Democrats and Republicans are presenting vastly different approaches for fixing the economy and driving long-term growth. Which strategy is optimum to manage the nation’s massive debt, deadlock and malaise and lead the U.S. economy back to growth? Which is best for business? The choices couldn’t be more diverse.
By Stephen Barlas
It’s being touted across the airwaves as the most important election in our lifetimes as United States citizens prepare to elect a new president. How important it is may depend on which side of the fence you are sitting. For businesses, the focus here, optimism in the U.S. economy has taken a deep dive.
More than two-thirds of chief financial officers responding to the Financial Executives International CFO Quarterly Global Outlook Survey for the 2nd quarter 2012 don’t expect a U.S. economic recovery until sometime in 2013 (29 percent) or even 2014 or beyond (38 percent).
In comparison, one year ago the majority felt the recovery had already begun or would begin by the second half of 2012; this quarter, just 23 percent of the respondents now believe the U.S. is in the midst of a recovery.
At this juncture — with the election of a U.S. president and congressional candidates just one month away — which candidates and policies will bring certainty, lift the nation out of its doldrums, help create jobs and inspire an overall economic revival? Is it a second term for President Barack Obama/Vice President Joe Biden? Or will Mitt Romney — former governor of Massachusetts, founder of private equity firm Bain Capital and rescuer of the 2002 Olympics — and his running mate, the Representative from Wisconsin since 1999 Paul Ryan, win the election?
The nasty rhetoric drowning out serious discussion during the 2012 presidential campaign has frustrated many in the business community, not to mention the electorate. “Both sides need to focus on real issues, instead of using scare tactics,” says Steve Wojcik, vice president, National Business Group on Health, whose members are mostly large corporations concerned about burgeoning health care costs.
Important issues beg for serious discussion this election season, not only in the presidential race, but congressional races, too. The outcome of the 33 Senate elections may dictate, more than anything else, what happens in Washington in 2013. That is because the Democrats, now with a 51-47 edge (plus two senators who are registered as Independents but caucus with the Democrats), could lose that majority, with 23 up for re-election, as opposed to 10 Republicans.
Handicappers like Stuart Rothenberg, political analyst and author of the self-proclaimed nonpartisan The Rothenberg Report, argue that only five of the 33 seats are really in play, with four of those held by Democrats. A sixth seat, held by Missouri Democrat Sen. Claire McCaskill, was thought to be endangered until comments on abortion made by her opponent, Rep. Todd Akin, in August, improved McCaskill’s odds considerably. Should the GOP gain control of the Senate and keep control of the House — which is expected — President Obama, if re-elected, would have a much harder time pursuing his agenda.
The Candidates’ Tax Agendas
The agendas of Obama and Romney are very different. Obama wants to spend more to stimulate the economy and increase taxes on individual and family incomes over $200,000 and $250,000, respectively. Romney wants to slash federal spending and cut taxes. By press time, both camps have provided somewhat skeletal specifics, and though the president’s objectives are clearer — having been in office and talking about them since 2009 — as the challenger, Romney still has the opportunity to make his plans known to the electorate in more detail.
Romney’s website (www.mittromney.com) is more detailed than Obama’s (www.barackobama.com) on specifics, such as taxes. On the other hand, the president has submitted four years of federal budget plans that provide considerable detail on how he would approach various national challenges.
There are those, however, who say neither of the candidates plans add up. Clyde Prestowitz Jr., president of the Economic Strategy Institute, says an exclusive focus on macro-economic elements and policies — taxes and spending — as the major drivers of growth and employment is a fallacy. “The truth is high-tax, big government countries like Sweden, Germany and China are doing well economically and so are small government, low-tax economies like Singapore, Hong Kong and Switzerland,” he says.
Prestowitz further says the candidates should be emphasizing competitiveness policies, where the U.S. outbids countries such as China, which uses incentives to induce companies like Intel Corp. and General Electric Co. to build wafer fabrication and avionics plants there. “We have not made it clear to Jeff Immelt, CEO of GE and chairman of Obama’s Jobs Council, that if GE wants to sell to the Defense Department, GE better make its avionics in the U.S.,” says Prestowitz.
“Immelt may say he is creating U.S. jobs by building avionics in China. But he is not creating as many jobs here as GE should be.”
One could argue that the Obama administration has instituted competitiveness policies — particularly with regard to green energy — via tax incentives for wind and solar power companies that manufacture in the U.S. But implementation of that effort has been, to say the least, something less than successful (think Solyndra and others).
The White House also propped up failing U.S. automakers General Motors Co. and Chrysler Corp., although the jury is still out on whether the U.S. Treasury (i.e., taxpayers) will recoup its investment in either of the above cases.
Romney, who initially opposed the auto bailout, has insisted that the auto companies needed to go through bankruptcy before receiving government help — which they subsequently did. But he is clearly not an advocate of the kind of competitiveness policy pushed by Prestowitz. Romney’s economic recovery program centers around a reduction in individual tax rates of 20 percent below the rates left by the George W. Bush tax cuts of 2001 and 2003 and a reduction of the corporate rate to 25 percent.
He has also endorsed a territorial tax system (versus the current international system) for businesses, meaning no tax on overseas profits, which has been a cause célèbre for the Obama’s Advanced Manufacturing Partnership group and his Council on Jobs and Competitiveness.
Romney says his tax cuts will be “revenue neutral,” paid for by simplifying the tax code and eliminating special interest deductions and credits. Details, here, too, have not yet been forthcoming. He also purports to eliminate taxes on interest, dividends and capital gains, as well as on estates and to repeal the Alternative Minimum Tax (AMT) in all cases for taxpayers with adjusted gross incomes below $200,000.
Obama would let the top two tax rates rise (from 33 percent to 36 percent and 35 percent to 39.6 percent) as well as raise the rates on dividends and capital gains. He would cut the corporate tax rate to 28 percent and an additional three percentage points for manufacturers to 25 percent, but opposes a territorial tax system.
Obama’s Framework for Business Tax Reform includes removal of tax incentives for locating manufacturing facilities overseas by imposing an international minimum tax, providing a tax credit to companies that move jobs back to the U.S., doubling the tax deduction for high-tech manufacturers and establishing a new tax credit for companies seeking to finance new factories, equipment or production in communities that have been hardest hit by a company choosing to relocate or a military base shutting down.
Which Plan is More Business-Friendly?
Even business groups differ on the specifics of what needs to be done. Dorothy Coleman, vice president of Tax and Domestic Economic Policy for the National Association of Manufacturers (NAM), whose bulk of members are privately held S Corporations, which are distinct from corporations (C Corporations), says the group supports a 25 percent corporate rate for all companies, not just manufacturers, a territorial tax system and a reduction in individual rates.
Would NAM support any tax increases to “pay for” those tax reductions, to make any tax reform revenue neutral? “We would not support tax increases on business as part of tax reform,” replies Coleman.
She says NAM doesn’t believe that tax cuts and the resultant loss of federal revenue will exacerbate the federal deficit. “When the economy is growing and strong, tax reform can go a long way to stimulate the economy and address the deficit,” says Coleman.
But a lobbyist for another major corporate group — with members who mostly pay at the corporate rate — disagrees with Coleman. “Certainly broadening the tax base means getting rid of some of the corporate tax expenditures,” he says.
Skeptical views on the results of lowering the corporate tax rate complicate the issue further. Bruce Bartlett, an economist and official in the Ronald Reagan and George W. Bush administrations and author of the book, The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take, says, “While it may be a good idea to reduce the corporate tax rate as part of a tax reform package, the idea that this will jump-start growth is nonsense.”
On the other hand, Obama’s plan to increase the top two tax rates on individual earners has not drawn favor from all fronts. A report by global accounting firm Ernst & Young finds that “these higher marginal rates result in a smaller economy, fewer jobs, less investment and lower wages.” Specifically, the E&Y report finds that the “higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock and real after-tax wages when the resulting revenue is used to finance additional government spending.”
Obama’s intention to increase individual tax rates on those he terms “wealthy” is meant to raise revenue and help close the federal deficit, not spark the economy. But, depending on which report/s one utilizes (and/or which economic philosophy is adhered to), raising the rates at the top two individual levels will tap a dribble of new tax revenue, not a flood, maybe not even a stream.
Further, the Democratic plan to “pump prime” the economy with new stimulus spending could further deepen the federal deficit without markedly improving the jobs picture, if the Obama stimulus package of 2009 is any guide.
Deficits and Entitlements
Concerns about the federal deficit are not exactly front-seat issues for either Obama or Romney, with neither of their plans making significant inroads. For example, Ryan’s Path to Prosperity plan, which formed the basis of the House Republican 2012 and 2013 budget resolutions and which Romney has spoken of approvingly (though not endorsed in every particular), wouldn’t balance the federal budget until 2030.
For his part, Obama refused to endorse the recommendations of the National Commission on Fiscal Responsibility and Reform, which he appointed. In December 2010, the bipartisan group recommended a balanced program of tax increases and spending cuts, which would have cut the federal deficit by $4 trillion over the next decade.
In July 2011, Obama nearly negotiated a deficit reduction plan with House Speaker John Boehner (R-Ohio) to cut $3 trillion-plus from the deficit over the next 10 years. There was a little something for everyone in that near agreement; increased tax revenue and reductions in Medicare and Social Security spending.
But that agreement fell apart. Eventually, Obama and Republicans in Congress agreed to a $1 trillion reduction in federal spending over 10 years as part of the 2011 Budget Control Act, a law that requires much larger federal spending cuts over the next 10 years unless Republicans and Democrats agree on an alternative budget-cutting plan before then.
Medicare spending inflates the federal deficit beyond any other federal spending program. “Simply put, there can be no lasting solution to the U.S. debt crisis without structural changes in the Medicare program to slow its cost growth,” former Republican New Mexican Sen. Pete Domenici told the Senate Finance Committee in June 2012. He co-chairs the Bipartisan Policy Center Debt Reduction Task Force along with Alice Rivlin, a Democrat and former director of the Congressional Budget Office (CBO). The task force supports a “transition of Medicare to a ‘defined support’ plan in 2016.”
That is essentially what Ryan, the House economic leader (and GOP vice presidential candidate), has proposed. Some Democrats, most notably Sen. Ron Wyden (Ore.), have come around to the idea, too. Romney would likely be sympathetic to a premium support solution for those still 10 years out from qualifying for Medicare, though he has not spoken on that.
In fact Romney has said little about reducing Medicare costs. Neither has Obama. And, even having served on the Fiscal Commission, Ryan voted against Bowles-Simpson because it didn’t include provisions for managing Medicare.
Obama’s signature health-care law, The Patient Protection and Affordable Care Act (PPACA), contains a number of provisions with the intent of squeezing federal spending on Medicare by shifting payment from a volume-based formula where doctors and hospitals get paid based on the number of procedures to a quality-based formula that emphasizes control of chronic conditions and reducing hospital readmission rates. But, the jury is still out on the actual results of those initiatives and won’t be known for some time.
That said, business groups are anxious to try the payment reform initiatives, which Wojcik of the National Business Group on Health, labels “seeds” of improvement. That is why NBGH does not support repeal of PPACA, which Romney has promised if elected. Known as Obamacare, the law has been one of the two main Republican regulatory piñatas during the campaign; the other, the Dodd-Frank Wall Street Reform and Consumer Protection Act, has also been targeted for repeal by Romney.
And though not a single Democrat, much less President Obama, has argued for eliminating provisions of Dodd-Frank, implementation deadlines of many of its provisions have been delayed and the SEC has eliminated its published timeline for completion of much of the rule-writing under its supervision.
Moreover, congressional Democrats and Republicans are remarkably aligned on a few Dodd-Frank “reform” initiatives related to protecting corporate finance activities. In early August, three Republican and three Democratic senators introduced a bill that would allow businesses to hedge and mitigate their commercial risk without being burdened by requirements imposed by Dodd-Frank. The Senate bill is identical to the Business Risk Mitigation and Price Stabilization Act (H.R. 2682) legislation that already passed in the House in March 2012 by a vote of 370-24.
To some extent, that bipartisanship extends beyond the end-user issues emanating from Dodd-Frank to other business issues, in part because of a fairly calm, cooperative working relationship between the chairmen of key committees in the House and Senate, all of whom will be back in 2013, Sens. Tim Johnson (D-N.D.) and Max Baucus (D-Mont.), chairs of the Banking and Finance Committees, and Reps. Spencer Bachus (R-Ala.) and Dave Camp (R-Mich.) of Financial Services and Ways & Means.
None of them would qualify by either temperament or thought for either Tea Party or Occupy Wall Street membership. They certainly have some differences on social issues. But generally, all four, if not on the same page, are at least in the same chapter, with regard to business regulation.
On digging beneath the partisan rhetoric on federal regulation, it is clear that the divisions between the two parties, beyond repeal of Dodd-Frank and PPACA, are less than advertised. For example, Republicans have supported regulatory initiatives. Bachus is sponsoring the Investment Adviser Oversight Act, which would empower a self-regulatory organization to oversee retail investment advisers.
The Republican-Democratic divide on financial regulation is probably narrower than it is with respect to environmental regulation where there exists more distance between the two parties, both in terms of the presidential and congressional candidates, but this is not a big issue in the upcoming election.
One might argue, however, that the biggest threat to the air this fall, from East Coast to West, is not necessarily from chemical pollution but rather from the tone of the campaign rhetoric. Certainly it has been easy for each side to mischaracterize the positions of the other. “There is a consensus that everybody wants action,” says a staffer for one of the main corporate lobbies in Washington. “The more candidates talk about solutions, the better.”
Stephen Barlas, an award-winning freelance writer who has been covering issues in Washington, D.C., for more than 30 years, is a frequent contributor to Financial Executive.