Economic Reality – Based on Facts

Heather Cox Richardson

Both President Joe Biden and House speaker Kevin McCarthy (R-CA) have stated publicly that the U.S. will not default. They are negotiating over the budget. For my part, I’ve started to wonder if the whole debt ceiling crisis isn’t about Republicans’ determination to cut taxes for the wealthy at all costs. 

When Ronald Reagan called for tax cuts in 1980, he argued that tax cuts would concentrate money in private hands, enabling investors flush with cash to build the economy. That growth would keep tax revenues stable even with the lower rates. That was the argument, but it never came to pass. In fact, a 2022 study by political economists David Hope and Julian Limberg shows that “tax cuts for the rich…do not have any significant effect on economic growth or unemployment,” but they do “lead to higher income inequality in both the short- and medium-term.” 

Indeed, Estelle Sommeiller and Mark Price of the Economic Policy Institute, an independent, nonprofit think tank, noted in 2018 that 1% of all families in the U.S. take home 21% of all the income in the U.S., making 26.3 times more than the bottom 99%, whose average income is slightly more than $50,000 a year. On average in the U.S., someone would need an annual income of slightly more than $420,000 to be a member of that top 1%. In 2020, annual wages for the top 1% grew by 7.3% while those in the bottom 90% grew just 1.7%. 

A 2020 study by Carter C. Price and Kathryn A. Edwards of the RAND Corporation showed that the changing economic distribution systems of the past forty years have moved a staggering $50 trillion upward, out of the hands of the bottom 90% of Americans. (The national debt is currently about $31.5 trillion.)

Nonetheless, today’s Republicans continue to insist that cutting taxes promotes growth. Today, Representative Bob Good (R-VA) talked over journalist Katy Tur to defend his support for extending the Trump tax cuts, which are due to expire in 2025 and which the nonpartisan Congressional Budget Office estimates will add $3.5 trillion to the debt. Good insisted that tax cuts are “incentivizing the right things.” 

Leaving the White House today, McCarthy told reporters that he would not entertain rolling back the 2017 Trump tax cuts for the wealthy and corporations. “[T]he problem is not revenue,” he insisted. “The problem is spending.” 

But the Trump tax cuts and Trump’s increased spending even before the pandemic ultimately added $7.8 trillion to the national debt, about $23,500 for every person in the country. The increase in the annual deficit under Trump was the third-biggest increase of any administration, relative to the size of the economy. He was beaten out only by George W. Bush and Abraham Lincoln. Bush, of course, led the U.S. into two foreign conflicts that were financed almost entirely through debt (in the past, the U.S. paid for war through taxes and war bonds), after Congress cut taxes by about 8% for the wealthiest Americans. Lincoln fought the Civil War. 

“It’s not that Americans are taxed too little, it’s that Washington spends too much,” Russ Vought, Trump’s acting budget director, wrote in 2019. He was defending Trump’s 5% budget cuts to nondefense discretionary spending. 

President Biden’s 2024 budget proposes to reduce the federal deficit by $3 trillion over the next decade by raising taxes on those who make more than $400,000 a year. His budget would effectively repeal the Trump tax cuts for the wealthy, restoring the top tax rate to 39.6% rather than the 37% the 2017 cuts established. It would also raise corporate taxes from 21%, to which the 2017 tax cuts dropped them, to 28%, lower than the high of 35% before the Trump tax cuts. 

Biden’s budget also calls for taxing capital gains at about the same rate as income for those making more than $1 million, and it calls for a new tax on unrealized capital gains. It also seeks to close loopholes that enable high earners to avoid taxes. Funding for the Internal Revenue Service (IRS) that was passed in the Inflation Reduction Act will enable the IRS to go after tax cheats who make more than $400,000 a year, netting an estimated $204 billion through 2031. 

But the Republicans say they will not agree to any tax hikes of any sort, and the right-wing extremists in the Freedom Caucus have said they would not agree to anything but the bill McCarthy muscled through the House by promising it would never become law. That bill, called Limit, Save, Grow, would cut discretionary government programs by at least 18%—more if Social Security, Medicare, and veterans’ benefits aren’t included. “My conservative colleagues for the most part support Limit, Save, Grow, and they don’t feel like we should negotiate with our hostage,” said right-wing Representative Matt Gaetz (R-FL).

As Catherine Rampell of the Washington Post pointed out last week, the bill also forces Congress to approve every “major” regulation proposed by a government agency, with the recognition that Congress is unlikely to agree to any such regulation, thus unraveling the federal government.

Senator Rick Scott (R-FL), who before the 2022 election called for sunsetting all laws every five years, forcing Congress to repass all discretionary spending, today fell back on the idea that Democrats calling for addressing the deficit through taxation are socialists. Poking fun at the recent travel advisories by LGBTQ, immigrant, and Black rights organizations warning against visiting Florida, he issued a “formal travel advisory” for “socialists” “in direct response to the Biden Administration attempts to erase capitalism and the system that has brought prosperity to Florida and the entire United States.” 

And yet it was the Republican Party that originally established the pattern of turning to increasing revenue to enable the government to meet its financial obligations, a pattern members of both parties relied on until 1981. Faced in 1861 with funding the Civil War, members of the Republican Party invented the U.S. income tax and graduated it to make sure that “the burdens will be more equalized on all classes of the community, more especially on those who are able to bear them,” as Senator William Pitt Fessenden (R-ME) put it.

Justin Smith Morrill (R-VT) agreed. “The weight [of] taxation must be distributed equally,” he said, “Not upon each man an equal amount, but a tax proportionate to his ability to pay.” The government had a right to “demand” 99 percent of a man’s property for an urgent necessity, Morrill said. When the public required it, “the property of the people…belongs to the Government.”

Far from objecting to taxes, Americans asked their congressmen to raise them, out of concern about the growing national debt. In 1864, Senator John P. Hale (R-NH) said: “The condition of the country is singular…I venture to say it is an anomaly in the history of the world. What do the people of the United States ask of this Congress? To take off taxes? No, sir, they ask you to put them on. The universal cry of this people is to be taxed.”

Those taxes helped to pay for the war and, after it, to repay the debt. And in 1866, when Confederate-sympathizing Democrats tried to undermine support for the government by changing the terms of that debt to make it less valuable, Republicans wrote into the Constitution that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

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