Bush, Kerry: A Tale of Two Americas

The candidates are far apart on the pocketbook issues of taxes, jobs, health care and Social Security.
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It's hard not to be swayed when either President George Bush or Democratic challenger Sen. John Kerry talk pocketbook issues.

Bush wants to guarantee that the tax cuts his administration put in place will keep on coming and that all Americans can be part of what he calls an "ownership society." You'll probably hear that loud and clear in his acceptance speech Thursday night at the Republican National Convention in New York.

Kerry would take away the Bush tax cuts -- but only from the nation's wealthiest top 2% of taxpayers -- and turn the savings into tax breaks for health care, college tuition and child-care expenses.

Ka-ching!

You'd never suspect that whoever is elected faces daunting challenges, which include a record $450 billion deficit, eroding Medicare and Social Security trust funds, and an economy in which the number of poor is rising and the number of Americans with health insurance is falling.

And then, of course, there are the political considerations.

Dan Mitchell, an economist and senior fellow with the Heritage Foundation in Washington, D.C., says it's unlikely that if Bush won a second term he would get all his tax cuts extended or that if Kerry won the presidency, he would succeed in getting many of Bush's cuts tax revoked.

"Both would face serious obstacles unless they have 60 votes in the Senate," Mitchell says. Otherwise, "They're just going to kick the can down the road."

A political stalemate (or functional gridlock) is not necessarily bad for the economy, notes Ross Starr, professor of economics at the University of California at San Diego. The final four years of the Clinton administration produced fiscal surpluses, low interest rates and a soaring stock market. "Wall Street loved having a dueling Congress," Starr says. "No new spending legislation could get through."

But assuming the candidates could carry out their campaign pledges, here's what each would do on the major financial issues.

Taxes

The Bush administration passed two major tax-cutting bills, in 2001 and 2003. They lowered individual tax rates, reduced tax rates on dividends and capital gains, created a child tax credit, reduced estate taxes and provided marriage penalty relief, among many changes. But the changes, because of their high cost, were made temporary and most will phase out between 2005 and 2010.

If re-elected, Bush would like to make those tax changes permanent. Critics contend the cuts mainly benefited the wealthy and are contributing to the huge federal deficit.

Lawrence White, a former government economist and now a professor with the Stern School of Business at New York University, describes Bush's approach - "in 2010 everything turns into a pumpkin" as "horrid public policy. It's highly strategic. It's devious. That was all a sham."

Mitchell of the Heritage Foundation, however, says the Bush tax cuts have been a success in stimulating the economy, but says, "It's difficult to envision major tax cuts ahead."

Kerry plans to undo the Bush tax cuts to the top 2% of Americans in income, those who earn more than $200,000 annually. (For some reason, politicians have clung to that income level for more than a decade, despite the impact of inflation.) He proposes to distribute $250 billion in tax cuts to the middle class without increasing the federal deficit.

The cuts would include: a tax credit of up to $5,000 on child-care expenses, a tax credit on up to $4,000 on college tuition, a tax credit to help small businesses and vulnerable workers pay for health care, and a tax credit for businesses that create new jobs.

Budget-watchers question whether Kerry's tax plans wouldn't cost just as much as Bush's.

Meanwhile, DeLoitte Tax LLP last week ran the numbers on the two different tax agendas. "The battleground for the two plans is how Bush and Kerry treat families and individuals with income over $200,000," says Clint Stretch, director of tax policy for the firm.

The comparison showed no tax increases for taxpayers earning less than $200,000 under the Kerry plan. But a married couple with two children under 17 earning $250,000 who received a $5,380 tax cut under Bush would see their current tax bill of $45,300 rise by $1,300. A married couple with $1 million in income who enjoyed a $41,000 Bush tax reduction and currently pay $214,600 in taxes, would see a tax hike of $35,500.

Bush has hinted at some kind of simplication of tax policy recently, but it's a subject often discussed and never carried out. The tax code gets only longer and more complex.

The burden of taxation is increasingly carried by taxpayers hit with the Alternative Minimum Tax, or AMT, a kind of stealth tax that has not been indexed to adjust for inflation. Intended originally to tax only the very rich, it now affects many in the middle class.

Short-term fixes to the tax code have got to stop someday in favor of an overhaul, says Mitchell: "It's like putting a patch on a bad tire. Sooner or later, you have to get a new one. The pressure is going to cause it to blow."

Social Security

Neither candidate has made shoring up the Social Security system a platform standout. The Social Security Trust currently takes in more than it gives out to pensioners, but that is set to reverse sometime between 2010 and 2020.

As Gary Burtless, an economist with the Brookings Institution in Washington, D.C., notes, President Bush floated the idea of privatizing a portion of Social Security contributions four years ago. That was about the time the stock market was peaking; he hasn't said much about it since.

Mitchell, however, says that the concept is still viable. At least two dozen countries, including Australia and Chile, have privatization of government pensions, where professional money managers invest on behalf of individuals.

Burtless says there is no question that Kerry is foursquare for the Social Security program: "He hasn't said how he will fix it." The Republicans want him to get boxed in, Burtless says, so they can criticize him for saying that either he will cut Social Security pensions or raise taxes.

Jobs

If President Bush has seemed defensive on the subject of jobs, a census report released this week explains why. It showed that the number of Americans living in poverty rose slightly last year for the third year in a row, due in part to the jobless recovery from the recession of 2001.

"I don't think the president wants to make the job market a focus of his re-election campaign," said Burtless. While production remains high, he said, this recovery has been marred by workers who have suffered especially long periods of unemployment and by the displacement of workers who have heretofore had years of long-term service.

Bush, however, defends his record, saying the census numbers are out of date and that the most recent months show strong economic growth and that his tax cuts have helped add new jobs.

Kerry's platform includes a host of tax credits and job-training programs aimed at boosting employment. A persistent theme on the campaign trail, perhaps because as Burtless noted, foreign workers don't vote in our elections, is the promise to keep more jobs from moving overseas.

Economists of all political stripes generally agree that protectionist trade policies aimed at keeping jobs here are not only ineffective but a bad idea. We are part of a global economy and jobs gravitate to where labor is cheaper. Sometimes that's to another country, sometimes to another state within our own country.

Professor Starr says that while displaced workers do suffer, the U.S. economy is better off engaging in international trade. Think for a moment, he says, of the quality and expense of life lived with only American products - Detroit autos, American-produced oil, and only garments made in the U.S.

"We can not wall ourselves off," says Professor White. The answer for displaced workers lies in better education and restraining. "Accommodate, don't resist."

Debt

Kerry has made a campaign issue of debt, both large (the ballooning federal deficit) and small (the individual debts that middle class families owe to credit card and mortgage companies).

Despite all the social programs he wants to provide, Kerry has emphasized that he wants to curtail the federal deficit. Economists say that Kerry is harkening back to the Clinton policy of budget surpluses as a model of fiscal responsibility, while Bush looks to the early days of the Reagan era when deficits soared.

What's wrong with running a big deficit? It causes government to spend a significant portion of its money on repaying debt rather than on more productive uses, prevents it from having the ability to fix big problems like Social Security and Medicare, and can keep interest rates high, which is bad for almost everyone.

This week, Kerry attacked Bush for being too cozy with credit card and mortgage companies that hike interest rates to middle-class and military families. He noted that household debt has risen about 10% a year since 2001 and bank foreclosures on homes have gone up over 18% in the same period.

Among the regulatory changes Kerry would seek is an end to the so-called universal default penalty charged by banks who issue credit cards, allowing them to raise the rate of interest on customers with perfect payment records who miss a payment on another company's bill. About half of card issuers have this policy, which can increase the interest rate by up to 30% without notice.

Health Care

The number of Americans without health-care insurance rose to a record 45 million last year, the Census Bureau reported this week, blaming higher coverage costs and a decline in employer-sponsored plans.

The candidates' views on health showcase their sharp differences. Kerry wants to make health care available to 95% of all Americans through tax credits that would allow small businesses and individuals to buy into his new Congressional Health Plan.

Bush, on the other hand, does not want health care delivered through the government. His approach is demonstrated through privately run and managed

Health Savings Plans, created under last year's Medicare reform act.

These plans allow individuals to purchase high-deductible, catastrophic insurance plans through tax-free money set up in IRA-like plans. Participants are encouraged to put money in the plans, spend it on medical needs, and save what they don't need for retirement.

In visits with voters around the country, Bush has praised HSAs as part of his concept for an "ownership society."

Professor Starr criticizes HSAs as only for the healthy few. He says they negate the whole insurance principal, that a large pool of the insured guarantee that everyone healthy or not will be covered. Others critics say the plans are disguised investment vehicles for the wealthy.

Some economists say they are baffled by what Bush means by an "ownership society."

"It's just a slogan," says Burtless. "I think both parties favor ownership. This could have come from the New Deal."

But Mitchell, of the conservative Heritage Foundation, says, "It's obviously just a phrase, but it does mean something." It's not a one-size fits all entitlement system, he says. Is it better to introduce vouchers and competition to a school system, he asks, or to let everyone in the ship drown when vouchers might only help half the kids?

Chances are we'll learn more in the next few days.

Before joining TheStreet.com, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at

Ann.Perry@thestreet.com.