There are two Americas , one well off and one left behind, and tax cuts for the rich must be repealed, says the campaign of John Kerry and John Edwards. America ’s economy is on the rebound, jobs are being created, and across-the-board tax cuts have been a key reason for that growth, according to the George Bush and Dick Cheney ticket.

Yes, it’s that time again – a presidential election year full of attacks and counter attacks, of claims and counter claims, of half truths and less-than-half truths, and sometimes no truth at all. In this issue of Knowledge at Wharton we canvass Wharton faculty members to get their views on the candidates’ stand on the economy and taxes, health care and Social Security.

The Economy and Taxes

Kerry wants to raise taxes to the levels that existed before Bush’s tax cuts were enacted, but finance professor Jeremy Siegel says even if Kerry emerges the victor, he may not be able to get what he wants. “Even if Kerry wins, it is unlikely that the Democrats can get [a majority of seats in] Congress. Without both the House and the Senate, there is no way – no way – that a Kerry tax plan can at all be passed.”

Siegel points out that several of the Bush tax cuts are due to expire in the coming years. The dividend tax cut will phase out in 2008, the lowering of marginal tax rates in 2010. If Kerry wins a first term and then manages to hold office for a second term, he could alter tax policy by vetoing any bill that would extend the tax cuts. For his part, Siegel supports lowering marginal tax rates, eliminating preferences and deductions, and closing loopholes. “Bush did flatten the tax but did nothing to eliminate the loopholes,” he says.

Kerry has said that middle-class families are less financially secure today than they were when Bush took office. Bush predicted that he would create some six million new jobs, but Kerry says the economy has actually lost nearly one million.

According to Siegel, however, Kerry’s focus on middle-class economic woes is tough to reconcile with economic reality. “When you have a little bit more than 6% unemployment, that means you have more than 93% employment. With job losses now quite rare, the fear that employees will lose their jobs has diminished rapidly … I don’t think I see a big squeeze [on the middle class],” Siegel adds. “It’s a hard theme to play for. It played a lot better six months to a year ago when job losses were the fear, when people thought they would be next. That subject today is not as potent as it was.”

In general, Siegel believes the country’s economic situation bodes well for Bush’s reelection. “He’s a year ahead of his father in terms of economic recovery, in terms of job creation,” Siegel notes, alluding to the 1992 reelection campaign of President George H.W. Bush, who lost to Bill Clinton because the country had not entirely emerged from a recession. “We do seem to be hitting a soft spot in the economy [right now]. But I don’t think it’s going to be worse. My feeling is it won’t be a roaring economy. It won’t be a ‘90s boom, not at least before the election. But the economy is not going to be decisive in favor of the Kerry team.”

The Democrats also have criticized Bush for the government’s burgeoning budget deficit. Kerry has said that he wants to cut the deficit in half over the course of his four years in office. Siegel, too, is upset that Bush has not done more to control spending, but says that voters, by and large, do not see the deficit as a major issue.

“The truth of the matter is that until Americans see some concrete disadvantages of deficit spending – which means inflation and sharply higher interest rates, not the tiny rate increases we see now – it’s hard to make that an issue,” Siegel says. “You look at the economy and things are going well. People ask, ‘Why are the markets doing pretty well if [the deficit] is such a bad thing? Why has my home price done well if this is such a bad thing?’ If the economy starts recovering strongly, the deficit can actually be reduced. During the Clinton administration, deficits disappeared because of strong economic growth, not because of cuts in spending.”

Health Care

Providing health insurance to those who do not have it has been a major issue for years and things are no different this campaign season. Both Bush and Kerry want to provide health insurance for all Americans – an estimated 42 million people are uninsured – but their plans part company in the methods they would use to reach that goal. “Who isn’t in favor of universal coverage?” asks Mark V. Pauly, chair of Wharton’s health care systems department. “But there are differences in achieving it.”

In essence, Kerry would spend more federal dollars on health care than Bush and use the government as the conduit to provide the coverage. Bush would rely primarily on the private sector. Bush also has proposed reducing health care costs through malpractice reform.

Still, Bush and Kerry’s plans have some similarities – both would use tax credits to help people buy health insurance. Kerry would use tax credits to give people the same insurance options that members of congress and federal employees enjoy. According to Pauly, some researchers have estimated that the Kerry plan would cost about $900 billion.

“Kerry wants to expand Medicaid to cover adults and children up to 300% of the poverty line and have the federal government pick up the full cost, which is now shared with the states,” Pauly says. “Bush, by contrast, wants to use tax credits to put people in the private insurance market. Like Kerry, Bush is in favor of universal coverage. It’s just a matter of how much you’re willing to spend. Kerry is proposing to spend substantially more than Bush on covering the uninsured, probably on the order of 10 times more, according to some estimates.”

What is noteworthy is that neither the Bush plan nor the Kerry proposal would literally achieve universal coverage because neither candidate has suggested spending the enormous sums of money that would be required. During the Democratic primary, even Edwards expressed doubts that Kerry’s plan was affordable. Bush’s proposal would cover about one-tenth of the uninsured, whereas Kerry’s would cover abut one-half, according to Pauly.

“My view is health care is a big issue for Kerry, and it’s primarily intended to provide a destination for the tax cut he wants to repeal,” Pauly says. “HHHe’s for rolling back tax cuts for the wealthiest Americans – partly for political reasons but partly because he wants to use that money for uninsured people. That seems to me the political strategy here: You can make the case for repealing tax cuts more strongly if you can propose using the money for an objective that’s up there with mom and apple pie.”

For his part, Pauly would like to see a blend of the two candidates’ plans so that the uninsured would have the option of choosing either the government or the private sector for coverage.

“I’ve long been in favor of the tax credit idea,” he explains. “I would prefer creating the widest possible option on the kinds of insurance plans people could use these tax credits on. They could use them for private insurance or, if the government wanted to open a Medicaid plan to not-quite-so-poor people, it could give them an option. Some people feel comfortable using the government instead of the private sector. I’d create what I call a Federal Express and a Post Office model, if I had my druthers. Since I’m concerned about the uninsured, I think that the kind of spending you need to make a big dent in the program is more like the Kerry level, which is enormous, than the Bush level, which is fairly minimal. But that’s a matter of fiscal priorities. There is no cheap solution. Kerry lately has been saying his program might not cost much because he will put in place plans to eliminate waste, fraud and abuse, but researchers are skeptical.”

Social Security

Social Security reform is a lot like broccoli: Everybody knows it is good for them, but nobody wants to take the first bite. Bush appointed a panel to explore reform and the group produced a report outlining ways to change the system, but there has been no serious movement to do so. Wharton experts say not to expect Social Security to be high on the list of topics that the candidates discuss between now and election day.

Siegel says that the issue simply does not energize voters, and that lawmakers, who fear tinkering with such a politically sensitive program anyway, are happy to talk about something else. In addition, Siegel points out that the Congressional Budget Office issued a report in June showing that the Social Security trust fund was not in as bad condition as the Bush administration has said. In March, the administration reported that the trust fund would run out of money in 2042. The CBO said the fund would not be depleted until 2052.

“We know it’s in surplus right now and it will be in surplus for many years,” Siegel notes. “You can tell people it won’t be in surplus and all the rest, but it’s hard to make that cut [in Social Security benefits].”
 
Brigitte Madrian, professor of business and public policy and an expert on pensions, agrees it is not surprising that Social Security reform does not rank high on most citizens’ agendas. “I think people can manage to get charged up by only a handful of issues at once. In the election four years ago, the state of the world was very different. If you ask people today what is most important to them right now, they say the economy. And when they say that, they mean jobs and unemployment. Unemployment wasn’t an issue four years ago. There wasn’t a war in Iraq .”

Madrian says no action will be taken on Social Security this year “because no one has anything to gain” by acting on the issue before the election. Still, the issue will have to be tackled at some point. Bush, if reelected, is more likely to push for reform than Kerry. Indeed, if voters give Bush another four years in office, he may work for Social Security reform with the view to making it part of his legacy.

“If Bush is reelected, that would be a prime political opportunity to tackle the issue,” Madrian says. “No matter what you do, you’re going to alienate some non-trivial fraction of the population by either cutting benefits or raising taxes. It’s a lot easier to do that if you don’t face reelection in four years. If Kerry is elected, it’s less likely to happen. It’s not a key campaign issue for Kerry and he would face reelection [in 2008].”

Bush favors privatizing Social Security to some extent, allowing people to have investment accounts over which they have some control. Kerry, by contrast, “has not come out publicly in terms of what he would support regarding reform of Social Security,” says Madrian. “But my interpretation is that he’s not in favor of any dramatic reform.”

Although Social Security reform may be below the radar screen in 2004, it is not about to disappear altogether. Says Madrian: “We cannot continue to pay benefits at the current rate without raising Social Security taxes at some point in the future, changing the way benefits are funded, or cutting back benefits.”