This commentary was originally published on Sept. 30, 2004.
We don't normally do politics here at The Motley Fool, but we figured with Election Day upon us it might be fun to let two Fools duke it out over the candidates' economic policies. From the left we have former Fool staffer Chris Rugaber. From the right we have new Fool contributor Jeremy MacNealy. Read the opening arguments here. then check out the rebuttals.
The opinions of this Duel are those of the writers only and not the opinions of The Motley Fool. (We know 50% of you will flame us for half of what is said here.)
Swift Boat to Recovery
By Chris Rugaber
When it comes to the economy, the choice in this election is simple. Would you like to return to the economic policies of the roaring '90s, when unemployment fell to record lows, wages rose, and the stock market soared? Or would you like to stick with the stagnation of the last four years?
President George Bush's economic record has primarily served to make Herbert Hoover appear better in historians' eyes. You can only expect matters to get worse if he is re-elected.
A grim report
The U.S. lost 1.6 million private-sector jobs under Bush -- the worst job-creation record since Hoover's day. Real (inflation-adjusted) exports are down, making Bush the first president in more than 70 years to oversee a decline in exports. And real median household income and real household net worth have declined as well. Bush's average annual real gross domestic product growth of 2.5% is decidedly mediocre for post-WWII presidents.
Bush blamed this lame record on 9/11 and the bursting of the tech bubble, which is about as credible as the corporate CEOs who blame bad quarterly results on the weather. Bush failed to meet his own projections for job creation. In February 2002, after the recession and 9/11, the administration claimed its policies would create 6 million new jobs by August 2004. They haven't. (Vice President Dick Cheney, meanwhile, is lamenting the fact that eBay (NASDAQ:EBAY) sales are not counted in economic statistics. See Rick Munarriz's recent article Is eBay Killing America?)
Of course, presidents don't actually create jobs or micromanage the economy, but they can help foster the conditions for economic and job growth. Bush has not done so; Sen. John Kerry (D-Mass.) will.
From bad to worse
Faced with a recession in 2001 and the aftermath of 9/11, Bush proposed long-term structural changes in the tax code when only temporary stimuli were needed. His three tax cuts have ballooned the budget deficit, undermining our economic future, while providing only limited economic stimulus.
You may have heard the criticism that his tax cuts have primarily benefited the wealthy, which is true, but the issue isn't just fairness -- it's also about economic impact. Tax cuts for the highest income earners, who add such cuts to their savings, simply do not spur the economy as much as cuts for lower- and middle-income earners, who are far more likely to spend the proceeds.
As Mark Zandi of Economy.com pointed out, instead of cutting the top marginal income tax rates, Bush could have instituted measures such as a temporary payroll tax cut that would have encouraged hiring and put more money in the pockets of middle-income consumers without creating such a huge budget deficit.
Bush has also cut taxes on dividends and capital gains as part of an ideological drive to shift the tax burden onto salary- and work-based income. But aren't these cuts good for investors? Sure, in the same narrow, interest-group way that, say, farm subsidies benefit farmers.
But they don't do much for an economy that is growing slowly and not creating many jobs. Goldman Sachs described Bush's dividend tax cut as "especially ineffective as a stimulative measure."
In addition, Bush's tax cuts have blown a hole in our nation's finances, transforming what was a $236 billion surplus in 2000 to a $422 billion deficit for 2004. Much of the tax cuts are back-loaded, meaning things will only get worse if Bush is re-elected, just in time for baby boomers to retire and begin overwhelming Social Security.
So what would Kerry do?
Kerry's plan to reverse the damage
Kerry would cut taxes in ways that actually encourage hiring and help small businesses. He would cut corporate taxes for 99% of the companies, maintain Bush's tax cuts for 98% of Americans, and introduce tax credits to encourage new hiring.
He would end the deferral of taxes on income earned by U.S. companies abroad. This may sound boring or technical, but it's not. The deferral provides a tax incentive for companies to invest overseas, and eliminating it would equalize taxes on corporate income earned in the U.S. and internationally.
The extra revenue from this reform would allow Kerry to cut the corporate tax rate from 35% to 33.25%. For companies with no overseas operations, this amounts to a straightforward tax reduction. For multinationals, this will help offset the ending of overseas tax deferrals.
Kerry has also proposed a New Jobs Tax Credit, which would pay the employer's share of Social Security and Medicare payroll taxes for two years for manufacturers and small businesses, making it easier for such companies to hire workers.
Meanwhile, Kerry's health-care proposals would also boost job growth and the economy. Health-care reform is not just about helping the uninsured, though that's hardly irrelevant, in my view.
Rising health-care costs are clobbering U.S. businesses, making it harder for them to add jobs. DaimlerChrysler (NYSE:DCX) spends approximately $1,300 per car in health-care benefits for its U.S. workers, according to TheWashington Post last March, while workers making an identical car in Canada add almost no health-care costs.
Sung Won Sohn, chief economist at Wells Fargo, told The New York Times in August, "Health care is a major reason why employment growth has been so sluggish."
To reduce costs to businesses and individuals, Kerry would have the government pick up 75% of health-care claims higher than $50,000. These huge "catastrophic" claims can slam a small business's health coverage and account for one-tenth of today's health insurance premiums. This change by itself could reduce family premiums by up to $1,000 annually and reduce the burden on business.
Kerry would also provide tax credits to small businesses and individuals to make it easier to purchase health coverage. And for all you lawyer-bashers, Kerry has proposed several measures to reduce frivolous malpractice suits.
Kerry's fiscal conscience
When it comes to fiscal responsibility, Kerry wins hands down. Bush has paired his ineffective tax cuts with rampant spending that would make Paris Hilton blush. In fact, according to the Economist, Bush has increased discretionary spending more than any president since Lyndon Johnson. His high budget deficits will eventually push interest rates higher.
Kerry would reinstate the pay-as-you-go budget rules, which require Congress to match proposed spending increases or tax cuts with offsetting spending cuts or tax increases. Such rules were a major factor in producing the Clinton-era budget surpluses and have been endorsed by Alan Greenspan. They lapsed in 2001, but Bush supports such rules only for new spending, not new tax cuts.
No candidate or economic plan is perfect, but Kerry focuses on the right problems and moves in the right direction. Economy.com concluded (.pdf file), "The economy under the Kerry plan... will modestly outperform that which would prevail if the president's plan were implemented." This is practically a ringing endorsement, given the relatively impartial nature of the source.
Chris Rugaber is a former Fool staffer who currently works as a journalist covering international trade issues. The opinions expressed here are his own and not The Motley Fool's. The Fool has a disclosure policy.
"W" Stands for Windfall
By Jeremy MacNealy
President George "Dubya" Bush and Sen. John Kerry (D-Mass.) adhere to different philosophies and platforms, and nowhere is this divergence more evident than in economic policy. My colleague Chris Rugaber states his case for Kerry's proposals, but my vote is for Bush, as he has the right policy for creating growth and opportunity. The administration's strategies -- for our economy, businesses, individual investors, and the average American -- stand to benefit our country in the near term and for generations to come.
When the going gets tough, the tough cut taxes
In Bush's first year in office, he encountered an economy reeling from irrational exuberance of the 1990s, massive corporate scandals, 9/11 terrorist attacks, and a recession.
The response to 9/11 continues to this day, and we thank our American troops and civilians around the world who place their lives in danger for the cause of peace, justice, and freedom.
To prevent corporate fraud from wreaking further havoc on investor confidence, Dubya signed the Sarbanes-Oxley Act, likely the most important piece of legislation on American business since the 1940s. Further, he established the Corporate Fraud Task Force to aid in the investigation and prosecution of white-collar crimes. Since its inception, 700 people have been charged, leading to guilty pleas or convictions from more than 300 execs (25 of whom were former CEOs). Giving a speech on Wall Street in July 2002, Dubya declared, "Shareholders are a company's most important constituency, and they should act like it." Dubya's firm stance and decisive action have gone a long way toward restoring investors' belief in the American economy.
To further respond to these challenges, Dubya and the Republican Congress paved the way for ambitious tax cuts in 2001, jump-starting the American economy. The cuts brought an immediate benefit to the American taxpayer by reducing marginal income tax rates across the board and making newly reduced rates retroactive (that's retroactive, not radioactive as those on the Left would argue). The 2001 tax cuts didn't stop there: A phaseout of the marriage penalty, increased dependent care credit, increased child tax credit, increased contribution limits for retirement plans, tax benefits for those pursuing higher education, and, perhaps most significant of all, the death of the estate tax were all addressed.
Piggybacking on the success of the 2001 tax cuts, Dubya and his Republican cohorts passed the Jobs & Growth Tax Relief Reconciliation Act of 2003, bringing unprecedented and sweeping supply-side changes to U.S. tax law. The 2003 tax cuts accelerated the phase-in tax cuts introduced in 2001, reduced taxes on capital gains and dividends (roughly 35 million households receive dividends, more than half of which go to American seniors), and allowed small businesses to deduct expenses on computers, machinery, and software at an accelerated pace.
It can be said that small business is big business, as it is responsible for more than half of the country's economic output and employs more than half of all American workers. Plus, roughly two-thirds of new job growth in the U.S. is a result of small-business expansion. Dubya's across-the-board tax cuts (affecting the more than 90% of small companies that pay taxes at the individual rate), increased expensing for new capital investments (from $25,000 to $100,000), and a phaseout of the death tax (allowing family-owned and -operated small businesses to pass on to family members unscathed) all provided critical growth incentives to America's small companies.
The pale rider called "supply-sider"
Why all this talk on tax cuts? Martin Feldstein -- Dubya's key economic advisor, a Harvard professor, and the man who many believe will replace Alan Greenspan -- culled a lifetime of research and found that lower taxes encourage savings and investments, ultimately resulting in increased economic growth. Supply-side economics has been the pistol of choice to put an end to the recession. While Clint Eastwood's Pale Rider tells the story of a gunslinging preacher coming into a small town and saving the day, the American economy gets Dubya, the Texan supply-sider.
Don't be economic girlie-men
The results of Dubya's supply-side polices have been impressive:
- This past July, the unemployment rate fell to 5.5%, below the average of the 1970s, 1980s, and 1990s.
- In the second quarter of 2004, homeownership rates reached an all-time high of 69.2%.
- Since the tax relief, real gross domestic product grew at an average annual rate of 5.6% (the fastest rate in 20 years).
The Institute of Supply Management measured the manufacturing sector at 59 on the ISM index (values above 50 indicate expansion) -- its 15th consecutive month of growth. Just ask shareholders of Motley Fool Hidden Gems recommendation FARO Technologies (NASDAQ:FARO), Hurco Companies (NASDAQ:HURC), and Stratasys (NASDAQ:SSYS) how manufacturing is performing.
While challenges remain for the American economy to contend with, Arnold Schwarzenegger's charge to doomsters and defeatists to stop being "girlie-men" reflects the type of positive attitude and progressive action that Dubya employs to achieve the right results.
The flip-flopper
We know Dubya's record, but what about his contender, Kerry? Perhaps we can note that Kerry voted against both the 2001 and 2003 tax cuts. Indeed, 350 times on record, Kerry has voted for higher tax levels than those preferred by his Republican colleagues. Yet faced with the most important election of his career, he now espouses the virtue of Dubya's supply-side policies by advocating his own corporate tax cuts. It's this kind of turnabout on key issues that has tagged Kerry as a flip-flopper.
Should we give Flip-Floppin' John the benefit of the doubt, accepting his reversal of opinion as a genuine change of belief? If this is the case, why unfairly raise taxes on those who currently bear the greatest tax burden? Kerry wants to raise taxes on those families with incomes of $200,000 or more -- the same ones that currently shoulder the highest tax rate and pay 41% of all income taxes collected by the U.S. government! Cut them a break, Kerry.
And an equally glaring concern: If indeed Kerry is a born-again supply-sider, why not make the tax cuts permanent as Dubya's plan calls for? Due to the opposition (I'm not going to name names), the 2001 and 2003 tax cuts are all set to expire in the very near future. This would yield a negative effect on dividends, capital gains, child credit, 10% bracket, 15% bracket, standard deductions, Alternative Minimum Tax, Small Business Expensing, and would resurrect the death tax. Only Dubya's plan calls for permanent tax cuts to sustain growth and opportunity.
The right policy
Flush John Kerry's big government proposals and vote for Bush's economic policy of individual freedom:
- Make tax cuts permanent.
- Permanently end double taxation on dividends so we can take further advantage of Microsoft's (NASDAQ:MSFT) recent venture into dividends, or fully enjoy the healthy dividends offered by Motley Fool Income Investor stocks Sara Lee (NYSE:SLE), RPM International (NYSE:RPM), and Merck (NYSE:MRK).
- Reform the litigation system. The current system costs the average family of four $1,800 per year, while injured persons collect less than 50 cents of every dollar that the legal process costs.
- Bury the death tax.
- Pass meaningful Social Security reform, so young folks like myself have hope in seeing our money returned with interest upon retirement.
- Simplify the tax code. I'll take the flat tax, supersized with a Coke, thanks!
- Provide regulatory relief.
This supply-side platform gives the people, not the government, more control of their own money, fueling growth in the term ahead and for generations to come. Bush has the right policy to secure a brighter economic future for America.
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Fool contributor Jeremy MacNealy owns shares of Faro Technologies. The opinions expressed here are his own and not The Motley Fool's. The Fool has a disclosure policy .
