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Why a Lot of CEOs Favor Higher Taxes

Rick Newman

It's axiomatic that business leaders want to keep taxes low. For one thing, low taxes limit the amount of profits they have to fork over to Uncle Sam. Plus, most CEOs rank among the one percent, which means they're the first likely to be targeted if Washington hikes personal income taxes.

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Yet 100 prominent CEOs have banded together in a nonpartisan campaign called Fix the Debt, which is meant to persuade Congress to do whatever is necessary to corral the government's out-of-control borrowing--and that includes raising taxes. Paying down the nation's $16 trillion national debt requires "higher revenue, reduced entitlement spending, reduced discretionary spending, and investment in infrastructure and math and science," Honeywell CEO David Cote, a member of the group's steering committee, said in a statement. Other CEOs backing the campaign include the leaders of Goldman Sachs and several other Wall Street firms, Microsoft, UPS, Delta Air Lines, Merck, Cisco and General Electric.

Raising taxes, of course, is anathema to Republicans, who at a minimum seem likely to control the House of Representatives during the next session of Congress. And Republican presidential nominee Mitt Romney is campaigning on a plan to cut taxes, not raise them, while scaling back a lot of loopholes and streamlining the tax code. President Obama, by contrast, wants to raise taxes on the wealthy while keeping taxes where they are for everybody else.

But most experts who have studied the huge gap between the government's revenue and its spending say there is no way to fix the problem without raising taxes. It's mathematically possible to do it by cutting spending alone, but that would decimate many programs that Americans consider essential, such as Medicare, Social Security, national security, highway and airport funding, food and drug oversight, and cancer research. A better approach, most budget experts believe, would be a ratio of spending cuts to tax hikes that's somewhere between 2-to-1 and 4-to-1.

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The whole problem is becoming acute, since Congress must soon address a huge set of tax and spending decisions--the "fiscal cliff"--that need to be made by the end of the year. If Congress does nothing and all of the pending measures go into effect, most Americans will face a sizeable tax hike and spending cuts will shrink GPD while the economy is still fragile. Most economists agree that tumbling over the cliff, and letting all of those measures go into effect as planned, would promptly cause another recession.

CEOs get paid to think strategically, and many realize that a solution that includes modest tax hikes would pay off if it paved the way toward fixing the government's finances, creating a more predictable business environment and reestablishing confidence in the American political system. But they also know that big companies have the least to lose, and a lot to gain, from a debt deal that includes higher taxes. Here are 5 reasons why:

Big companies probably won't pay higher taxes anyway. Multinational corporations in particular have a lot of flexibility in terms of which countries they do business in and where they declare revenue, which allows them to take advantage of the most favorable tax laws. The ability to do this varies by industry, but big companies in general have numerous tools--including large staffs of tax experts--to help keep their tax bills down.

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They've already got low tax bills. It might not feel that way to families scrimping to get by, but a recent study by the Congressional Budget Office found that the federal tax burden is the lowest since at least 1979, when the CBO started tracking it. That's because of large "temporary" tax cuts in 2001 and 2003, plus other tax cuts passed during the recent recession to help stimulate spending.

The problem is that instead of cutting spending in similar proportion, the government has continued to spend lavishly, making up the difference through borrowing. That needs to end, but if taxes go up modestly they still might end up roughly where they were during the 1990s--which turned out to be a great decade for business and profitability.

The taxes they do pay, goes right back to them. If the debt were paid down through spending cuts alone, it would cut deeply into things like infrastructure, scientific research and efforts to improve education--all of which benefit business directly. Mitt Romney says frequently that government doesn't create jobs, the private sector does. But the private sector depends on a lot of resources that wouldn't exist if not for government, because the cost is too high or the investment too dubious for one business to undertake, no matter how large. Roads, ports, basic research and a large cadre of well-trained professionals are the hallmarks of any successful economy, and much of that is funded or made possible by the government.

Which makes it a small price to pay for other 'business' reforms. Democrats have indicated there's no chance they'll agree to spending cuts if taxes aren't raised as well, at least on higher-income Americans. But if taxes are part of a deal, that might open the door to other reforms that are priorities for the business community, such as streamlined regulation and a tax overhaul that simplifies the tax code and lowers the cost of compliance.

Predictability is better than low taxes. CEOs don't necessarily mind higher costs--including taxes--as long as they know in advance what they'll be and can plan for them. In some cases, they can even pass those costs along to their customers. But trying to plan for a chaotic environment in which tax rates are unknown and political shenanigans might induce a recession is a nightmare, which is why many CEOs have simply decided to put off big decisions on spending and hiring until they know what Washington's going to do about the fiscal cliff. A deal that leads to higher taxes while addressing other problems will let business get back to business. But if there's no deal, politicians will hold sway over the economy for much longer than any CEO would like.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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