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Kerry and Edwards on the economy
The Senators have the Big Mo coming out of Iowa; how would they handle the U.S. economy?
January 20, 2004: 4:15 PM EST
By Mark Gongloff, CNN/Money staff writer

NEW YORK (CNN/Money) - It's too early to gas up Air Force One for either one of them, but the stunning success of Senators John Kerry and John Edwards in Monday's Iowa caucus gives them the Big Mo in the race to get their hands on the reins of the world's biggest economy.

According to their campaign promises, they'd both handle it in very similar ways -- including leaving alone the recently passed middle-class tax cuts.

The race for the Democratic nomination is far from over. But if the Iowa result is indicative of a broader desire on the part of Democrats to move closer to the center in an effort to defeat President Bush, then Kerry and Edwards -- and their economic policies -- could gain traction.

"As these primaries start to evolve, voters will look for who is most electable," said Greg Valliere, political economist at Schwab Washington Research. "The more moderate record on economic issues is going to prevail."

Protecting some tax cuts

Though former Vermont Gov. Howard Dean was in many ways a centrist in his home state, he has called for a total repeal of the tax cuts passed in 2001, 2002 and 2003 -- a stance some analysts consider political poison.

In contrast, both Kerry and Edwards -- along with retired General Wesley Clark and Sen. Joseph Lieberman, D-Conn. -- want to keep in place all of the tax cuts for the middle class, while repealing cuts for wealthier Americans.

Kerry wants to roll back tax cuts for families earning more than $200,000 per year. But he wants to keep the higher child tax credit, the lower marriage penalty and the new 10 percent tax bracket for lower-income families. He also calls for new tax credits for health care and college tuition.

Edwards has similar ideas, but offers greater detail. He would repeal tax cuts -- including dividend and capital-gains tax cuts -- for what he says are the top two percent of Americans, those making $240,000 or more per year.

Edwards would also keep the tax on very large estates, and he would set the top rate on capital gains at 25 percent for families earning more than $350,000, which he says represents less than one percent of all Americans.

Edwards would also adjust the tax code so that the top one percent pay the same tax rate on investment income that middle-class families pay for their wage and salary income, in order to fix what he calls the "two tax systems" in America, "where a millionaire investor sitting by his swimming pool pays a lower tax rate than a Manchester teacher."

Like Kerry, Edwards would keep in place the latest middle-class tax cuts and would introduce more breaks, including:

  • a $5,000 credit for first-time home buyers
  • a $1,000 credit for savings accounts
  • a cut in the capital-gains tax rate, along with allowing the first $1,000 in capital gains and the first $500 in dividends to be tax-free

Soak the rich?

Economists are divided about the impact of rolling back tax cuts for the wealthy.

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Supporters of tax cuts for the wealthy say structural changes in the economy have made small businesses and sole proprietors more important than ever for job creation and economic growth. In order to avoid the hassles of incorporation, many of these entrepreneurs file taxes as individuals. Raising their taxes could force them to hire fewer workers and slow down investment, according to this theory.

"The money channeled from failed industries to small businesses would be taxed at higher rates, and that would be harmful to the economy," said Anthony Crescenzi, bond market strategist at Miller Tabak & Co.

Not all economists share this view.

"I don't think the evidence that small businesses are affected adversely is terribly compelling," said former Federal Reserve Governor Lyle Gramley, now a consulting economist with Schwab Washington Research. "I think tax cuts had a useful role in getting the economy going again, but we probably could have accomplished much of that with a narrower, more focused tax cut."

Others say there are better ways to help small businesses; Edwards, for example, has proposed a plan to give venture capital money to small businesses and entrepreneurs in poor communities.

Tough -- but not too tough -- on trade

Kerry and Edwards are also similar in their approach to trade. While candidates Rep. Richard Gephardt, D-Mo., and Rep. Dennis Kucinich, D-Oh., both supported by labor unions, talked about canceling trade agreements as a way to protect U.S. jobs, Kerry and Edwards have been less protectionist.

Howard Dean
John Edwards
John F. Kerry
Wesley Clark

"The two candidates who had backing from organized labor got slaughtered last night," said Valliere of Schwab Washington Research. "You have to conclude that protectionist arguments just aren't going anywhere."

Both Kerry and Edwards would keep in place current trade agreements, but promise to enforce those agreements more vigorously. Kerry takes the extra step of promising a 120-day review period of all current agreements, in order to make sure trading partners meet environmental and labor standards.

Both have also promised to repeal corporate tax breaks for companies that move jobs offshore, and both would give new incentives for manufacturers who hire U.S. workers.

Lofty job growth goals

More than 2.4 million jobs have been lost since February 2001, a month before the last recession began, marking the longest stretch of joblessness since World War II.

Some economists believe there are many start-up companies and self-employed workers not yet being counted in the government statistics. Others say the labor market could be weaker than it looks, with many people having simply given up looking for work or working part-time or for lower pay in lower-quality jobs.

In any event, without significant improvement, the labor market could be a reelection issue, and both Kerry and Edwards promise they can grow jobs.

Kerry says he will help restore the U.S. manufacturing sector -- which has been shrinking for decades, in what many economists say is an unstoppable decline -- with his tax and trade policies, in addition to:

  • giving manufacturers tax breaks for developing new energy technology
  • doubling the Manufacturing Extension Partnership, a federal program that helps small factories get loans
  • paying for increased worker training

Though Kerry -- perhaps wisely -- sets no specific goal for job creation, Edwards promises he will create 5 million jobs in two years with his tax and trade policies.

That could be a risky gambit -- this year, the Bush administration promised tax cuts would add about 300,000 jobs per month, beginning in July 2003, a promise that hasn't come anywhere close to true, as Democrats have had the pleasure of pointing out about once a month.  Top of page

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