On tax policy, John McCain proposes to:

1. extend the Bush tax cuts;

2. require a 3/5 majority of Congress to raise taxes;

3. double the dependent exemption from $3,500 to $7,000;

4. repeal the Alternative Minimum Tax;

5. set up a simple, alternative tax (unspecified);

6. raise the estate tax exemption to $5 m. with a 15% top rate;

7. extend the 15% top rate on dividends and capital gains;

8. cut the top corporate tax rate from 35% to 25%, pay for it by closing loopholes;

9. expense business investment;

10. make permanent and simplify the R&D tax credit;

11. ban Internet taxes;

12. suspend the 18.4¢/gallon gas tax from Memorial Day to Labor Day;

13. establish tradable allowances to limit greenhouse gas emissions.

Senator McCain's tax policy is much more pro-business than that offered by the Democratic candidates. Lowering the corporate tax rate, expensing equipment, and making the R&D credit permanent and simpler are all good ideas that would make America more competitive around the world. Expensing would be a badly needed reform of our antiquated depreciation system, although it has a steep up front revenue cost.

Not all businesses would be winners, depending upon how aggressively Mr. McCain would close business tax loopholes. That's a catchall campaign phrase that could mean heavily tax subsidized industries are at risk, or, more likely, that he just wants to have a response when asked how he's going to pay for the business tax cuts. McCain knows full well that identifying "loopholes" is fraught with difficulty and controversy. Congress would probably serve up hikes on overseas operations of U.S. businesses and on the oil and gas industry, but those alone would come nowhere near paying for the cuts.

John McCain is the only remaining presidential candidate who would preserve the 15% top rate on dividends and on capital gains. Many economists would like to exempt dividends and capital gains from taxation. That would eliminate the current double taxation of dividends -- It's already taxed by the corporate income tax -- and would reward risk-taking of capital investment and recognize that a significant portion of capital gains are created by inflation. However, because dividend and capital gains income is mostly earned by the wealthy, we continue to tax it anyway.

Extending the Bush tax cuts for most Americans is supported by all the presidential candidates, but Mr. McCain would not target the rich for tax increases the way the Democratic candidates would. McCain voted against the Bush tax cuts in 2001 and in 2003 because they were too generous to the rich and were not offset by spending cuts.

Doubling the $3,500 dependent exemption to $7,000 recognizes society's investment in children, but the benefit varies with marginal tax rates. A low income person in the 10% bracket would get a $700 tax benefit per dependent, while a millionaire in the 35% bracket would get a $2,450 tax benefit per dependent. Some have proposed leveling that by converting it to a credit that is the same for everyone.

Repealing the Alternative Minimum Tax is a good idea, but it's a stretch to call that a middle income tax cut. All but a small amount of the AMT is paid by the top 20% of taxpayers. Most AMT taxpayers have adjusted gross incomes of between $100,000 and $500,000 a year. Repealing it will force some adjustment in marginal tax rates. House Ways and Means Chair Charlie Rangel has already proposed a 4% surcharge on those with incomes over $200,000 in H.R.3970.

A $5 m. estate tax exemption is a little high compared to this year's $2 m. level, but Mr. McCain's 15% top rate is much lower than a Democratic Congress would ever agree to. Next year, Congress will have to avert the debacle in present law, which repeals the estate tax in 2010, and then reinstates it in 2011 as it was in 2001 with a $1 m. exemption and a 55% top rate. I expect a compromise to be enacted next year which will extend the 2009 estate tax with a $3.5 m. exemption and a 45% top rate.

The thought of a simple alternative tax system has tantalized elected officials for a long time, but somehow it never gets enacted. Once every generation -- the last time was in 1986 -- we undergo a major reform, lowering tax rates and expanding the tax base, but we never come close to a simpler system. That's because there are limits to how simple the system can become before it appears unfair. When taxpayers begin to realize that a simpler system may impose a higher tax on many of them, they quickly lose interest. They like those tax breaks.

Banning Internet taxation is a no-brainer for us bloggers. (Speaking of us bloggers... In their separate posts here at Capital Gains and Games, Andrew explores the economics of McCain's plan, while Stan focuses on the politics in play.)

Recently, Mr. McCain proposed a federal gas (and diesel) tax holiday, removing the current 18.4¢/gallon gas tax (24.4¢/gallon diesel) between Memorial Day and Labor Day. That's a bad idea for several reasons. First, it encourages more consumption of gasoline and make us even more dependent on oil imports. Second, it would undermine the purchase of more energy efficient vehicles. Third, it would take approximately $9 b. away from the Highway Trust Fund and eliminate about 300,000 jobs building roads. In the policy business, I sometimes say, "Other than that, it's a good idea." It would put money directly in voters' pockets -- the real reason it was proposed.

Mr. McCain is to be commended for early on being one of the few Republican members of Congress to support a tradable allowance greenhouse emissions control bill. It has only been very recently that President Bush and Rev. Pat Robertson have come to recognize that climate change poses a severe economic threat to all of us. However, the effectiveness of such measures in limiting greenhouse emissions will only be in direct proportion to the price hike they indirectly impose on energy consumption.

Finally, Mr. McCain is also to be commended for what he didn't propose, a long list of new tax loopholes to reward special interest political supporters.