Business Analysis: Tax policies separate the candidates in the US election race

Republicans now oversee runaway spending while Democrats preach fiscal restraint

This is the moment in US election campaigns when the last vestiges of clear-cut economic policy is lost in the fog of partisan rhetoric.

This is the moment in US election campaigns when the last vestiges of clear-cut economic policy is lost in the fog of partisan rhetoric. Hear George Bush tell it, and John Kerry is a free-spending Massachusetts liberal who never met a tax increase he didn't like, and whose election would be a death knell for American capitalism. For the Democrat, this President is the tool of big business, sacrificing US jobs and the mythical "middle class" so that his greedy corporate backers can grow richer still.

Ever wilder estimates are hurled about. Mr Kerry's programme would cost $2 trillion, says the Bush/Cheney campaign. Rubbish, retort the Democrats, who claim that Mr Bush's proposals would cost $3 trillion. Clear differences between the candidates' economic platforms do exist. Whether they will be implemented - and if so whether they would have much impact - is another matter.

The power of any White House to influence the economy is limited. The 1990s boom, which Mr Kerry promises to restore, owed something to the brave deficit-reduction package of tax increases and spending cuts pushed through by President Clinton. But it probably owed more to the new opportunities opened up by the IT revolution - a feat that is unlikely to be repeated any time soon.

For his part, Mr Bush may have signed into law record income and dividend tax cuts. But historically low interest rates, and the property boom which they helped bring about, may have done at least as much to promote today's solid if unspectacular economic recovery.

His first term has also been remarkable for the surge in federal spending. But not once has the President wielded his veto. The philosophy of this White House, unashamedly sympathetic to business, is classic supply side. Give enterprise its head, and a rising tide of prosperity will boost growth, cure unemployment, and remove deficits. If re-elected, Mr Bush has said he intends more of the same.

In practice, Mr Bush would have little room for manoeuvre in a second term. Whoever wins on 2 November will still be at the mercy of global oil prices; in the short term at least, Mr Kerry's plans to boost US energy independence will change little.

Then there are the current account and federal deficits, about which Alan Greenspan, the Federal Reserve chairman, has expressed concern. A loss of international confidence in US macroeconomic management could cause a drop in the dollar or on Wall Street, which no White House could long ignore.

In short, the economic policy of a second Bush term is set to be less ambitious than his first. The focus may well be on marginal and long-term initiatives. The former will probably include a drive to secure tort reform. Among the latter could be moves towards privatisation of social security. But, once in the Oval Office, Mr Kerry's room for manoeuvre would also be limited. On paper, his programme is more clear cut, a reprise of the business-friendly New Democrat policies of the Clinton era. It even includes a cut in the corporate tax rate and targeted tax breaks to encourage companies not to send jobs abroad.

True, he has talked tougher on trade. Mr Kerry threatens to punish companies that out-source jobs. Over his 20 years in the Senate however, Mr Kerry built up a strong pro-free trade record. In practice, trade policy may be much the same under a new Democratic administration.

One key difference is on taxes. The nub of the Kerry plan is to roll back the Bush income and dividend tax cuts for families earning more than $200,000 (£111,000) a year. This, says the candidate, would free up resources for a $650bn scheme to expand federal health care coverage, for children, low-paid workers and small businesses which cannot afford to cover their employees. Mr Kerry also promises $200bn of new spending on education.

The Massachusetts senator promises to create 10 million new jobs, but it is hard to foresee how. Whoever becomes President will face a budget deficit, estimated at $420bn for fiscal 2004. Mr Bush's squandering of the budget surplus he inherited has sealed a reversal of images. The former "tax-and-spend" Democrats now stand for fiscal discipline. The Republicans, once associated with good housekeeping, are now the party of deficits. Fiscal hawks of every hue might welcome a Kerry victory. But even then a return to the brief golden era of surpluses is unlikely.

The biggest economic decision facing the new President will involve people, not policies. With his control of short-term interest rates, Mr Greenspan wields more influence on economic policy than the Treasury Secretary, John Snow, and perhaps even than the President himself. But the Fed chairman will step down in 2006, and the new President must appoint a successor.

If Mr Bush wins, the frontrunners are reckoned to be Martin Feldstein, an architect of the supply side policies of the Reagan administration, and Glenn Hubbard, the former chairman of Mr Bush's Council of Economic Advisers. But here Mr Kerry probably has the better hand. Should he win, the favourite for the job is Wall Street's own favourite - Robert Rubin, the Treasury Secretary under Bill Clinton and generally regarded as the safest pair of hands in the business.