The One Percent Solution
by P.J. DiNuzzo November 2, 2012
During the run-up to the Presidential and Congressional elections, you might sometimes get the idea that certain voters line up reliably behind certain policies. In fact, the biggest stereotype has been that people with above-average wealth--the so-called "one-per centers"--never want to pay any taxes. Instead, corporate executives and financial leaders expect the government to reduce spending, and somehow reduce the federal deficit without calling on them to make a contribution.
But in the real world, business leaders are trained to apply business logic to the problems in front of them, and when they look at the challenges facing America's finances, the conclusions they're coming to don't fit neatly along partisan lines.
For example? Recently, a coalition of more than 80 CEOs of major U.S. corporations have joined together to tell Congress that it needs to find a bipartisan solution to the so-called "fiscal cliff"--the changes in tax law and the federal budget that will take place at midnight, December 31. Longer term, they have asked Washington to address the deficit in a realistic way. The group, which includes such one-per centers as the CEO of General Electric, Boeing, Verizon, Aetna, Microsoft, Cisco, Blackrock and Goldman Sachs, has publicly argued that, despite the "no new taxes" pledge that many in Congress have signed, raising taxes in some form is inevitable if we are serious about paying down the federal debt. So far, the coalition has raised $29 million to carry this "raise taxes" message to various Congressional districts.
The One Percent Solution came right out of their respective accounting departments. The CEOs say that it makes no mathematical sense to try to fix the deficit without raising taxes, but they also believe there is a significant amount of waste in current government spending. The group has asked Congress to follow a deficit reduction model similar to the Simpson-Bowles deficit reduction committee recommendations, which called for both spending cuts and temporarily higher taxes which fall hardest on persons with the most income and wealth.
Why would the one-per centers lobby for a higher tax bill? Interestingly, their letter makes clear that they are not necessarily putting the good of the country ahead of their own interests, but they are putting the welfare of their companies first. They say that the looming fiscal cliff and uncertainty over the budget is costing their corporations meaningful business. Goldman Sachs cited a report which shows that capital spending has weakened over the past few months, and 6-month forward capital spending levels have fallen to pre-recession levels.
Meanwhile, another group of one-per centers are asking for similar measures. The Financial Services Forum--which brings together the nation's largest banking institutions--has sent a letter to the White House and Congress asking them to negotiate a bipartisan deficit agreement as soon as possible--and the term "bipartisan" is clear code for "we will accept Democratic proposals to raise taxes as part of the deal." The letter repeats warnings that have been sounded by Fed Chairman Ben Bernanke, the Congressional Budget Office, various ratings agencies and even the Chinese government.
The CEOs of big banks and big businesses would almost certainly benefit personally from lower tax rates. Their respective calls to action suggest that the threat of inaction on the economy has finally become too dire to ignore. America's one-per centers, who have been spoken for throughout the election cycle, and now speaking out on their own, saying they are willing to sacrifice a bit of their own income to help the country climb out of its fiscal woes and restore economic growth and prosperity. It is possible that a forecast delivered by their own accounting departments suggests that higher economic growth will more than pay for the temporary cost of higher taxes--in the long run.
Economists and accounting professionals from these various firms are sitting down with members of Congress through the remainder of the year to help explain not just the importance of these fiscal issues, but also the best, most realistic ways to move past them. Dare we hope that Congress will finally listen?
P.J. DiNuzzo, CPA, PFS®, MSTx, MBA
President, Founder, and Chief Investment Officer