Divide over managing US's wallet

Both President Bush and Sen. John Kerry profess to be "free traders," opposed to tariffs and other impediments to commerce.

But Senator Kerry wants any future free-trade pacts to include "enforceable" standards on labor and the environment, while Mr. Bush calls for a "level playing field," which means working to eliminate foreign subsidies, such as the support that Europe gives to its aerospace industry.

The difference is typical of the split between the presidential candidates' economic programs: Kerry's leans toward programs favorable to labor and the middle class; the president's program is often business-friendly.

Positioning themselves on the economy is vital: The economy and jobs rank among the top concerns on voters' minds, and in some polls in the past year they have even beaten out terrorism and the war in Iraq as the No. 1 issue.

Both sides have developed economic plans for the next four years. Bush's program is heavy on tax cuts and tax credits. Kerry wants to raise the minimum wage and increase spending on poverty programs.

Bush sees education as a way to improve competitiveness. Kerry wants to take away corporate tax credits that he claims encourage companies to move jobs offshore.

"Kerry is pretty much a traditional Democrat," says Larry Sabato, a political analyst at the University of Virginia in Charlottesville. "And Bush is pretty much a supply-side Republican."

No matter which candidate wins, the economic challenges ahead will be daunting. Although the budget deficits for 2004 and 2005 will be smaller than forecast, the deficits in later years are projected to grow, according to the Congressional Budget Office. By 2009, the cumulative deficit will amount to $2.6 trillion. Those estimates don't include any new tax cuts, including the $145 billion, 10-year cut just passed by Congress.

At the same time, the next president will have to manage rising healthcare and energy costs. In addition, the US trade deficit next year is expected to hit $2 billion per day. And during the next four years, the first significant wave of baby boomers will retire - placing even more strain on healthcare spending and reducing federal tax dollars.

"The economy will be more difficult to manage than the last four years because certainly interest rates will be rising, which will hurt housing, and there could be greater stresses on the financial markets," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

Each side thinks it has the right answer to these problems. Jason Furman, economic adviser to the Kerry-Edwards campaign, says the senator will change the fiscal tone in Washington. "John Kerry would pay for all his proposals," says Mr. Furman. "He would do this by requiring all government spending outside of education and security to grow no faster than inflation, and if it did grow faster, then it would be automatically cut."

An analysis by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution in Washington, concluded that Kerry's proposals would increase the budget deficit by $425 billion under current law. However, if the 2001 and 2003 tax cuts do not sunset in 2010, then Kerry's proposals would represent a tax increase of $721 billion.

To stop the loss of jobs, Kerry has two plans. First, he wants to end the tax break that corporations receive when they set up operations overseas that export products. Second, he wants to give tax breaks to manufacturing companies, businesses affected by outsourcing, and small businesses when they add net new workers in the US.

The tax break that companies receive for their offshore operations has been around for decades, well before Bush took office. Since US corporate tax rates are higher than most of those abroad, US companies get a deferment on paying taxes on foreign income until the money is repatriated. Kerry would eliminate the deferment.

Outside analysts, however, think it might just result in corporate creativity as companies try to find ways around paying taxes. "It creates opportunities for creative accounting to avoid the tax," says Leonard Burman, a former Treasury official now at the Tax Policy Center.

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