In a joint letter, many of America’s top CEOs have finally engaged substantially in the debate over America’s fiscal mismanagement. Curiously, the day before the letter came out President Obama made public an interview with the Washington Post that included “a pledge to solve the nation’s intractable budget problems.” Apparently, a great fiscal alarm clock went off somewhere in the universe.
The letter, signed by the chief executives of more than 80 high-profile corporations, calls for spending cuts and tax hikes in a three-to-one ratio: cutting spending $3 for every $1 in tax hike. As Aetna’s Mark Bertolini puts it, “You can’t tax your way to fix this problem, and you can’t cut entitlements enough to fix this problem.”
Be clear: Bertolini’s is not a judgment regarding budget realities. It is entirely a political judgment, and Mr. Bertolini’s welcome to his opinion. But it is only an opinion of someone whose specialty is making profits, not making budget policy.
As a factual statement, Bertolini is half right. Raising taxes sufficiently to eliminate the deficit would so harm the economy that the expected revenue gains wouldn’t materialize. Greece, Italy, Spain, and France among others are proving the point as they jack up taxes to reduce budget deficits only to see their economies plunge into recession and the expected revenues vanish. The U.S. should thank these nations for their example, and then avoid it.
On the other hand, it is entirely possible to reduce spending alone enough to eliminate the deficit. The questions are only 1) over what period, and 2) whether politicians are willing to do the work. To prove the point, Paul Ryan, chairman of the House Budget Committee, has a plan showing it can be done, as does the Heritage Foundation through its fully scored Saving the American Dream Plan.
The so-called “balanced approach” advocated by the CEOs might be as inevitable as Mr. Bertolini suggests, if future deficits resulted from a balanced deficiency of revenues as against an excess in spending. But, as the Congressional Budget Office makes plain in its “Alternative Fiscal Scenario,” by 2016 or so, federal revenues are projected to return to historical norms as a share of the economy. Persistent deficits thereafter result entirely because baseline spending has soared under President Obama.
The problem, as described clearly in the CBO figures, is spending. Solutions should address problems. No doubt this is how Mr. Bertolini runs his company.
This press for higher taxes should surprise no one. We at Heritage warned in 2009, and again in 2011, of the Obama plan to “glut the beast” — raise spending so much that a fiscal crisis would force major tax hikes. This would be the converse of the famous “starve the beast” strategy in which one attempts to deprive the government of revenues so deficit pressures force spending cuts. America’s CEOs have fallen for the Obama play hook, line, and sinker. (In their defense, as noted, the CEOs are not government-budget experts and so they can be forgiven — a little.)
The telling line from the CEOs’ letter is the call for “comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenue, and reduces the deficit.”
If the higher revenues the CEOs envision result from economic growth, then they’re right on target. A strong economy generating strong revenue growth is the best, most effective way to bring down the deficit, with spending cuts finishing the job.
However, if the higher revenues the CEOs call for come not from a stronger economy but from straightforward tax hikes, then here’s a suggestion: They should tell us how much they are willing to see the taxes rise on themselves and their own companies. Surely they are not so feckless as to propose a budget solution of taxing others. They should lead by example and have their own corporations take the first tax hike.
Perhaps to avoid any suggestion of shifting taxes among industries, a simple and courageous proposal by these leaders of industry would be to eliminate 20 percent of all corporate tax deductions up front. Don’t distinguish between interest expenses, depreciation, labor expenses, and so forth. Tally up all deductions and shave off 20 percent. It’s simple, straightforward, balanced, and would really show good faith.
If more revenues are needed, then try 30 percent. And if they want to up their own taxes, maybe eliminate the deduction for salaries paid to top corporate management altogether. Then, of course, they can explain to their shareholders why dividends were cut to increase the government’s take.
A shortage of revenues is not the problem, so raising taxes should not be the solution. However, if America’s corporate leaders want to lead the nation into higher taxes, then they should lead by example by putting their own companies on the tax block first.
— J. D. Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at the Heritage Foundation.