John McCain wants middle-class Americans to believe they can solve their problems themselves, as long as he keeps the government out of their way.

McCain recognizes that the middle class is being squeezed, feeling the strain of rising gas and food prices, stagnating wages, and job and pension insecurity, and is worried about the cost and availability of health insurance. But more government isn't the answer, McCain says. Rather, he wants to let the free market work its magic.

McCain's economic plan

In policy terms, this translates into individual and corporate tax cuts to free up money for consumers and spur investment, a reduction in government waste and cuts in federal spending, including an end to congressional pork barrel spending.

McCain on the economy

That would mean more free trade and less federal regulation, an overhaul of unemployment insurance to make it a program for retraining, relocating and assisting workers who have lost jobs, and limited, targeted help for homeowners facing foreclosure.

Tell us: What should the next president do to fix the economy?

When it comes to health care, McCain proposes, in part, to eliminate subsidies to employers who provide insurance and instead to give individuals a $2,500 tax credit ($5,000 for families) to help them to buy their own health insurance on the open market.

Breakdown: McCain on 7 top issues

"I offer a genuinely conservative, pro-growth plan to provide much-needed stimulus to our economy, creating more prosperity and opportunity for American families. Unlike the Democrats' tired ideas of tax and spend, my plan will cut taxes, spur investment and innovation, and make American business more competitive in the global marketplace," McCain said in a recent campaign speech.

First, he'd cut taxes

The centerpiece of his plan is taxes -- fewer of them.

Although originally an opponent of President Bush's tax cuts, McCain now favors extending them beyond the 2010 expiration date for both middle- and high-income Americans.

He wants to reduce the corporate tax rate from 35% to 25%, let businesses immediately write off investments in new equipment and technology, and keep the capital-gains tax rate low.

McCain also proposes:

• Permanently repealing the Alternative Minimum Tax, which affects 4 million taxpayers, some 93% of whom earn between $200,000 and $1 million a year.

• Doubling the value of tax exemptions for dependents to $7,000.
• Providing a temporary summer holiday on the federal gasoline tax.
• In the long term, instituting a "simpler, flatter, more equitable tax code."

All of this is music to the ears of conservative economists.

Graph: Who's hit by the AMT?

"I see a candidate who is going to try very hard to keep the middle class from being hit hard by a big tax hike," said J.D. Foster, a senior fellow at the conservative Heritage Foundation in Washington, D.C.

Diana Furchtgott-Roth, an economist with the conservative Hudson Institute, said that for the middle class, McCain's approach of "lower taxes and more choice'' easily beats the Democratic alternative of "higher taxes and better services."

The Tax Policy Center, a joint venture of the nonpartisan Urban Institute and the Brookings Institution, estimates McCain's tax plan would "primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households."

Fewer low-income households would get tax cuts, and those whose taxes fell would, on average, see their after-tax income rise much less, Tax Policy Center economists said.

Jared Bernstein, an informal adviser to Barack Obama and economist with the liberal Economic Policy Institute in Washington, said that, in addition to favoring the wealthy over the middle and working class, the McCain tax plan would bleed the federal Treasury and could prevent the government from pursuing any new social-policy initiatives.

"The first thing to realize is that when it comes to tax cuts, McCain is President Bush on steroids," Bernstein said. "And you have to ask yourself, what are the implications of that? How are you going to keep from blowing a massive hole in the federal budget?"

No matter who becomes president, Harvard University economist Jeffrey Frankel said, the country faces a tough economic road because it has accumulated so much debt. Even without McCain's tax cuts, he said, there isn't going to be any money for the next seven years because of the tax cuts being handed out right now.

"We've dug ourselves into a very deep hole on the budget," Frankel said. "Forget about bold plans. The problem is so great that no one is going to be able to solve it."

What the cuts would cost

A Tax Policy Center analysis said McCain's tax proposals, excluding those addressing health care,

would reduce tax revenue by $3.7 trillion over the next 10 years, or approximately 10% of the revenue scheduled for collection under current law. If the policies were fully phased in and permanent, the center said, the 10-year cost would rise to $4.1 trillion, or about 11% of total revenue.

McCain insists his tax cuts would be offset by increased economic growth and reductions in government spending. Douglas Holtz-Eakin, McCain's senior economic adviser, told reporters in a conference telephone call in June that the Tax Policy Center analysis is full of holes and that the costs are exaggerated.

"If you cut the corporate rate, the Tax Policy Center assumes some fat cat, whose job was never endangered, gets all the benefit, but what we know from experience is that if you cut that corporate rate, we don't see jobs go to another country, we don't see the workers get laid off, we don't see them lose their health and retirement benefits," Holtz-Eakin said. "And the benefits of that kind of proposal are targeted on the people who need it the most."

Democratic candidate Barack Obama has offered a different approach: a mix of some tax increases on the wealthy and tax cuts for middle- and lower-income Americans.

He is less inclined to let the market take care of matters, seeking a more aggressive government role and more programs to directly assist embattled Americans.

"He (McCain) says we've made great progress in our economy these past eight years," Obama said in a recent campaign speech. "He calls himself a fiscal conservative, and on the campaign trail he's a passionate critic of government spending, and yet he has no problem spending hundreds of billions of dollars on tax breaks for big corporations and a permanent occupation of Iraq -- policies that have left our children with a mountain of debt."

McCain has not proposed any big new government programs.

He wants to help truly needy distressed homeowners caught in the foreclosure mess, but on a limited basis. He has called for increased federal need-based aid and government-backed low-interest loans for college students but has offered no details.

Map: See housing prices near you

He backs expanded job training opportunities for workers who have lost their jobs, saying: "We have to help displaced workers at every turn on a tough road. I have made that commitment with reforms to expand and improve federal aid to American workers in need."

But McCain has provided few specifics.

Free-market insurance

The Arizona Republican promises to protect and reform

Social Security without raising taxes, and he supports adding personal investment accounts to the government-run retirement system. He has called for restraints on Medicare spending and proposed that wealthy seniors pay more for Medicare prescription-drug coverage, a plan that could affect the pocketbooks of 1 million Americans.

His health care plan could have major ramifications for middle-class Americans who have seen their coverage erode. He wants to shift the nation's health plans away from employer-based coverage, moving to tax incentives to get people to buy their own insurance. McCain said he wants to help people who are now having problems getting coverage in the private market, including those with pre-existing conditions and without prior group coverage. He would provide federal assistance to states to form high-risk insurance pools for people who couldn't get coverage on the open market.

Chart: How much does health care cost?

He would allow consumers to purchase health insurance across state lines to maximize choice and heighten competition, and would make insurance portable, so consumers could maintain coverage when they change jobs.

Chart: Rising costs of health insurance

"I offer a genuinely conservative vision for health care reform, which preserves the most essential value of American lives -- freedom," McCain said in a speech last year. "We do not believe in coercion and the use of state power to mandate care, coverage or costs."

Read more on the 2008 presidential campaign

Published June 30, 2008