McCain: Fix tax law, freeze spending

McCain outlined his views on taxes, spending and other economic issues.

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NEW YORK (CNNMoney.com) -- In his most wide-ranging speech on the economy, presumptive Republican nominee John McCain on Tuesday laid out an agenda that would change the tax code, freeze discretionary spending and temporarily suspend federal gas taxes.

The speech, to be delivered at Carnegie Mellon University in Pittsburgh, comes less than a week after McCain provided a broad outline of his economic plans, including a plan to stem foreclosures.

"We need reforms that promote growth and opportunity. We need rules that assure fairness and punish wrongdoing in the market. We need tax policies that respect the wage-earners and job creators who make this economy run, and help them to succeed in a global economy," McCain said.

McCain, with the exception of military spending and veterans' benefits, called for a one-year freeze on the amount of money Congress allocates to discretionary programs. This year, that amounts to $460 billion.

"'Discretionary spending' is a term people throw around a lot in Washington, while actual discretion is seldom exercised. Instead, every program comes with a built-in assumption that it should go on forever, and its budget increase forever. My administration will change that way of thinking," McCain said.

Taxes: Time for a new system

In terms of taxes, McCain made several proposals. He said he would offer an alternative tax system that would consist of just two tax rates and a larger standard deduction than under the current code. Tax filers would be allowed to choose whether they wished to file under the current system or the new one.

"Americans do not resent paying their rightful share of taxes - what they do resent is being subjected to thousands of pages of needless and often irrational rules and demands from the IRS," McCain said.

McCain has not settled on the details of his tax plan such as what the rates would be, his senior adviser Douglas Holtz-Eakin said in a call with reporters.

Holtz-Eakin said that whatever McCain proposes "would be economically beneficial and would restore compliance." The current complexity of the tax code is often blamed as one factor for the tax gap - the difference between what tax filers owe and what they actually pay.

But Len Burman, director of the Tax Policy Center, said if given the choice between two systems, people would opt for the one in which they owe the least, thereby reducing overall tax revenue.

An analysis of a plan with a similar structure, the Tax Policy Center found that tax revenue could be reduced by $7 trillion over 10 years if all taxpayers took advantage of it. Under that plan, proposed by former Republican candidate Fred Thompson, all taxpayers would owe less than under the current system, but filers making between $100,000 and $500,000 would see the biggest break.

McCain also proposed phasing out the Alternative Minimum Tax and boosting the dependent child exemption from $3,500 to $7,000 per child.

For corporations, he said he would seek to lower the top corporate tax rate from 35% to 25%.

Oil, loans and jobs

In a proposal sure to get the most attention in the near-term given record-setting oil prices, McCain proposed a suspension of the federal gas tax from Memorial Day to Labor Day - traditionally the heaviest season for driving. At just over 18 cents per gallon, that would save the average driver about $2.35 every time he fills up his tank. The plan is estimated to cost roughly $10 billion.

McCain also touched on student loans. He gave his support for congressional proposals to have the federal government advance funds to loan guaranty agencies so they can make loans if other lenders drop out of the federal student loan program.

He also proposed that unemployment insurance taxes be used to build "a buffer account" for each worker, which he could draw on directly if he loses his job.

"We have an unemployment insurance program straight out of the 1950s. It was designed to assist workers through a few tough months during an economic downturn until their old jobs came back. That program has no relevance to the world we live in today," McCain said.