Over-Leveraging America’s Future: Business Leaders Must Do Better

Published Dec. 8, 2017 in the Harbus.
Reilly Kiernan and Rachel Lipson contributed to this article.

Roaming the halls of Harvard Business School over the past few weeks, you would never know it, but the U.S. Senate just voted on one of the most consequential pieces of legislation of our time. Early Saturday morning, the Senate passed a tax “overhaul” that dramatically lowers corporate tax rates, balloons the federal deficit, reduces access to health insurance, and exacerbates inequality.

The unpopular bill was buoyed by support of business leaders, who made the case that lower corporate tax rates would be good for

American companies, encouraging reinvestment and leading to higher wages. But this support suggests hypocrisy, short-sightedness, and the willingness of CEOs to put self-enrichment above concern for the overall American economy. If America is to remain a global leader, our generation of business leaders must avoid the same mistakes.

CEOs and business lobbies have largely been enthusiastic cheerleaders for the House and Senate bills.  The Business Roundtable, a group representing CEOs of some of America’s largest companies, has prominently endorsed the “reform.” So has the U.S. Chamber of Commerce. In fact, both groups expended significant resources towards a public and private lobbying campaign for the bill;  the Chamber had 100 lobbyists working on taxes this year alone, and the Business Roundtable had 51. And while most business leaders have focused their efforts on the corporate tax (rather than individual rates or other components), there is no doubt that their outspoken support added a veil of legitimacy to the entire package, which only 25 percent of Americans support.

Most of these leaders have been unwavering in support for the bill despite the fact that it is projected to add $1T to the national deficit over the next decade. Ironically, in the recent past, BRT called for changes to the corporate code to be “revenue-neutral,” and CEOs like BRT Chair Jamie Dimon (HBS ’82) railed passionately against the growing US deficit, lobbying the Obama administration to raise revenue and cut spending. In 2012, Dimon convened an elite group of CEOs and policymakers in a campaign called Fix the Debt, focused on solutions for managing the country’s growing national debt burden. Yet this group was silent on the issue in the recent debate around tax overhaul. Where was the concern for the debt that so galvanized the business community in 2012?

The tax overhaul also rests on the assumption that businesses will reinvest incremental profits, but many major companies like Cisco, Pfizer, and Coca-Cola, have already conveyed that they will turn over most of the gains from the tax overhaul to shareholders through buybacks and dividends. At a November 14th speech to the Wall Street Journal’s CEO Council by Trump’s top economic advisor Gary Cohn, the moderator asked business leaders to raise their hands if they would reinvest proceeds from tax cuts. Tellingly, only a few hands went up. Likely, some share of tax cuts will go to reinvestment, but it is important to acknowledge the gap between business lobbies’ rhetoric in promoting the bills and the true short-term intentions of many business leaders.

Perhaps most disappointing in the tax debate has been the disregard for evidence. In the HBS classroom, we are taught the value of serious, unbiased analysis. But the discourse around this bill has defied what learn about the responsibility of managers to think critically and incorporate data in decision-making. The lies from the President and Congress about a plan that “pays for itself” and doesn’t advantage the wealthywould have been bad enough. But many business leaders were complicit in promoting false numbers and interpretations that mislead the American people about the true effects of this bill.

For instance, the Business Roundtable paid for internet ads that claimed “a competitive 20 percent corporate tax rate could increase wages sufficient to support 2 million new jobs.” When former Harvard President and US Treasury Secretary Larry Summers pointed out to the BRT that 2 million new jobs would likely reduce the unemployment rate below 3 percent — a level unseen in a half-century, he learned that the BRT’s “analysis” did not even attempt to incorporate any data or studies on hiring, employment or job creation. BRT members seem to have forgotten basic rules about financial models and assumptions from business school.

The Chamber of Commerce has not been immune from the “attack facts you don’t like” trend either.  After the nonpartisan Joint Committee on Taxation released analysis that contradicted Congressional Republicans’ claims that the bill would “pay for itself,” the Chamber’s chief economist released a piece lamenting the committee’s “epic fail” and inability to produce good dynamic analysis… just three years after he testified to Congress that the same committee “proved dynamic analysis of tax policy can be done credibly, refuting longstanding assertions to the contrary.”

The Wall Street Journal editorial page has helped to disseminate overly-optimistic estimates to the US business establishment. A letter to Secretary Mnuchin published there last week claimed annual growth effects at least triple those found by independent models and misrepresented the academic studies it cited. In contrast, the Chicago Booth survey of a panel of bipartisan economists, comprised of Nobel Prize winners, past Presidents of the American Economics Association, former members of the Council of Economic Advisors, and editors of the leading journals, found only 2 percent agreeing that the proposed tax cuts will substantially increase GDP and not a single economist who said it would pay for itself.

There exist reasonable arguments to lower the US corporate rate, contingent on closing loopholes and finding the revenue to pay for it. But the way this particular legislation was designed and sold to the American people reflects a profound irresponsibility on the part of American business leaders. We are particularly troubled by the undue focus on the short-term at the expense of a careful consideration of the longer-term. Short-term windfalls may be attractive to CEOs and their shareholders, but Finance 1 teaches first-year MBA students the lessons of the costs of leverage – costs that will be born by our generation over the decades to come in the form of slower growth, reduced government services, and increased inequality.  

Many in the business community are quick to bemoan “broken government.” Less discussed, however, is that trust in business and CEOs has fallen at about the same clip as trust in government. Unfortunately, watching the business community react to this tax plan, we’ve empathized with the millions of Americans who doubt whether capitalism really has their interests at heart. The lack of discourse amongst the HBS student body on a policy that will have such a large impact on our countries and companies is similarly concerning.

That said, we remain optimistic that the business community’s instinctive short-termism can be reversed.  Some CEOs have spoken up, defying personal and professional risk. Peter Peterson, co-founder of Blackstone, is one good example. We should listen carefully to his plea: “Mortgaging our fiscal future for trillions in temporary tax cuts will hurt our economy over time, and every C.E.O. should know that. True business patriots need to advocate for their country as well as their company.”

Indeed, the prospects for American businesses are closely intertwined with the prospects for the country as a whole. Let the passage of this bill serve as a call to action for our next generation of business leaders. We must do better – America’s future depends on it.

Reilly Kiernan (HBS ‘18, HKS ‘18) comes to HBS from the Bridgespan Group in NYC, where she was a social impact strategy/management consultant. She is currently Co-President of the Social Enterprise Club at HBS and can be found running and/or punning.

Rachel Lipson (HBS ‘18, HKS ‘18) arrived at HBS en route from the World Bank in Washington D.C.  In a previous life, she was a writer for the Harvard Crimson and Let’s Go Travel guides. She currently works as a Research Assistant at the Mossavar-Rahmani Center for Business and Government.  As a New Yorker, she bemoans both the sports fans and lack of good bagels in Boston.