In today’s article from around the web we visit Inc.com where author Dan Ferrara discusses the ideas of 500 CEO’s of the Inc. 500 when it comes to rebuilding the economy. As always, read, comment, share and enjoy!
Here’s what has to actually happen if we are going to make control the deficit, stimulate the economy, and reform the tax code.
Last summer, we polled the CEOs of the Inc. 500—the fastest-growing privately held companies in America—about what they hoped to see from the winner of next month’s election. They told us that they wanted a reelected Barack Obama or a newly elected Mitt Romney to do three things: balance the budget, stimulate the economy, and cut taxes.
As political to-do lists go, these goals make perfect sense. The desire for a healthier economy and reasonable taxes is self-explanatory for any entrepreneur. As for the budget, Washington’s paralysis on the issue adds to the pall of uncertainty hanging over the economy, and it gets worse the longer it lasts. “Sooner or later, we risk triggering a meltdown in the U.S. Treasury market,” says Dane Stangler, research director of the Ewing Marion Kauffman Foundation.
Moreover, Congress’s refusal to compromise on the deficit condemns us to repeated self-inflicted crises, like the so-called fiscal cliff looming in January. (More on that later.) “Frankly,” says Stangler, “it makes us look ridiculous.”
To be sure, the entrepreneurs’ agenda is somewhat contradictory. You can’t literally balance the budget, cut taxes, and stimulate the economy all at the same time. But we take business owners seriously on the intent of what they asked for—a sustainable fiscal policy, support for economic growth, and a fair, rational tax system. Washington should do the same.
Which candidate is likely to do a better job in realizing the entrepreneurs’ agenda? Both President Obama and former Governor Romney say they share the CEOs’ goals, although the paths they propose couldn’t be more different. So, the question isn’t which party supports Inc. 500 CEOs’ wish list; they both do. It’s a question of which can deliver on it.
Priority No. 1: Create a Sustainable Fiscal Plan
There’s no sense in rushing to balance the budget; that would require steep tax hikes and spending cuts that could be mortal to the weak recovery. What businesses (and U.S. Treasury bondholders) need to see is a clear and credible path to a sustainable deficit—which means shrinking the annual red ink (as a percentage of GDP) to a level below the economy’s rate of growth. Achieve that, and America’s debt bomb starts to defuse.
Right now, however, the deficit is about 7 percent of GDP, and the long-term growth rate of the economy is 3 percent or so. So to bring the deficit to a sustainable level will mean cutting it by more than half compared with the size of the economy.
How tough is that? One way to halve the deficit would be to let the economy go off the so-called fiscal cliff in January next year. If Obama and Congress don’t come to a budget agreement by year’s end, in January—no matter who has been elected President in November—tax rates will rise to Clinton-era levels. That would suck some $400 billion out of the economy. Add the effects of mandatory spending cuts, and the deficit would fall by $560 billion in fiscal year 2013.
And the economy would be devastated. A Congressional Budget Office, or CBO, analysis of the cliff predicts that cold-turkey austerity of this magnitude would almost certainly drag us into another recession and send unemployment back over 9 percent. Neither candidate has the remotest appetite for that kind of medicine.
Both aim for the less draconian goal of halving the annual deficit as a percentage of GDP in about 10 years, but even so, they may be soft-selling the sacrifice really required. The President starts by raising taxes on the top 2 percent of taxpayers; he matches this modest revenue increase with relatively modest spending cuts. According to the CBO, his plan would cut the deficit in half by 2022, assuming some very healthy growth in GDP. If growth falls short, so does the plan. “Because he’s exempting 98 percent of the population from many tax increases, he raises some revenue but not nearly enough,” says Roberton Williams, a senior fellow at the Urban-Brookings Tax Policy Center.
Romney’s plan starts with a 20 percent cut in marginal income tax rates as well as elimination of the estate tax. He says he’ll offset the lost tax revenue by getting rid of unspecified tax breaks, but even if he succeeds in doing that, the entire burden of deficit reduction falls on spending cuts. To raise his strategy’s level of difficulty even higher, he has pledged to increase the defense budget and largely taken Social Security off the table. According to a Center on Budget and Policy Priorities analysis of the Romney plan, “If policymakers spread the spending cuts proportionately across all programs other than core defense and Social Security, they would have to cut every other program—including Medicare and Medicaid—by 29 percent in 2016 and 40 percent in 2022.” What’s going to go? The ex-governor isn’t saying.
If Obama wins a second term, he will almost certainly face a Republican House. He may face a Republican Senate as well. It would be nice to think Congress might do more than stonewall, as it has done since 2010, but don’t count on it.
If Romney wins but Democrats end up retaining control of the Senate, they will probably act with equal hostility toward any budget he proposes. And so U.S. fiscal policy will continue to lurch from one showdown to the next, and any deficit reduction will be slow and highly dependent on economic growth—unless the two sides learn to talk.
Would a Republican sweep yield a better chance of reining in the deficit? It might, but the path to a Romney budget isn’t a cakewalk, even if only Republican votes are needed to pass it. Will congressional Republicans rip through their to-do list of painful spending cuts—even as they slash taxes for the wealthy—heedless of the fact that they need to run for office again in 2014?
History isn’t encouraging. The last two times Republicans pushed through tax cuts, under George W. Bush, they blinked at cutting spending. By the end of Bush’s tenure, the annual budget gap had gone from a $236 billion surplus to a $455 billion deficit. A repeat would be disastrous.
Priority No. 2: Stimulate the Economy
The classic way to stimulate the economy is to cut taxes or increase spending to spark demand. As Obama’s 2009 Recovery Act certainly confirms, that increases the deficit. In traditional economics, that is a price worth paying for increased economic growth. (Only recently has this been considered a liberal conceit. George W. Bush produced stimulus packages in both 2002 and 2008; Paul Ryan spoke eloquently in support of the 2002 bill.)
None of that matters now. The fact is, the economy won’t see any more of the short-term jolts represented by the Recovery Act in either an Obama or a Romney administration. It is now a Republican article of faith that such spending is pointless. “Sending out checks won’t work,” says Brian Darling, a senior fellow at the conservative Heritage Foundation. “It’s better not to let government handle the money at all.” In the Heritage Foundation’s view, the only stimulus that is necessary or effective is to give businesses and individuals tax cuts.
But, of course, spending and tax cuts aren’t the only forms of stimulus available. Both camps will probably look favorably on helping young private companies raise capital and find talent. One of the few things Republicans and Democrats agreed on in the last Congress was the start-up-oriented JOBS Act. That bodes well for the prospects of Startup Act 2.0, described on page 69.
As for giving a longer-term boost to the economy, Republican strategists believe there are no better economic elixirs than tax cuts and freeing business from government interference. But the evidence is mixed. The tax-cut-and-deregulation formula didn’t work in George W. Bush’s term, which suffered two steep recessions. Moreover, cutbacks in government spending aren’t always a springboard to an economic boom. Ask the Irish, who still face 15 percent unemployment.
Priority No. 3: Cut Taxes
Strictly speaking, the Inc. 500 CEOs’ request for lower taxes is off the table from either party. Obama would raise taxes on top earners with a higher income tax rate and a Medicare surcharge, which was part of the Affordable Care Act. If he is reelected, your taxes will probably go up if you earn more than $250,000 (as do about 3.5 percent of small-business owners). And Romney promises that his tax strategy will be revenue neutral.
But what could happen in the next administration is the beginning of a debate on tax reform. Reforming the tax code—with or without raising taxes—was the fourth most-popular goal among Inc. 500 CEOs. Both Obama and Romney have said they are in favor of a plan that streamlines the tax code, lowers income tax rates, and does away with tax deductions and preferences. “Democrats want to use tax reform to raise taxes on the rich, and conservatives want it to be revenue neutral,” says Heritage’s Darling. “But either way, the tax code is a mess and needs to be fixed.”
There are two elements to tax reform, however. The easy part is to lower tax rates, which would pass without a dissenting vote in a Republican Congress. The hard part is wiping out tax breaks to offset the lower rates, especially when you consider that the largest of them are the mortgage interest deduction, the charitable deduction, and the tax exclusion for health care (without which employees would have to pay tax on the value of their health benefits). These deductions are woven into the financial fabric of many, many American lives.
Their extermination is not necessarily something Republicans want on their resumé. In a National Association of Home Builders poll in January, for example, 77 percent of Republicans opposed eliminating the mortgage interest deduction. Romney has said he would preserve it for middle-income families. But that makes the budgetary math only harder.
Where Do We Go From Here?
If all you cared about in next month’s election was realizing the entrepreneurs’ agenda, your best hope would seem to be a Republican sweep. Arguably, a Republican legislature and executive uninhibited by the need for Democratic votes is the team most likely to reduce the deficit and reform the tax code in the near future.
But the Republican steamroller scenario makes some ambitious assumptions. It requires that a President Romney and a Republican legislature fractured between Tea Partiers and traditional politicians be able to deliver a unified vote on tough issues. It assumes Republicans have the ability to face down the special interests that are certain to campaign against cuts to their favorite spending programs and tax breaks. Most of all, it assumes that Republicans will resist the fiscally catastrophic temptation to do the easy thing—namely, to cut tax rates—and not the hard thing—to cut popular spending programs and beloved tax breaks. Congress tried once before in the Bush years—and failed. That’s why there’s a case for a split government for the next two years. “The majority of Americans live politically in the center,” says Kauffman’s Stangler, “and thus very likely would prefer divided government. It may result in less sweeping legislation, but if radical change makes you nervous, that may be fine.”
Isn’t a split government a euphemism for stalemate? Not necessarily. We’ve actually seen the grownup approach to the issues that matter to entrepreneurs. It was embodied in the chairmen’s report from the National Commission on Fiscal Responsibility and Reform, better known as the Simpson-Bowles report, of late 2010. It’s true that Paul Ryan, a member of the committee, disavowed it. Barack Obama, reading the politics of that, didn’t endorse it. But Simpson-Bowles embodied the way the deficit will actually be tamed: with a painful, widely loathed combination of revenue increases and spending cuts.
That was also the premise of the talks last summer between President Obama and House Speaker John Boehner, the so-called Grand Bargain talks. Until the negotiations fell apart at the 11th hour, it seemed that all the necessary noses were going to be held and a deal was going to be struck.
It may be that the only way such difficult deals can be reached is, in fact, in a divided government. Bruce Bartlett, a former senior policy analyst in the Reagan White House and a staff member for the late Congressman Jack Kemp, co-author of the Kemp-Roth tax reform legislation, points out that on all three occasions when serious tax reform took place in the past 40 years, it happened under a Republican President and a Democratic (or at least a divided) Congress. The two sides gave each other cover for the inevitably tough choices. “Without genuine compromise between the two parties,” he writes in his book on tax reform, The Benefit and the Burden, “nothing would have happened.”
Business owners are not impressed by the absolutism and posturing that have characterized this election year. They don’t need warriors, not on economic issues. They need results from Washington, just as they need results from their own business. Perhaps the only good thing to come of the bitter stalemate of the past two years is that it has increased risks to the economy so much that a deficit reduction plan almost has to be put in place in 2013 or 2014. Maybe that’s when the fever will break. And Washington—finally—can get down to business.
Eric Markowitz and Jeremy Quittner contributed additional reporting for this story.