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Obama and Romney clash over the economy

If there is one major campaign issue with stark differences between the plans proposed by Barack Obama and Mitt Romney it is economic policy. But one key aspect is simply too hot to handle for either candidate.

With a persistently high unemployment rate of eight percent and a sluggish economy, it's no wonder that economic policy was slated as the key issue that could decide the US presidential election.

Add to that a challenger - Mitt Romney - who sells himself to voters as a successful businessman and turn-around-specialist just cut out for such an occasion and the election outcome should be a done deal.

But, it isn't. Even worse for Romney, according to most national polls Obama has pulled ahead of his Republican challenger despite the rather bleak economic picture.

With voters still citing the economy as the most important issue in the November election that can mean two things for the economic proposals put out by the candidates:

Either Romney has not won over voters' trust that he and his plans are better for them and the economy than Obama's because he hasn't done a good enough job explaining his credentials and his programs - as his Republican critics argue.

Or the voters have actually understood Romney's plans and reject them because they believe they wouldn't improve the economy and therefore side with Obama's plans - as Democrats argue.

So let's compare some three key economic issues to see where Obama and Romney stand:

Taxes

Obama wants to raise taxes for households earning more $250,000 or individuals earning more than $200,000. For this group, the Obama plan would raise the current top marginal income tax rate from 35 to 39.6 percent. Raising the taxes for high incomes would allow Obama to keep the current levels for the other tax payers.

President Barack Obama walks off stage after signing the $858 billion tax deal into law in a ceremony in the Eisenhower Executive Office Building on the White House complex, Friday, Dec. 17, 2010 in Washington. (ddp images/AP Photo/Pablo Martinez Monsivais) // Eingestellt von wa

Barack Obama plans higher taxes for wealthy Americans

"Obama's plan would be status quo for most Americans and a tax increase that's actually quite modest in scope for high earners," says Andrea Louise Campbell, a professor of political science at the Massachusetts Institute of Technology in Cambridge, currently researching the fiscal effects of the Great Recession as a fellow at the Radcliffe Institute at Harvard University. "That would be raising the income tax back to the same level that existed under President Clinton."

Romney meanwhile wants a 20 percent tax cut across the board.

"The biggest difference for the aggregate budget is that the Romney plan has really left unspecified how it is going to pay for the 20 percent reduction," notes Robert P. Inman, a finance and public policy professor at the University of Pennsylvania's Wharton School in Philadelphia.

Hole in the budget

Inman, who says he supports the tax reduction in principle, explains that in order to pay for those cuts Romney would have to close very special preferences, so-called tax expenditures, for most Americans. Among the biggest tax preferences, adds Inman, are the ability to deduct home mortgages, state and local taxes and charitable contributions from ones taxable income.

Romney, according to Inman, has an obligation to close those tax deductions in order to create a revenue neutral policy. But since most Americans benefit from these exemptions it is politically extremely risky to spell this out in an election campaign.

Romney also wants to eliminate the so called estate tax, the inheritance tax. Obama wants to maintain the estate tax with a 45 percent maximum and exemptions of up to $3.5 million.

Romney plans to maintain the capital gains tax at 15 percent while Obama wants to raise it to 20 percent.

In addition, notes Campbell, Romney would reduce the size of the so-called income tax credit - essentially an income tax refund for low earners - thereby effectively raising taxes on low earners.

Healthcare

Healthcare is not just a social issue, but a very important economic one as well. Roughly 20 percent of the US government's budget is spent on healthcare. That means the US spends more on healthcare than any other country. Despite these giant outlays millions of Americans are still without health insurance.

June 12, 2012 - Orlando, Florida, U.S. - GOP presidential contender MITT ROMNEY delivers remarks during a town hall meeting at Con-Air Industries, an air filtration business in front of a sign that reads 'Repeal Replace Obamacare

Mitt Romney has promised to repeal the so-called Obamacare

Even more than taxes, healthcare policy, therefore is the area with the clearest ideological contrast between Obama and Romney. Basically, Romney in the long run wants to privatize or massively slash government spending on healthcare while Obama wants to strengthen and expand government-run healthcare services.

Mitt Romney wants to repeal the health reform just implemented by Obama and the Democrats which expanded health insurance coverage to millions of previously uninsured Americans. "Our uninsurance rate would remain at one out of every six Americans without insurance under Romney," concludes Campbell.

Radical reform

What's more, Romney wants to completely overhaul the currently existing national health insurance programs. Romney would turn Medicare, the healthcare system for older Americans, into a voucher program of limited value enabling senior citizens to shop for insurance in the private market.

"And if the private market insurance were to cost more than the value of the voucher, the seniors would have to pay the difference out of pocket," explains Campbell. She adds that while this is an excellent way to control governmental health care spending, it will increase the out-of-pocket costs for senior citizens.

"And what's important to note is that the current Medicare program is even seen in its present form as inadequate in the sense that seniors still pay for half of their medical costs out-of-pocket."

Medicaid, the other government-run health care program for the poor, would also see drastic cuts under a Romney presidency. At the moment the national government and the states share Medicaid costs with Washington ensuring adequate funds for the eligible segment of the population.

Block grants

"The Ryan and Romney plan would change that program into what's called a block grant," says Campbell. "Each state would just get a capped amount of money from the federal government and that capped amount of money goes down in value over time. So, essentially fewer and fewer poor people would be able to get healthcare under the Romney plan in the long-term."

Obama meanwhile wants to maintain the current government-run health care services by making the system more efficient.

"Obama's hope that we are going to find big tax savings through for example preventive activities and the like is yet unproven," says Inman. He calls both Romney's and Obama's healthcare plans "unchartered territory". "We just don't know how those two alternative strategies are going to turn out in controlling our health care costs."

Defense

This is the elephant in the room. Washington spends roughly 20 percent of the budget on defense. To put that in context: The US last year spent much more than the next 10 countries combined on defense or more than five times what China, its closest competitor, spent.

Given this huge military superiority you would think that amid calls for general belt-tightening US defense spending would be on the cutting block.

The Pentagon again postponed a key test of its troubled THAAD'''' anti-missile defense rocket, seen this file photo, due to a commercial power failure, the Defense Department said. (photo by Lockheed Martin)

The defense budget is basically off limits

Not so. Neither Romney nor Obama have called for significant defense cuts. Romney has criticized Obama for weakening the US military and vowed to maintain the current share of roughly four percent of the gross domestic product spent on defense. In real dollars that would of course amount to an increase in defense spending.

Obama meanwhile has only slated a one percent cut for the Pentagon for next year.

Third rail

"Neither discuss it because Americans simply don't understand it," says Inman. Many people tend to primarily think of the US as either the world's cop or the world defender of freedom, he adds. It's a third rail in politics, says Inman. "I don't think either of them wants to touch it."

Campbell agrees noting that many Americans don't realize just how big the defense budget is and how it crowds out other spending. But, says Campbell, public opinion also supports high military spending both because the sector employs a large number of people and because Americans want to have a strong military.

"Ironically, there are even certain weapon systems and certain fighter plan systems that the Pentagon itself has said that it doesn't want and that they could cut, but that Congress won't let them because there will be individual members of Congress whose districts include the facility where those planes would be manufactured."

Ideological divide

Asked to sum up both candidates' economic proposals, Inman says the strongest difference between Obama and Romney is probably Obama's confidence that the government can make a significant contribution to the well being of the economy and the people and Romney's confidence that markets can do a better job than the government.

Campbell believes that the Romney plan will exacerbate the trend toward economic inequality in US society. "It's the largest share in the US since the 1920s and it's a larger share going to the top one percent in the US versus European nations and Japan. I personally see that as a bad thing that so much of the nation's output is accrued by a very small slice of the population."

Campbell hopes that by the tax increase for high income earners the US can add much needed revenue for additional government spending:

"We are so underinvested in things like education and infrastructure. We are just starving government. There's a phrase in the United States eating your seed corn, undermining your future possibilities for productivity, because we are not investing either in people or in our physical infrastructure."

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