Larry Kudlow

John McCain is gaining traction on the tax issue as he aggressively makes the case that Obama the Redistributor will take your money and give it to someone else, while he, McCain, will create more economic opportunity by growing the pie for everyone.

Key polls — like Rasmussen, Gallup, Battleground, and IBD — show a narrowing of the race to 2 or 3 percentage points just in recent days. This is in part because Joe the Plumber has crystallized McCain's campaign message to a pro-growth tax-cut recovery plan that reaches out to investors all across the country. Now the big question is whether McCain will stay on message and keep hammering these points home.

Two days ago in Ohio, McCain argued: "We will cut the capital-gains tax. And we will cut business taxes to help create jobs, and keep American businesses in America." It's the first time he referred explicitly to his capital-gains tax cut, which would take the investment rate to 7.5 percent from current law of 15 percent.

Against the backdrop of plunging stocks and deflating home prices, that means asset buyers would keep 92.5 cents of every additional dollar of profit from the purchase of underwater stocks, houses, or any other asset. Current law will let you keep 85 cents on the extra dollar. So McCain's plan is a 9 percent incentive reward to invest and take risks.

Now contrast that with Obama's capital-gains tax hike to a 20 percent marginal rate (at least). That means you keep 80 cents of the extra dollar of invested profit instead of today's rate of 85 cents. In other words, that's a 6 percent penalty compared with current law.

Adding up McCain's 9 percent reward and Obama's 6 percent penalty, we're talking about a 15 percent swing in the after-tax cost of capital and reward for investment. Stocks have already fallen 40 percent from last October's peak. So the 15 percent differential between the Obama and McCain plans makes a very big difference to the 100 million investors who comprise nearly two of every three votes in presidential elections.

Additionally, McCain would provide a $15,000 capital-loss tax deduction and would lower the tax rate on retired investors who redeem their 401(k)s or IRAs to a rock-bottom 10 percent. Plus, McCain would drop the corporate tax — a big boon to consumers who actually pay the tax — and would keep income-tax rates at present levels.

Obviously, there's a very significant difference between the Democratic and Republican plans. If only Mac hammers this home in the final days of the election. Sure, folks have a strong dislike for redistribution. They prefer opportunity. They want to grow the pie larger. And they don't want left-wing activist Supreme Court judges to take away even more of their economic rights. Hence McCain's case grows even stronger — if he pounds away and makes it. But yesterday on CNBC John McCain never mentioned capital-gains or investors. That's not the way to do it.

The latest IBD/TIPP poll shows a 46-46 toss-up among investors. That's not good. What I'm saying here is that while the redistribution argument is working, it needs to be bolstered by a strong case to investors, who are usually the very base of the GOP.

The opportunity is there for Sen. McCain. But he must have a disciplined investor message in the remaining days.

29 Oct 2008 Tech Central Station

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