From the October 2008 issue of Treasury & Risk magazine

Change Agents?

A survey of American finance executives, released just before the two parties' national conventions in August, found that 71% preferred to see Republican Sen. John McCain win the presidency this November, compared to just 13% who preferred Democratic Sen. Barack Obama (6% said it would make no difference who won and 10% didn't care for either one). Of course, finance and treasury executives--a tiny demographic--won't play much of a role in choosing the nation's leader, and the broader polls to date suggest a much closer race between the two tickets, so the question those executives probably should be asking now is what the election of one of them as president will likely mean for the country, and for their companies' prospects.

The Financial Executives International (FEI) survey found that the biggest concerns finance executives had for their companies were anemic U.S. economic growth (48%), high oil prices (34.8%), lagging consumer spending and demand (29%) and inflation (25.3%). Well below these issues were health care costs (10.9%), the sagging dollar (10%) and costs of regulatory compliance (7.2%), though it's a fair bet treasurers--who weren't interviewed for the survey--as a group, rate the credit crisis and better regulation of the financial markets and rating agencies high on their list, especially after the heart-stopping crisis of mid-September.

There is some common ground between the two presidential candidates--for example, both have been calling for tougher regulation of financial markets, and both are supporters of Sarbanes-Oxley, though McCain is clearly a late-hour convert to the concept. There are also some striking differences between the philosophies and the economic strategies of the two candidates, particularly on taxes, and laws and regulations relating to labor organizing--with Obama (and most Democratic candidates for Congress) supporting a labor movement call for making the signing of union cards, not an election, all that is needed for workers to win the right to have a union at a workplace.

At the same time, there are forces at work that limit how far either can go with his ideas. McCain, for example, has been vowing that he would keep all of the Bush tax cuts in place after the 2011 expiration date. He has also promised to cut the corporate tax rate from 35%, one of the highest levels in the world, to a more modest 25%. Obama, in contrast, is calling for higher taxes on those earning more than $250,000, significant tax cuts for middle and lower income workers, and a limited rise in both the tax on dividends and the tax on capital gains. On the corporate profits tax, Obama has spoken of making it broader, while leaving the statutory rate unchanged. (Since studies show few companies pay the actual rate, or anything close to it, the real impact of a lower corporate profits tax rate would likely be not lower tax bills, but less time spent by finance departments devising ways to reduce taxes.)

Still, most finance executives (86.5%) claim they expect Obama's tax policies would impact their companies negatively, while nearly half (46.2%) say McCain's tax policies would impact them positively. But, the reality is that with what is expected to be an even more Democratic U.S. House of Representatives and Senate next year, it is highly unlikely that McCain, if elected, would get his way on tax policy.

Alan Viard, a tax policy expert at the American Enterprise Institute (AEI), a conservative think tank, says that where McCain's economic approach would be "aimed at putting incentives in place for long-term economic growth," Obama's more detailed tax plan, which includes raising the top individual rate from 35% to 39%, ending income taxation for seniors earning less than $50,000, granting a $500-per-worker tax credit and a $4,000 college tuition credit, is "oriented more towards income redistribution." But, he adds, "All the McCain talk about keeping the Bush tax cuts is empty because he won't be able to get it through Congress, and the markets are starting to realize that."

Adds one economist who communicates regularly with corporate finance executives: "They may like what McCain is saying, but they know he would probably not be able to cut the capital gains tax from 35% to 25%. Congress would never go along. Nor will a Democratic Congress simply extend the Bush tax cuts."

John J. Castellani, president of the Business Roundtable, an organization of 160 CEOs of many of the country's largest corporations, agrees. "The arithmetic makes it a safe bet that Democrats will control both houses of Congress next term, so McCain would face a divided government," he says.

Obama as president, on the other hand, would have a solidly Democratic Congress to work with, and while a Democratic majority in both houses might not give him all he wants--especially if Democrats don't pick up nine Senate seats to get the 60 votes needed to move bills past a filibuster (or 10 if they plan to dump Connecticut Sen. Joe Lieberman from their caucus)--they would likely back much of his tax agenda.

There is considerable support among Democrats for a modest rise in the capital gains tax and the tax on dividends, though only for those in higher income brackets. Jared Bernstein, an economist at the Economic Policy Institute who has "informally" advised the Obama campaign, claims that corporate concerns about the effects of a higher corporate tax rate or a rise in capital gains and dividend taxes are overblown. "The history of corporate finance suggests that it is not that sensitive to these factors," he says. "Supply-side theory is bogus. Most executives make business investment decisions based on whether they make business sense or not--not on how they impact the company's tax bill."

Meanwhile, in the wake of the collapse of Lehman Brothers and the Fed takeover of AIG, both have blasted the managers of banks and investment banks for the credit crisis, and both have called for a heightened focus on corporate governance. While McCain and Obama struggle to articulate specifics regarding regulatory reform, Andrew Biggs, an AEI fellow and former deputy commissioner of Social Security in the second Bush administration, says: "Obama and the Democrats are apt to go with a regulatory solution to problems, but then, McCain, too, has shown, for example, with campaign finance reform, that he's willing to go with government solutions."

Says the Roundtable's Castellani: "The more important point is that there are some very substantial challenges facing our financial markets, and whoever wins will need some very smart and experienced people in the Cabinet to help him. They both have some very good people advising them."

McCain's and Obama's health care proposals are fundamentally different, with McCain calling for a refundable tax credit designed to help individuals and families buy their own insurance (and making it easier for businesses to get out of the health benefits provision business) and Obama calling for some kind of employer health mandate. But again, if Democrats control Congress, it is unlikely that McCain's health care reform ideas would get much of a hearing. That means waiting for two years or more and hoping for a Republican resurgence in Congress, or McCain would have to work with a Democratic proposal. In any event, Castellani, for his part, is dismissive of both candidates' plans. "Neither one has been comprehensive about this," he says. "We think any solution will have to be a hybrid involving both the government and the private sector."

On the economy and consumer spending, Obama is calling for another more targeted round of $50 billion in economic stimulus to follow this year's bigger $160-billion tax rebate stimulus. McCain would rely on continuation of the Bush tax cuts, plus some new reductions--for example, a rise in the personal exemption and the cut in corporate taxes, to stimulate economic growth.

One area of interest to corporate America where there is a big difference between the candidates is trade. "Half our member companies' revenues come from outside the U.S.," says Castellani, "so we are very concerned about our continuing ability to work in global markets. Sen. McCain has expressed support for continuing to reach trade agreements on a bi- and multi-lateral basis. Sen. Obama has said he'd like to take a time-out on trade agreements. That concerns us."

As for keeping interest rates down, neither candidate has much to offer. Obama's tax proposals, according to the politically independent Tax Policy Center, would increase tax revenues overall by $700 billion over the next 10 years, while McCain's would reduce tax revenues by $600 billion, but given Obama's spending proposals for infrastructure, health care, education and a larger military, in the end both would be adding to the country's budget deficit, thus putting upward pressure on interest rates. "I don't think either candidate is treating the deficit, or the debt, seriously. And I don't see any proposals from either one that would make the situation any better," says Robert Bixby, executive director of the non-partisan Concord Coalition, which monitors budget issues.

For all the talk about dealing with high energy prices, again, neither candidate offers much hope to beleaguered companies or to their struggling workers. Oil and gas experts say that the McCain campaign's "drill baby drill" call for opening up all offshore areas for drilling will do little in the short term, and not much even in the long term to increase U.S. production. Nor would Obama's call for investing $50 billion in research into new non-carbon-based energy sources and improving the gas mileage of U.S.-built vehicles do much to reduce U.S. energy use in the short term. Both candidates are calling for some kind of cap-and-trade system to use market forces to bring down energy use by industry and the power sector, but that program is more geared towards reducing the nation's production of greenhouse gases than lowering energy costs.

In short, while there certainly are big and hotly contested issues at stake in this November's election, the political reality is that, as long as Democrats, as seems likely, continue to control and even further solidify their control of Congress, for America's companies, it will not make that much difference which presidential candidate--John McCain or Barack Obama--takes the oath of office next January.

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