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It’s the economy, stupid

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With the economy in a slump, the electorate is likely to become even more focused on traditional "pocketbook" issues as November approaches. That will be a challenge for the presumptive Republican nominee, Sen. John McCain. He is known for foreign policy, and so an election which turns more on domestic concerns than on successful prosecution of the war would seem to work against his natural strengths. But growing anxiety about the American economy presents Mr. McCain with an opportunity too.

In the months before the summer party conventions, Mr. McCain has a chance to make something like a first impression with potential voters who do not yet have firm views on his candidacy and may be open to hearing from a new messenger on economic matters. So, what should Mr. McCain say to such voters? To begin, he needs to articulate and defend President Ronald Reagan's economic legacy. The United States is in a painful "rough patch," even so, the performance of the economy over the last quarter century has been nothing short of remarkable. Between 1983 and 2007, there were two relatively shallow recessions. Total employment increased from less than 100 million people to more than 146 million. On average, the economy grew 3.3 percent per year in real terms. Inflation was held in check and the total, real net worth of American households nearly tripled. Mr. McCain must embrace those policies which allowed America's entrepreneurial economy to flourish: low marginal tax rates, stable prices, free trade and deregulation to promote competition and consumer choice.

At times, it seems the rest of the world understands the power of our free markets and sensible policies better than we do. Reform-minded governments around the world now compete with each other to secure the lowest possible corporate and income tax rates, reform their entitlement programs and expand free trade. Meanwhile, the Democratic candidates for president want to erect new trade barriers, raise taxes and expand government.

Embracing past economic success is not an excuse for passivity in the face of today's challenges. The 2008 election will indeed be about change and Mr. McCain should stand for big change to correct what is holding back our economy today. And there's no bigger problem to fix than the federal tax code.

Fortunately for Mr. McCain, the Democratic candidates are making part of his case for him. Both Sen. Hillary Clinton and Sen. Barack Obama are campaigning for a massive federal tax increase. The Democratic budget plan recently passed by the Senate, with Ms. Clinton and Mr. Obama in support, would kill most of President Bush's 2001 and 2003 tax cuts. Overall, the Democratic budget would raise taxes by at least $500 billion compared to today's tax law over the three-year period 2011 to 2013.

To win, it will be necessary, but not sufficient, for Mr. McCain to firmly pin the tax increase label on his Democratic opponent.

But he must also show voters what kind of tax law he favors. Mr. McCain does not need to present a detailed plan but should instead signal priorities. His top priority should be a steep tax cut for middle class families with children, as several conservative writers, including Ramesh Ponnuru of the National Review, have suggested. One possibility would be to increase the child credit, now $1,000, to as much as $5,000 per child, per year.

There are strong economic reasons for a tax cut aimed at parents. Social Security and Medicare depend on productive future taxpayers to stay afloat, but the programs provide a strong disincentive to having children because parents get no extra retirement benefits for "investing" their time and money in the next generation of workers. Mr. McCain can partially correct this inequity by giving these parents a more sizeable income tax break.

Mr. McCain should offer such a tax cut in the context of larger tax reform. As matters stand, the Bush administration's tax cuts expire after 2010, the alternative minimum tax is scheduled to sweep millions of households, and pressure is building for a business tax cut too. Mr. McCain should make it clear that he would cut taxes below Mr. Bush's planned revenue levels, offset somewhat with realistic spending cuts. But to address all of the pressure points for tax relief, Mr. McCain will need to broaden the tax base too, much as Mr. Reagan did in 1986. If anyone can weed out special interest tax breaks, Mr. McCain the reformer can.

Tax cuts for parents to invest in the next generation, and tax reform for simplicity and stability. An anxious electorate would take note.

James C. Capretta, a former associate director at the Office and Management and Budget, is a fellow at the Ethics and Public Policy Center.

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