The Internal Revenue Code is always a hot topic, but the dialogue about the Code is now over the top.  Last week, a popular, nationally-syndicated talk show host echoed the claim of many:  that the complexity of the Code is the root cause of our current financial mess.  He’s dead wrong.  But he’s no more wrong than those who think that the cure to our problems is changing the Code to take a bigger bite from the rich or the crowd who claims that the ultimate fix is broadening the tax base and dropping the rates.

The Tax Code is always center stage.  It’s the tool that the federal government uses to generate revenue.   It allocates the burdens of government, declares winners and losers, and provides financial incentives and disincentives for specific actions.  Change is always the name of the game with the Code; a bill approved by the Congress and signed by the President can instantly reallocate the burdens and scramble the incentives and disincentives.  So when things go bad, often the Code becomes the first and primary source of attack.  Many actually perceive misfortune as an opportunity for Code changes that will benefit them.

But as enticing as it is to tinker with the Code, we should not fool ourselves into thinking that the Code is the primary cause or the ultimate cure of the problems we face today.  At this juncture, it’s a mistake for us to assume too much from changes to the Code.  The pro-business Bush tax cuts have now been around for a long time (some 10 years, the rest eight years).  Looking back, no one can responsibly claim that stronger or weaker business tax incentives would have eliminated a protracted recession and a pitifully anemic recovery that have delivered chronic unemployment numbers exceeding nine percent, brought many financial institutions to their knees, and forced countless businesses to close their doors.

For more than two decades, the world markets have been fueled by consumers in developed countries progressively spending at a faster pace. It was done with leverage – debt backed by assets that were supposed to continually grow in value and support perpetual borrowing and spending increases. The leverage occurred at all levels; government debt escalated; financial institutions leveraged derivative-based securities to the hilt; subprime mortgages triggered by government mandates pushed millions of families to buy homes they couldn’t possibly afford; and households pumped up debt by refinancing based on escalating home prices and using easily available credit card leverage.

Then the momentum shifted. Asset values turned and headed in the wrong direction, spiraling down as demand shrank and fire sales escalated the descent. The largest financial institutions – those “too big to fail” – saw their balance sheet values crumble. They were soon on life support, begging the government for a lifeline.  The value of just about every home in America plummeted, leaving millions of Americans underwater, with more debt than assets.  The whole private sector was forced to deleverage by reducing debt and cutting spending.  The resulting massive drop in demand forced employers to slash payrolls, which accelerated the drop in demand.

The government and the Federal Reserve kept money flowing by cutting short-term interest rates to nearly zero, driving annual federal deficits to unsustainable trillion-dollar levels that no one could have imagined just a few years ago, and pumping trillions into the economy through the Federal Reserve’s “quantitative easing” programs.  The first signs were positive as financial spreads bounced back to normal, but then Ireland, Greece, Iceland and others hit the wall, and everyone began questioning and fearing the risks of massive, unsustainable government leverage. Meanwhile, nothing has seriously reduced the horrendous unemployment rate and associated pain experienced by millions of America’s businesses and families.

The core problem, of course, is a huge drop in global demand for just about everything. Businesses, plain and simple, need more customers.  Our hope now is that the drop in demand is bottoming out, but it will take time and the right environment before companies have the confidence to start hiring real numbers.  Many will fear that positive signs are nothing more than short-term blips triggered by government manipulation.

These experiences have once again confirmed that unrestrained, irresponsible asset-based leveraging is a double-edged sword; it has the capacity to either fuel wonderful growth or quickly put large financial institutions and millions of businesses and families on their backs.  Debates will forever rage over the effectiveness of various government actions designed to help offset the massive private sector deleveraging and the debilitating drop in global demand.  But there is little doubt that, when it comes to job creation, aggressive, creative government monetary policies are no substitute for new technologies and market opportunities that push American companies to build products and deliver services that the world wants and is capable of buying.  And, to that end, there appears to be widespread agreement on one basic point: America’s private business sector is the only hope for any real recovery.

To get things moving in the right direction, bold actions must be taken to restore a confidence and certainty that will encourage growth in the private sector.  This will never get done if we continue to pull from the private sector to grow government.  Today, this pulling does not occur through taxes (our taxes are at historic lows); it’s done with mammoth debt that threatens the future and breeds an impossible uncertainty that drives businesses to the sidelines. The uncertainty is compounded by an unprecedented regulatory push that is scaring businesses to their core.  Boeing, Gibson Guitar and Solyndra are just a few examples of a broad sweep of actions that leave no doubt that the most powerful forces in Washington are beholding and committed to labor union bosses and anti-business environmentalists.

Looking forward, can the Code play an important role in helping us out of the mess?  Sure.  We can promote certainty and confidence by eliminating the temporary extensions and short-term quick fixes in the Code, rejecting all additional demands for more short-term quick fixes, and establishing permanent pro-growth tax incentives.  Today, not a single business in American knows what the tax picture will be in 2013 and beyond.

But these Code fixes, while essential, are not a cure.  They stand down the list behind four other more compelling priorities. First, the regulatory course must be reversed.  We will never get on track so long as the government pushes a political agenda by attacking successful businesses and flushing billions of taxpayer dollars on fantasy ventures like Solyndra.  Second, a smart and profitable development of our natural resources to fast-track real energy independence must become a driving force for immediate job creation and improved global competitiveness.  Third, the fear and uncertainty of the pain that healthcare reform now promises in the years ahead, just around the corner, must be mitigated or eliminated.  And fourth, above all a smart reform of our senior entitlement programs and intelligent discretionary spending caps must be the cornerstones of a new long-term financial plan that confirms to all that we have reversed course and, once again, are on a sound, sustainable financial path.

September 19, 2011