Deficit reduction and economic growth.

Analysts agree that in the November election Americans voted for change. FEI members have long believed that there is a need for change in national policy to promote long-term economic growth and to provide the structural foundation for achieving clearly defined national goals. To help in the debate over just what changes are needed, FEI's Executive Committee in January approved two position papers--on economic growth and health care reform--prepared by ad hoc committees composed of representatives from relevant FEI technical committees. These position papers have been distributed to members of the Administration and to Congress, and the key recommendations were published in the February 1993 Briefing.

FEI believes that the federal deficit must be eliminated if the United States is to enjoy long-term growth. We do not expect this to be accomplished overnight, and we do not propose specific spending cuts or tax increases. Instead, FEI proposes basic structural reforms in tax policy, government spending, budget process reform, regulation and federal financial management reform, a continuation of our longstanding view that this would eliminate much waste and abuse. The most controversial elements of the leading deficit reduction proposals, both within FEI and in the nation, are taxes and spending.

On tax policy, FEI's position maintains that there are three major flaws in the current tax system--its complexity and the enormous cost of compliance, its bias against savings and investment, and its bias against worldwide competitiveness for U.S.-based firms. FEI recommends that the existing federal income tax system be modified to minimize complexity and costs and to remove these biases, either by improving the current system or by replacing income as a basis for taxation.

Improving our tax system will not be easy. Economists have argued over the best type of tax system for more than 200 years. Adam Smith, in his 1776 Wealth of Nations, propounded a progressive income tax. In 1822, David Ricardo seems to have agreed, writing, "Almost all taxes on production fall finally on the consumer." But, by 1871, John Stuart Mill proposed that, "The proper mode of assessing an income tax would be to tax only the part of income devoted to expenditure, exempting that which is saved?" Perhaps the most cogent statements were made by Winston Churchill in 1937 when he stated, "There is no such thing as a good tax," and by Robert P. Crum in 1982 in the British Accounting Historians Journal, where he wrote, "The most 'equitable' tax is the one someone else pays." Despite the complexities, we believe that the three major flaws FEI has identified in the current U.S. tax system must be addressed before the system suffocates us.

Government spending is another area of continued controversy. Former British Prime Minister Sir Anthony Eden once said, "Everybody is always in favour of general economy and particular expenditure." That is certainly true today. Although FEI's proposal suggests several areas where spending should be reduced, a major recommendation supports the establishment of a blue-ribbon Program Review Committee, similar to the Base Closing Committee, to provide an effective, bipartisan review of all federal government spending programs. FEI's recommendations also include an overall cap on the growth of government spending based on the Consumer Price Index and line-item veto authority for the president.

Moreover, unless the spiraling costs of health care are brought under control while simultaneously providing for quality care and access, neither tax changes nor spending cuts will eliminate the federal deficit. FEI's principles for health care reform provide a good basis for judging the effectiveness of proposals that will be introduced in Congress.

I urge you to participate in the debate on these critical issues. As financial executives, we are uniquely qualified to address federal fiscal policy issues and it is imperative that we each make our views known.