American
Business
Conference A Coalition of Growth Companies
The President
The White House
Washington, DC 20500
Dear Mr. President:
On behalf of the members of the American Business Conference (ABC), a coalition of CEOs of fast-growing, midsize companies, we write to congratulate you on your election and on a very promising beginning of your Administration.
Founded twenty years ago, the American Business Conference brings together leaders of midsize, high-growth companies for the purpose of advocating public policies to promote economic growth and a higher standard of living for all citizens. Our work at ABC is self-interested in the best sense: we believe that if we can help to secure a strong economic environment in which everyone has an opportunity to succeed, our companies will flourish.
The record of the last decade has validated our point of view. A smarter, more productive workforce, combined with superior management systems, technological innovation, and the emergence of new markets resulting from expanded world trade, yielded an extraordinary run of economic growth that eradicated the federal deficit, pushed corporate earnings and equity prices upward, and drove down the unemployment rate even among historically disadvantaged groups of our citizens.
Sustaining economic growth should be a national goal of the very highest priority. We say this not because we think prosperity is an end to itself. It is not. Rather, a strong economy is an indispensable precondition for realizing ends that make life worthwhile, such as preserving our natural environment, cultivating the arts and sciences, and strengthening our families and communities.
With this in mind, we would like to offer you our views regarding a few of the key economic growth issues which you and the Congress likely will be addressing in the days and months ahead.
Taxes
If federal spending can be kept under control, we agree with you that tax cuts are desirable.
In this regard, we were disappointed that Congress and the Clinton Administration, over the last few years, annually flouted – through so-called “emergency” spending and other deceptive accounting techniques – the caps on discretionary budget authority enacted into law in 1997 (and due to expire in 2002). Fortunately for the President and Congress, the unexpectedly large flow of tax revenues into Washington, and the budget surpluses those revenues created, permitted a certain lack of accountability on the spending side. The question now is whether you will be able to reassert real spending discipline on Congress if the flow of revenues is reduced as a result of new tax cuts. This is the threshold issue.
Assuming discipline can be exerted on federal spending, what sorts of tax cuts make sense from a growth perspective? We agree with you that an across-the-board reduction in personal income tax rates should be part of the package. Doubtless such an initiative will be criticized as rewarding the wealthy. It is hard to see how it could be otherwise, since our personal income tax system is progressive. If, following an across-the-board reduction, the income tax retains the same level of progressivity as it did before (only now with lower rates) it would be difficult to argue that the reduction was in any meaningful sense “unfair.”
Supplementing a reduction in income tax rates, we would, as an organization long in favor of fundamental tax reform, urge tax changes to mitigate the current code’s bias against saving and investment. For example, we favor allowing individuals who sell stock to avoid the capital gains tax if they reinvest their gain. Such a “rollover” provision would facilitate an efficient, continuous reallocation of investment capital to its highest and best uses. It would also constitute an important milestone toward what we believe should be our long-term goal: the deferral of all taxes on all saving and investment.
We also think the time has come to take a hard look at the corporate income tax, which is grotesquely complex, is ill-suited to the realities of global competition, and is ultimately borne, not by fictitious “individuals” called corporations, but by real people.
There is a strong case to be made for scrapping the corporate income tax entirely and finding a simpler, fairer, and more understandable means of raising the revenues thus foregone. Short of that politically difficult initiative, there are incremental measures that could, if enacted, improve and simplify the corporate income tax. To take but one of many examples, we strongly recommend that you consider legislation that would accelerate the ability of businesses to recover the cost of their productivity-enhancing investments in equipment and in people. Ultimately, we would like to see the day when businesses could expense their investments in new equipment and in worker training and education. The reason is simple common sense: why would we ever want a tax system that makes it unnecessarily expensive for enterprises to make the kind of investments that result in greater productivity and therefore, greater economic growth?
On the international side, we recommend that your Administration continue the movement toward making the tax code territorial and border-adjustable. A territorial and border-adjustable system would not tax foreign-source income and would allow a rebate on business tax paid on goods and services that are exported.
Making the corporate tax both territorial and border-adjustable would adapt our code to the realities of a competitive global marketplace. Although we disagreed with the World Trade Organization’s decision against foreign sales corporations (FSCs), it may be that the search to find a WTO-compatible alternative to FSCs will provide an opening for a more thoroughgoing change to the corporate tax along the lines we advocate.
Trade
We believe in the continued development of a rules-based system that encourages ever-greater economic activity across national borders. This not only represents the best international economic policy for the United States, it also represents the best policy we know of to increase global prosperity, human dignity, and environmental protection.
The members of the American Business Conference have actively lobbied in favor of every major trade and investment liberalization agreement that has come before Congress over the last twenty years. Most recently, we strongly supported Permanent Normal Trade Relations with China, and we want to take this opportunity to thank you for your strong support of PNTR for China during last year’s campaign.
As President, you inherit a somewhat paradoxical legacy in regard to international trade and investment. The benefits of expanded trade and investment for this country and for the world are readily quantifiable and are there for all to see. At the same time, the American political consensus in favor of expanded international trade and investment, a consensus that has been in place since the end of World War II, has become badly frayed. Rising protectionist sentiments can be found in both major political parties, among labor and environmental interest groups, and, most worryingly in terms of our future, on college campuses.
Resolving this paradox will not be easy. First, we believe it demands from you, and from the excellent trade team you have recruited, a willingness to talk to the American people, openly, frankly, and often, about the benefits of international trade and investment. That means talking about the benefits of exports and imports, American investment overseas and foreign investment in the United States.
Second, it means laying out a specific negotiating strategy before asking Congress for fast-track authority. We know from hard experience that simply asking for fast-track authority without tying it to a specific negotiation or set of negotiations invites rejection. Certainly from a business lobbying perspective, it is not easy for a group of even the most motivated CEOs to advance the merits of a political process, which is what fast track is. It is far easier instead to discuss the possible benefits of a specific proposed negotiation which fast track can make possible.
Third, we want to caution you about accommodating those urging the insertion of labor and environmental provisions within future trade negotiating objectives. As we have noted, expanded trade itself promotes world prosperity and environmental protection. We thus do not accept the premise that expanded trade and investment must be accompanied by the sort of safeguards that some labor and environmental groups demand. Nor have other countries shown that they welcome meddling by the United States in these non-trade areas.
Achieving good trade agreements is hard enough; why make the task harder by acceding to the demands of labor and environmental groups whose innate hostility to international commerce suggests that they will never support trade expansion under any terms? Again, we think the best way to counter the political muscle of the protectionists is through straight talk to the public about the benefits of trade.
That said, we readily concede that trade entails economic change. Economic change inevitably causes dislocations. Here in the United States, we would support stronger efforts to assist workers and others adversely affected by trade expansion. And, in the long term, we believe your initiatives to improve education and training will play a crucial role in helping the American people to capture the economic rewards of the new world marketplace.
Legal Reform
Some of our Texas-based members saw at first-hand your successful efforts as Governor to rein-in out-of-control litigation. Now, as President, you face a similar challenge on the federal level.
Our successful efforts in support of the Private Securities Litigation Reform Act of 1995, which was enacted over President Clinton’s veto, taught us that substantive legal reform is possible if it is pursued in a bipartisan spirit. In this regard, your efforts to build policy bridges to Democratic members of Congress should serve you well.
Still, the political clout of the trial bar will complicate any effort to build a bipartisan coalition for reform. Choosing the right legislative vehicle is, in this regard, vital. ABC continues to support many of the broad-based tort and product liability reform proposals that are reintroduced on a regular basis with each new Congress. At the same time, we recognize that such proposals stand very little chance of enactment because they are regarded as too “extreme” by all but a handful of Democratic members of Congress.
Progress on the legal reform front requires smaller steps: “niche” measures that, while valuable, are less sweeping than fundamental tort or product liability reform and which can attract sufficient Democratic support for passage. A number of current initiatives seem to meet this “niche” strategy. Among them, we would respectfully recommend for your scrutiny legislation designed to apply the principles of Federal diversity jurisdiction to interstate class actions.
In plain English this means changing existing rules by which opportunistic plaintiffs’ attorneys can keep large interstate class actions out of Federal court in favor of State courts where oversight of class actions is often lax and where most of the abuses of class action litigation occur. This idea has garnered support of Republicans and Democrats alike. It could make a real difference in returning a measure of accountability to class actions while forming the basis for further reforms.
Capital Markets
As the value of equities has soared over the last decade, the number of Americans owning stock as a percentage of the total population has skyrocketed. Today, over half of American households have at least some of their wealth in the stock market. Never in history have the capital markets been more intensely and minutely examined by so many people with so great a financial interest in the markets’ performance.
The capital markets today also drive economic policymaking in new and profound ways. The large and largely unanticipated federal budget surpluses we have enjoyed in recent years have relied significantly on unusually large capital gains tax receipts – the result of stock sales triggered by surging equity prices. Similarly, most proposals to “privatize” Social Security rely at least in part on the redirection of payroll taxes into the stock market, where, it is assumed, the return on investment will be large enough to fund the obligations the government has to future retirees. It seems extraordinary that so much reform can be based on expectations of the performance of capital markets.
As President, the very best thing you can do to insure the strength of the capital markets is to support an economic environment that encourages entrepreneurial risk taking and business expansion.
There are many elements that can contribute to such an environment. As we have already noted, one of the main ones is the creation of a simpler, more understandable tax code that does not penalize saving and investment.
Additionally, who you choose to chair the Securities and Exchange Commission is absolutely crucial. The SEC, which has always been an important agency, today plays an especially vital role in economic policymaking.
ABC does not have a candidate for the job (our founder, Arthur Levitt, is the outgoing SEC Chairman). But we do have some thoughts about the qualities the next SEC Chairman should possess.
First, at a time when Main Street and Wall Street have merged, the next SEC Chairman should have a broad understanding of the economy as a whole. He or she should understand how the rise of the Internet, the democratization of equity ownership, global commerce and, within business enterprises, the heightened role of intangible “knowledge-capital,” affect the Commission’s regulatory agenda. The next Chairman must have the courage and expertise to adjust that agenda to these new realities.
Second, the next SEC Chairman must be able to address the Commission’s multiple constituencies. That means effective outreach to the nation’s individual investors, constant communication to members of Congress, and non-confrontational dialogue with the business community.
Third, the next SEC Chairman must be an effective manager and leader. Staff morale at the Commission is low and the turnover rate of talented employees high. These problems must be rectified. At the same time, the next Chairman must demand of the Commission staff complete fidelity to due regulatory process, in part by making clear that speeches, press leaks, staff bulletins, and the like are not appropriate vehicles for rule-making.
Entitlement Reform
Already more than half of federal outlays is funneled to mandatory spending programs; Social Security and Medicare alone account for one out of every three dollars that the federal government spends. By 2010, Social Security and Medicare payments are on track to increase by $500 billion and that is before the bulk of the Baby Boomers retire.
We profess no special expertise regarding entitlement programs. We can, however, read a balance sheet. A day of reckoning is coming regarding the government’s unfunded obligations to the elderly – the recent growth in the economy has postponed, not eliminated, that inconvenient fact. Failure to take action now to control the growth of entitlement spending threatens the standard of living of our children.
It has been dismaying to witness, over recent years, how federal budget surpluses blunted responsible calls for entitlement reform and instead encouraged new legislative initiatives, such as prescription drug benefits, to increase entitlement spending. These initiatives should not be undertaken absent a broader plan for entitlement reform.
We do not underestimate the appeal of inaction. Apologists for the status quo tell us that there is no Social Security and Medicare crisis, which, from our point of view, is exactly the point. There is no crisis now. And that is why now is the time to take relatively simple steps to avert the crisis which the harsh reality of demographics tells us lurks just over the horizon.
Fortunately, much intellectual spadework has already been done in regard to Social Security and Medicare reform. We urge you to take advantage of the best of this thinking and to build a bipartisan coalition for constructive change. As with so many of the other issues you confront, success on this matter will also require a large amount of public education. We believe that if the American people are honestly apprised of the economic facts, they will support intelligent reform.
Conclusion
In closing, Mr. President, we acknowledge that the large issues discussed in this letter cannot be adequately addressed by political leaders alone. Nothing of value can get done without a substantial constituency behind it. Building such a constituency requires citizen participation, including those of us in leadership positions in the private sector. In that context, we pledge to do all that we can to help you, and those on both sides of the aisle in Congress, to achieve the structural reforms of the economy necessary to sustain and expand upon the economic growth of the nation in the years ahead.
Sincerely,
/s/ Alfred P. West, Jr., Chairman, American Business Conference
and Members of the American Business Conference