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CEOs Suggest Raising Taxes, Don't Include Specifics

More than 80 CEOs of large companies made news this morning with a statement asking Congress to work together to reduce the deficit.

The statement says “growing debt is a serious threat to the economic well-being and security of the United States” but then softens that call to action by suggesting a plan should be “enacted now, but implemented gradually to protect the fragile economic recovery.” That statement is an acknowledgement that deficit spending IS currently a help to the economy.

The most radical part of the statement is the call for tax reform that “raises revenues and reduces the deficit.” Calling for raising revenues is a polite way of saying someone's taxes should go up. Taking this position has been tantamount to suicide in Republican circles during recent budget negotiation. Perhaps the party that constantly touts its ties to the business world will heed the words of the leaders of some of the world's largest businesses.

In a similar vein, the statement calls for strengthening Social Security and reforming Medicare and Medicaid to reduce future cost growth, but says any plan should protect the vulnerable. The call to protect the vulnerable may be lip service to the 47% of Americans Mitt Romney believes feel entitled to government handouts, or it could be genuine acknowledgement that social safety nets are a reasonable and good idea in civilized society. Without the inclusion of any specifics, the intent behind them is impossible to decipher.

That lack of specifics is where the statement falls apart. While it's nice to see business leaders acknowledge that balancing the budget without increasing tax revenues is impossible, the lack of specifics, other than an endorsement of the Simpson-Bowles Commission's plan, makes this little more than a plea to Congress to get along. That is nothing new in a country where the legislature has an abysmal 21% approval rating.

Also, it should be noted that the Simpson-Bowles plan failed to get enough votes from the members of the commission that drafted it (which included Republican vice presidential candidate Paul Ryan) to move on for further consideration. That doesn't sound like a plan everyone can agree on.

Missing from the statement is any threat to withhold votes or campaign donations for members of Congress who would hold up progress on a bipartisan plan, or any mention of restrictions—self-imposed or otherwise—on lobbying for or against such a plan. These CEOs have control over tremendous sums of money, both through their own companies and the various trade groups, political action committees and other lobbying groups that they participate in.

Reforming the tax code to make it simpler sounds easy enough, but what “lowering rates and broadening the base” actually means is removing deductions that allow people and companies to pay less in taxes, while also lowering the posted rate. Sure the U.S. has a 35% corporate tax rate, but I'd be willing to bet that none of the companies managed by the 80 CEO's who signed this statement actually pay anything close to that. General Electric (GE) whose CEO, Jeff Immelt, is one of the signers paid effectively no taxes at all in 2010, a year when it booked a profit of $14.2 billion worldwide and $5.1 billion in the U.S.  

Today's letter would go a lot further if it contained a specific list of tax loopholes that should be closed. As written, today's letter leave the door wide open for GE and other companies to lobby and donate to any member of Congress who votes to keep preferred tax loopholes open, which is exactly how we got into this mess in the first place.

Perhaps even more troubling is the CEO's apparent lack of awareness about the relationship between the deficit and the economy. Reuters blogger Felix Salmon's reaction piece has a graph that shows the recent history of the debt-to-GDP ratio, which shows that not only has rate of growth slowed, but the ratio itself has declined in recent years.

Salmon also points out that borrowing costs, for both the government and corporations, are at record lows. This means now is the perfect time for the government and companies to borrow money for infrastructure projects or new capital spending, both of which would help reduce the unemployment rate.

Getting more people working means more people paying taxes, this would increase revenues and lower the deficit without Congress having to take a single vote.

Not only are corporations not accessing cheap financing, they seem to be devoid of new ideas. Corporate America has seen record earnings in recent years (current quarter excepted) and companies for the most part have stockpiled that cash. That money could be invested in modernizing factories, expanding lines of business or research and development for new products. Instead, much of it has gone to repurchasing their own stock. Some companies have even borrowed to fund repurchase repurchase plans.

Share repurchases can be an effective way to return capital to shareholders by by reducing the number of outstanding shares and boosting per-share earnings. As an investment decision though, it is pretty uninspired. Apparently the leaders of this country's largest corporations have no good ideas or grand plans to make their companies bigger or better. The best they can come up with is just giving the shareholders' money back to them. I guess it's better than losing it, but it certainly isn't what I'd call leadership.

America's elected leaders have thoroughly disappointed their constituency by wasting time squabbling, so today, the leaders of the business world decided to make a big show of asking politicians to stop their bickering. But they did so without as much as pretending to offer a solution. That's not leadership, just wishful thinking.

 

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com.

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.