Whose Plan Is Better?

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Whereas Bush tries to use tax policy to spur growth, Kerry sees it as a tool of social intervention. His main proposal would raise taxes for those earning more than $200,000 a year and use that money to fund tax credits for college tuition and child care. Kerry takes a further swipe at offshore outsourcing with a proposal to start taxing corporate income earned in other countries.

Economists doubt that either plan would stimulate the economy or generate jobs. The wealthy are spending what they want to, explains Beth Ann Bovino, economist at Standard & Poor's, while everyone else is struggling with higher prices and stagnant wages.

Both candidates draw fire for ignoring what their tax plans will do to the deficit. "This is a gigantic time bomb," says David Bradford of Princeton University. As with any business, when the Federal Government runs in the red, borrowing gets more expensive. The result? Interest rates could rise, and in the long run, the government would find it more difficult to meet its Social Security and Medicare obligations.

Almost any discussion of the economy eventually reaches the tangled thicket of the U.S. health-care system. The price of health care is climbing four times as fast as everything else, and health insurance premiums rose nearly 14% last year. Economists say the cost for employers of providing benefits is a serious drag on hiring. Workers are no better equipped to pay the rising costs, and many are going without any insurance. More than 15% of the population had no health insurance last year.

His plan relies on "health savings accounts," which would shift some of the costs of health care to the consumer. Insurance would still pay for major medical expenses, but these accounts, funded by a tax-free deduction on a worker's paycheck, would cover routine care.

He uses tax credits as a carrot to encourage employers to offer their workers health benefits. Under his plan, small businesses would get tax credits if they offer health insurance to their employees, and they could pass on the cost of insuring catastrophic cases to the government.

Both plans win limited praise. The health savings accounts would make Americans more price conscious about health care, but they could also discourage people from getting preventive care.

Kerry takes the cost directly to businesses, but economists say his plan would do little to lower health-care prices broadly. "They're all going to make a difference on the margin, but the whole system is broke," says Swonk.

The heavy indebtedness of American consumers is nothing new. U.S. families have gradually been spending more of their household budget, about 13%, on debt payments. As long as housing prices hold up, economists say the debt burden will stay manageable. But as interest rates rise, mortgages and credit-card debt get more expensive, especially for those making less than $50,000 a year. "If you look at the low end of the income spectrum, they seem to be having more difficulty making payments," says Sohn. Over time, the deficit could worsen that effect, by making interest rates higher than they would have been otherwise. "Its effects on the economy are slow and cumulative," says Ed McKelvey, senior economist at Goldman Sachs.

"It's like driving with your emergency brake on."

In response to criticism of the mushrooming budget deficit, Bush's chief economic adviser, Gregory Mankiw, acknowledges that the tax cuts, along with spending on homeland security, have dug a hole.

"The deficit is unwelcome but understandable," he says. Mankiw says that further tax breaks will be offset by cuts in spending. He vows that this fiscal discipline and economic growth will halve the deficit in five years.

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