Executives Cheer Bush but See a Need for a Tax Increase

On the morning after, America’s business community had a rather mixed reaction to George Bush’s victory in the presidential election. There was, initially, a collective sigh of relief that Michael S. Dukakis had not won, followed almost immediately by consternation about the economic challenges Bush will face.

The nation’s business leadership had generally supported Bush during the campaign, both out of a sense that he represented an extension of the pro-business Reagan era and out of a fear that Dukakis favored much greater government intervention in the economy.

Yet with a huge federal budget deficit staring the nation in the face, many in the business community are disturbed that Bush has taken such a hard stance against a tax increase.

Corporate executives lament that the deficit was not addressed more forcefully by Bush during the campaign and say Bush has painted himself in a tight corner on taxes and fiscal policy.

And business doesn’t seem to be in the mood to get in the corner with him.

“I would say he’s got to raise taxes, but he has already pledged not to,” complained Robert E. Mercer, chairman of Goodyear Tire & Rubber. “I see the need for a tax increase, but I don’t see how he can do that--I see the need for his credibility to remain intact more than for a tax increase.

“George can say he’s not for a tax increase, but if you had a responsible Congress, they would shove something through,” Mercer added. “They ought to do the tax increase even over a veto to get us out of this thing.”

Indeed, both in corporate suites and on Wall Street, there seems to be a growing belief that Bush will soon be forced to find a way to finesse his way out of his tax pledge; perhaps, some speculate, through the old euphemism of “revenue enhancements.”

Philip M. Hawley, chairman and chief executive of Carter Hawley Hale Stores, said he expects that individual income tax rates will “stay very much where they are” under Bush. Still, he added, “ I’m much less sure about additional charges coming in under different labels.”

“Anybody who knows how to do arithmetic knows there has to be a tax increase, and some of the proposals we’ve heard, including Bush’s ‘flexible freeze,’ are phony,” observed Lawrence Chimerine, chairman of WEFA Group, an economic forecasting firm. “So I think there are two concerns in the business community: that Bush has locked himself in so hard that he can’t get out and that we will have a gridlock with Congress.”

Yet if Bush and the Democrat-controlled Congress find themselves in a stalemate on the budget, the financial community may finally demand a tax hike, some on Wall Street say. Indeed, the financial markets gave Bush a tepid welcome as President-elect Wednesday, displaying what some analysts believe is growing concern over Bush’s unwillingness to deal with the deficit and tax issues.

To be sure, Wall Street had already discounted a Bush victory in earlier trading sessions and undoubtedly would have reacted more sharply to a Dukakis upset; still, the Dow Jones index dropped by more than nine points Wednesday, while interest rates rose and bond prices fell.

“I think there would be more of a revolt on Wall Street if there is not a tax increase than if there is one,” observed Michael Lipper, president of Lipper Analytical, a New York research firm.

Even those executives who don’t want a tax hike--and there is still not a solid consensus on the issue in the business community--feel that higher taxes are inevitable.

“You have to look at the country he faces,” added Joseph P. Pinola, chairman and chief executive of First Interstate Bancorp in Los Angeles. “It’s awfully hard for me to see how it’s going to be done without a tax increase.”

But business--like virtually every other constituency--wants a tax hike that won’t hit it directly. Many business leaders favor a consumption-based tax that would tax consumer spending rather than personal or corporate income.

Others suggest sophisticated trade-offs to help business. Michael Duval, managing director of First Boston, an investment banking firm, suggested that Bush agree to eliminate the deductibility of interest payments on “junk bonds” and other corporate debt in order to win congressional approval for Bush’s proposed reduction in capital gains taxes for business.

Yet even some economists and business leaders admit that corporate America’s view on taxes may be politically unrealistic and that business had better be ready to share in the sacrifice if it is planning to lobby for a tax hike.

“The business people mostly want him to raise taxes because they think it won’t be their taxes that will go up,” said Jerry Jordan, chief economist at First Interstate. “There is a belief in the business community that since we got hit on taxes in 1986 (when some corporate taxes were increased) that it should go to the consumers this time.”

Despite concerns over Bush’s tax and fiscal policies, the overwhelmingly Republican business community stood by their party’s candidate during the campaign. For many, they did so because Dukakis was an unknown and seemed too liberal.

Indeed, Bush’s ability to paint Dukakis as someone who was out of the mainstream of politics apparently worked with business, just as it did with so many other voter groups; it made Bush appear to be the lesser of two evils.

Mercer of Goodyear, for instance, supported Bush even though he failed in personal discussions to win the Vice President over to his view that new curbs are needed to stop the current wave of hostile takeovers and leveraged buyouts.

“Business leaders were very worried that they would be saddled with the cost of Dukakis’ social programs, and those worries were more important to them than their concerns about the budget deficit,” said Norman Robertson, chief economist at Mellon Bank in Pittsburgh.

“I don’t think the worries over the deficit among business leaders today would be greater than the relief they are feeling over the fact that we didn’t elect a president who would have added to their business costs in a very significant way.

“There were broad philosophical differences between Bush and Dukakis,” he added. “Dukakis in the closing weeks had swung more to a protectionist view and had begun to make statements that were hostile to foreign investment. So I think the feeling of relief would be dominant in the business community.”

James Risen reported from Detroit and Jane Applegate from Los Angeles.