Chief executives are getting away with a clever trick: Publicly calling for higher taxes while giving money to the presidential candidate who will cut theirs
Yesterday a group of about eighty senior corporate executives, flying under the newly-painted banner "Fix the Debt," called on Washington to mend its ways. The solution to our long-term debt problem, they say, is "comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit." The magic words, which much of the media has fastened on, are "raises revenues"--the idea being that America's corporate leaders are breaking with the Republican Party's "no new taxes" position.
Though not quite as incoherent as a previous letter from a financial services lobbying group on a similar subject (signed by some of the same bigwigs), this one also makes little sense--except from the point of view of the signatories' individual tax bills.
Apparently, the mark of a self-appointed centrist these days is saying things that are simply not true. Mark Bertolini, the CEO of Aetna, was quoted by the Wall Street Journal saying this: "There is no possible way; you can do the arithmetic a million different ways. You can't tax your way to fix this problem, and you can't cut entitlements enough to fix this problem."
Of course you can do either one. If you were to eliminate Medicare, Medicaid, and the health insurance subsidies of Obamacare, there would be no long-term debt problem. Similarly, if you were to raise tax revenues simply to the average level of OECD countries--an increase of about seven percentage points of GDP from the long-term level forecast by the CBO--the debt problem would also vanish. I think one of these solutions is obviously better than the other, and Paul Ryan has the opposite view. But it can be done.
More importantly, the call to "raise revenue" does not mean, as many have assumed, that these CEOs are calling on Congress to raise their taxes. It means they are calling on Congress to raise your taxes.
Fix the Debt is just the latest group claiming that it wants to increase revenues by lowering tax rates and reducing loopholes--after Simpson-Bowles, Domenici-Rivlin, the Gang of Six, and the Committee for a Responsible Federal Budget. This is not surprising, since its organizers include members of Simpson-Bowles, Domenici-Rivlin, and the CRFB. Theoretically, this is possible. But there are two things you have to watch out for.
The first thing is the baseline. Every plan I have seen that claims to lower tax rates and increase revenues--including those mentioned above, which are discussed at the end of chapter 7 of White House Burning--only "increases" revenues from the levels set by the Bush tax cuts of 2001 and 2003. In other words, they assume that those tax cuts are made permanent, even though they are set to expire in two months. Then they raise revenues from what are the lowest levels in recent history. And if you look at the details, they leave tax revenues much closer to George W. Bush levels than to Bill Clinton levels--despite our aging population and increasing health care costs, which require more spending to maintain the same level of benefits for the elderly, not less.
The second thing--and here's the big giveaway--is the capital gains tax rate. For most of these multi-gazillionaires who signed this letter, there's only one number in the tax code that matters: the tax rate on long-term capital gains. That's because most of their compensation comes in stock, either options or restricted stock, and once they retire most of their income will come from gains on their stock portfolios.
They don't care about the mortgage interest deduction, since their mortgages are insignificant to them. They don't care about the employer health care exclusion, since their health plans are insignificant. They don't care about the tax breaks for retirement savings, since for most of them (unlike Mitt Romney), their IRAs are small compared to their taxable accounts. They don't really care about the deduction for charitable contributions: even if you donate 10 percent of your income, your effective tax rate only drops from 15 percent to 13.5 percent.
There's only one loophole--one way to "broaden the base"--that they care about, and that's the tax preference for investment income, which right now means that they pay tax on long-term capital gains at 15 percent instead of 35 percent. Unless and until these CEOs say they want to eliminate the capital gains loophole, you can safely ignore what they are saying.
How do I know they don't want to eliminate the capital gains loophole? Well, let's look at where these corporate titans are putting their money rather than their overly large mouths. I started going through the list of people in the CEO Council to see if they contributed money to Barack Obama or Mitt Romney (thanks to the invaluable OpenSecrets.org). I only made it through the D's (I have a stack of midterms I have to grade), but I found eight Romney donors and not a single Obama donor. And that's excluding the ones who donated to Rick Perry or gave tens of thousands of dollars to Republican committees.
It's no secret that Mitt Romney wants to cut tax rates by 20 percent and keep the capital gains tax rate at its current level. (His running mate wants to eliminate all taxes on investment income.) He says he can maintain current tax levels for the rich, but that has repeatedly been shown to be arithmetically impossible, since there simply aren't enough other loopholes to get rid of. (Romney also wants to eliminate the estate tax, which is the other thing that the super-rich care about.) So what we see here is a pack of rich people saying that taxes should go up, without mentioning the one tax break that they care about, many of whom are giving their money to the guy who will actually reduce their taxes.
Actually, it's worse than that. If you're going to lower rates and raise revenue, but you're not going to raise taxes on yourselves, there's only way to make that work: raise taxes on other people. If, at the same time, you're calling for reductions in federal spending on health care and Social Security, that means lower benefits for other people. As Felix Salmon said, this is "gross self-interest masquerading as public statesmanship."
I've previously argued for specific tax changes that would reduce my own tax breaks and raise my taxes. And I put my money where my mouth is. I'm waiting for the CEOs of Fix the Debt to do the same.
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