Nov. 2's Winner? Corporate America
By Bruce Nussbaum
Bush vs. Kerry: Who would be best for Corporate America? That's a question that's sure to get the partisan blood up. I'm just waiting to get blasted by e-mail. John Kerry called CEOs "Benedict Arnolds" for outsourcing jobs! And President Bush just signed a $145 billion tax bill that's a bonanza for most of Big Business. It's obvious who would be best. Reelect President Bush -- right? Actually, it's not that clear-cut.
O.K. It's pretty clear that only those industries that hired morons for lobbyists have failed to get something from the Bush Administration. Big agro-farmers got big subsidies. Big Steel got big tariffs. Energy companies were able to drill more holes in more places. Logging companies got to cut more trees in more forests. Construction companies got plenty from a mammoth highways bill and Iraq. Any company that could dress itself up as a domestic "manufacturer" got the equivalent of a three-percentage-point tax break from the new tax bill.
DELIVERED THE GOODIES.
Multinationals with overseas operations got to repatriate huge profits and pay just 5.25% taxes on them. Pharmaceutical companies gained from the new Medicare drug benefit. Heck, even the folks who import Chinese ceiling fans got breaks with Bush. And, of course, the cut in capital-gains and dividend taxes made the shares companies issue all that more valuable.
Wow. You have to admit that in his first term, President Bush did a lot for Corporate America. He may have broken some basic conservative Republican principles in doing so -- such as paying out huge subsidies, building protectionist tariffs, and generating big budget deficits. Yet there's no denying that he delivered the corporate goodies.
But what can the next President do for Corporate America in the four years ahead? Surprisingly, the answer isn't as straightforward as one might think.
Here's the calculus:
Health Care. The biggest issue for Corporate America in 2005 and beyond is getting out from under the crushing burden of costly medical-care benefits (see BW, 11/8/04, "Your New Health Plan"). It costs businesses about $9,000 a year to cover each employee's medical costs. Many executives and managers don't want to deal with ever-rising medical costs that they can't control. Workers get angry as their costs rise. European and Asian competitors don't pay directly for employee medical benefits, and Corporate America just wants someone -- the government or the employees -- to shoulder the responsibility.
Kerry has a plan. He would extend government insurance for children and low-income workers. Small businesses that can't afford medical care could join a national insurance pool to cover their employees. And for companies big and small, Kerry would have the feds take over the cost of catastrophic illness.
If enacted, the Kerry plan could lower health-insurance premiums significantly. CEOs worried about soaring health-care costs have to look closely at Kerry's plan. It goes a long way toward achieving their goal. Of course, it'll cost anywhere from $650 billion to $1.5 trillion, depending on which political party you believe. But hey, no one complained when the GOP-dominated Congress and White House passed the outrageous $1.3 trillion Medicare drug benefit.
President Bush, of course, has his own plan to help corporations cut their medical costs. He's championing Health Savings Accounts, 401(k)-type accounts that let employees set up tax-advantaged nest eggs to cover out-of-pocket medical expenses. If workers don't spend all the money in the HSA in one year, it rolls into the next.
Legislation allowing companies to set up HSAs if they also provide high-deductible insurance to cover catastrophic medical costs was passed last year. Employees have to agree to deductibles that can range up to $5,150 for families if they want the tax break.
Bush wants to make HSAs even more attractive by giving folks a tax break on the premiums they pay for their high-deductible insurance. HSAs should help bring down medical-care costs as individuals pay for their own lab tests, drugs, and visits to the doctor. Of course, the downside risk is that people will try to save money by not doing preventive care.
HSAs shift much of the risk of rising medical costs to employees. Of course, it means billions in lost tax revenues, but it will still cost the government less than Kerry's plan. Bush's idea appeals to big companies. Kerry's benefits small business more. So when it comes to medical-care costs -- the single most important issue for Corporate America -- it's a virtual tie between Bush and Kerry. By Bruce Nussbaum Corporate Taxes. President Bush's big tax goal for a second term is to make permanent all the cuts he made in his first. Of course, by making permanent the tax cuts on incomes over $200,000, the President would continue to help partnerships and small businesses that pay taxes via the income route rather than the corporate route. But his plan doesn't offer much new for larger companies.
Kerry is promising to cut the corporate income tax rate from 35% to 33.5% and offering a tax credit to cover payroll levies in industries affected by outsourcing. He was going to offer a tax holiday for companies that reinvest overseas income in the U.S. But Bush just beat him to the punch. Still, Kerry's 1.5-percentage-point cut in the tax is a big deal. So when it comes to corporate taxes, Kerry has to be the favorite.
Capital Gains and Dividends. In his first term, President Bush cut capital gains from 20% to 15% at the top end and also reduced the tax on stock dividends from ordinary income to 15%. The result has been dramatic, with more companies paying out more dividends to investors. Dividend-paying stocks have done better so far this year than nondividend-paying stocks. And while the cap-gains tax cut hasn't done much this year to turn around an anemic stock market, it's bound to help promote growth in the long run. The cap-gains and dividend-tax cuts are due to expire in 2008. Bush wants to make these cuts permanent.
Kerry wants to keep them also -- except for those making $200,000 or more. For that group, he wants the tax rates to rise, back to 20% on capital gains and 39.6% on dividends (the top ordinary income-tax rate under Bill Clinton). Unfortunately, it's the people who make the big bucks who do most of the investing in America. Raise their taxes on capital gains and dividends and you curtail their investing -- and probably future growth. Who's best for Corporate America on the issue of cap gains and dividends? Bush wins clearly.
Brand America. The candidates aren't talking about it, but CEOs of large, multinational corporations sure are. Anyone traveling to Europe these days -- and much of Asia and all of the Middle East -- knows that an astonishing amount of anti-Americanism is washing through consumers. Since the war in Iraq, this sentiment has spread throughout the populations of virtually ever country in Europe -- including Britain, Poland, and others that have sent troops to Iraq. Well-known American brands are getting hammered in Europe: Coke (KO ), McDonalds (MCD ), Marlboro, Gap, Disney (DIS ), Starbucks (SBUX ), and so are the auto companies.
Of course, competitive and economic pressures play a role. But advertising companies in Europe increasingly say vehement anti-American feeling is eroding consumer support for key U.S. brands. Since the President and his foreign policies are so opposed in Europe and much of the world, a second term would probably exacerbate the decline of U.S. brands abroad. This is no small thing.
The French-speaking Kerry promises to bring Old Europe back into the fold. He's the anti-Bush and vows to restore the Atlantic Alliance. If he does, he might also restore consumer loyalty to U.S. brands. Again, this is no small thing. When it comes to reviving Brand America, Kerry comes out ahead.
So let's get back to the original question: Who is best For Corporate America in this Presidential election? Sorry, it's too close to call. Either one is going to be good in very different ways. No matter who wins the Presidency, Corporate America is positioned to win as well.
Nussbaum is Editorial Page editor for BusinessWeek
Edited by Patricia O'Connell