flaws are fully recognized, there will be an October plan.” If McGovern can win back the votes that polls show he is now losing, his ideas may begin a new chapter in U.S. economic history. Even if he goes down to the crushing defeat now so widely predicted, he has crystallized questions about the equity of the tax system and the nation’s spending priorities that will not fade away.