Bush, Kerry differ sharply on the 'pocketbook' issues

Author: Julie Hirschfeld Davis

Published: October 10, 2004

Listen to the presidential candidates talk about the nation's economic outlook, and you will hear two stunningly different versions of reality.

President Bush sees an economy - hobbled by the Sept. 11 terrorist attacks, the dot-com bust and corporate scandals - making a heroic comeback and adding jobs, thanks to three major tax cuts he has signed into law since taking office.

His rival John Kerry sees an economy in which low-paying jobs have replaced better ones lost during Bush's term, and workers struggle increasingly to make ends meet while the wealthy and businesses reap a windfall from tax breaks.

The contrasting views lead Bush and Kerry to two different prescriptions for job creation and economic growth - a top concern of voters this election year, especially among undecided voters who traditionally base their choice in large part on "pocketbook" issues.

Bush promises to add to the $2.6 billion in tax cuts he has signed into law during his term.

Democrat Kerry is pledging to roll back large portions of Bush's signature tax reductions - the parts that go to the wealthiest people - and steer the money to middle-class taxpayers, job-creation incentives and spending on health care and education.

Each candidate's tax plan stands as the centerpiece of his domestic agenda - the critical element that sets priorities and defines how much money is available for everything else. And Bush and Kerry both argue their economic proposals will create jobs in an economy whose anemic employment growth has become a central issue this election season.

Bush argues that keeping tax rates low will spur individual spending and investment, which he says will prompt businesses to hire more workers and produce more goods. The president wants to cut down on government regulations that he says hobble businesses' ability to compete and do away with "junk lawsuits" that drive up their costs. Kerry, on the other hand, wants to target tax cuts where he says they will have the greatest effect - for middle-class people and companies that are hiring workers - but raise taxes on wealthy people and businesses. He would use the money left over to make health insurance available to more people and improve education, Kerry says.

Supply-side approach

Bush credits his tax cuts with rescuing the nation from the jaws of a recession in the difficult months after Sept. 11. In the classic supply-side vein, Bush says that tax cuts for everyone boost the entire economy.

"When we keep taxes low and trust our American families with their own money, they spend it far more wisely than we can," Bush said last week in Des Moines, Iowa, where he was signing an extension of tax cuts that had been scheduled to expire at the end of the year. "And when they do, they make the American economy stronger."

The president accuses Kerry of being a classic "tax-and-spend liberal."

In fact, Kerry's plan departs somewhat from the traditional liberal mold, backing income tax cuts for some families but pairing them with tax credits and spending on social programs.

Kerry blames Bush's tax cuts for digging the country into a deep deficit - at a record high of $422 billion this year, according to congressional budget officials - and for rewarding wealthy people and prosperous companies at the expense of average people. The Democrat says he's ready to sacrifice tax breaks for rich people and some businesses to create jobs and help middle-income taxpayers afford health care, child care and education.

"We can continue to give massive tax giveaways to the wealthiest few in our country, or we can fight for the families who are working hard every day, by offering middle-class tax cuts that make work pay," Kerry said in a speech in Orlando, Fla., last weekend. Still, as different as their policy prescriptions are, Bush and Kerry have substantial common ground in their tax plans.

Both propose permanently extending individual tax cuts, first signed into law by Bush, that went to about 98 percent of taxpayers.

Under both candidate's plans, those earning less than $200,000 would pay the same amount of income taxes as they do now and keep benefits such as a $1,000 per-child tax credit.

The least wealthy taxpayers would see their investment taxes - paid on corporate dividends and capital gains - eliminated completely, while those earning more would continue to pay their current rate. That is where the similarities end. The major difference between Bush and Kerry is on how to treat those on the higher end of the income spectrum.

Bush would keep their income taxes the same, locking in reductions he signed into law during the past three years. Kerry would raise income and investment taxes on those in the top two income tax brackets - currently those earning $146,750 for an individual or $178,600 for couples - to pre-Bush levels. He would use the approximately $860 billion saved to pay for his large health care overhaul and educational programs.

Some of the money would be used for tax credits to help people afford health insurance and to cover up to $4,000 in college tuition expenses.

The bulk of it, however, would be spent on an expansion of government medical programs to cover poor or near-poor people without health insurance and a new subsidy for companies that offer health coverage to cover their highest-cost medical cases.

Kerry's aides say his health care plan will make coverage affordable for individuals and lower costs for businesses, which in turn will help create jobs.

"Tax cuts couldn't work worse than they have in the last 3 1/2 years, in terms of creating jobs and relieving the middle class," said Jason Furman, the Kerry campaign's economic policy director.

But the Bush campaign says that raising taxes will be a drag on the economy - not a boon.

Bush argues that Kerry's plan to raise the top two income tax brackets will hurt as many as 900,000 small businesses.

Economists differ on just how many small employers would be affected by the increase, as many of the individual filers are self-employed people - such as independent consultants - with no workers.

The liberal Urban-Brookings Tax Policy Center says that only about 470,000 small businesses would pay higher taxes under Kerry's plan.

Bush argues that his plan will spur enough growth to create jobs and put the economy on a sound footing.

Kerry job plan

Kerry's approach to jobs is more aggressive, although economists differ on whether it would be effective.

The Democrat is proposing an overhaul of corporate taxes that he says will take away companies' incentives to ship jobs overseas and encourage them to hire workers at home.

His plan would end a tax break businesses can use to avoid paying taxes on income earned overseas, and use the money to cut corporate taxes by 5 percent. Kerry also wants to create a new tax credit to encourage companies to hire new workers.

According to Kerry's plan, closing additional tax loopholes would yield enough money to expand an existing child care tax credit, allowing parents to claim the credit for $5,000 in expenses, up from $3,000.

But critics say ending the overseas tax break would deal a crushing blow to companies.

But the biggest criticism of Kerry's economic plan isn't based on what he has proposed but on Republicans' charge that the Democrat is secretly planning to raise taxes on everyone to pay for his priorities.

Kerry "says the tax increase is only for the rich - you've heard that kind of rhetoric before," Bush told a crowd in Wilkes-Barre, Pa., last week. The Kerry campaign denies it.

"There are absolutely no plans, whatsoever, to make any tax changes other than tax cuts for people making up to $200,000 a year," the Kerry campaign's Furman said.