May 9, 2023
May 9, 2023
President Biden has called on Congress to raise the statutory limit on the amount of debt the federal government can issue, as it has more than 100 times since World War II. Congress raised the debt limit three times during the Trump administration, including twice when Republicans controlled both chambers of Congress. Those were “clean” debt limit increases, meaning no one attempted to force former President Trump to make concessions in order to raise the debt limit because lawmakers of both parties acknowledged that allowing the country to breach the limit would lead the federal government to default on its debts, unleashing financial havoc beyond our imagination.
But now House Republicans pretend things are different. House Speaker Kevin McCarthy has insisted that his members will not vote for a clean increase in the debt limit but will instead demand dramatic budget cuts in return for increasing the limit. The bill they passed in April would provide a short-term increase in the debt ceiling but would also dramatically cut public investments that Americans need to work their way into the middle class while scaling back efforts to ensure that the richest Americans pay their taxes.
Recently Rep. Jared Golden (D-Maine) has suggested that Democrats and Republicans should negotiate a deal, one that could include tax increases for the rich and corporations to reduce the budget deficit.
Congress absolutely should raise taxes on the rich and on corporations to generate revenue and improve the fairness of our tax code. President Biden has several proposals to do exactly that. But this is an entirely separate question from whether we should raise the debt ceiling to honor the debts the nation has already incurred and avoid an economic apocalypse.
Raising the Debt Ceiling is About Facing Decisions Congress Already Made, Not Future Budgets
The debt ceiling as it exists today was actually created to make it easier, not harder, for the federal government to issue debt. Before 1917, Congress would enact legislation allowing the issuance of bonds to fund a particular project with specific conditions. Lawmakers came to see this as onerous and in 1917 enacted legislation that allowed the federal government to issue bonds for all purposes up to a level that seemed appropriate at the time. And Congress has since increased that debt limit many times.
But now Congress has created a bizarre situation by legislating a federal debt limit and then enacting legislation that requires borrowing beyond that amount. The tax laws enacted by Congress do not raise enough revenue to cover the spending provisions enacted by Congress. The mismatch between the two is the federal deficit and requires government borrowing and will soon require borrowing beyond the current debt ceiling.
If Congress does not raise the debt ceiling, the President has no way of executing all the laws that Congress has enacted. Either the President stops enforcing the debt ceiling, or he stops enforcing the various spending laws – laws requiring payments of everything from Social Security benefits to soldiers’ salaries to interest payments for lenders. And there is a strong argument that the latter option, failing to carry out spending laws, is barred by the Constitution’s requirement that “the validity of the public debt of the United States… shall not be questioned.”
Rather than creating a bizarre constitutional crisis (and chaos in financial markets) with its conflicting laws, Congress should raise the debt ceiling. Doing so really has nothing to do with Congress’ tax and spending decisions going forward, but instead is about honoring the decisions it has already made, paying the bills it has already incurred.
Of course, some current members of Congress might object that they are not the same members who racked up that debt. But they are not entirely different people, either. All current members of the House GOP leadership were in Congress back in 2017 when Republicans enacted the Trump tax cuts without a single Democratic vote, despite projections that it would increase the debt by $1.5 trillion over a decade. Of the 221 Republicans in the House today, 87 were also in the House back in 2017. This includes Jason Smith, the Ways and Means Committee Chairman who has jurisdiction over tax legislation that could reduce the budget deficit but who instead supported the Trump tax cuts.
These people are threatening to breach the debt ceiling – and thus cause economic cataclysm – unless other people make sacrifices to pay for the debts they (at least partly) racked up. One thing they were right about during the Trump administration is that the need to increase the debt limit is entirely separate from questions of how much revenue we should collect or how much money we should spend.
Congress Has Many Options to Improve Our Fiscal Health by Raising Revenue
Let’s assume, against all evidence, that Congressional GOP leaders really are concerned with the budget deficit. What options to reduce that deficit have they not considered? Options that would raise revenue.
And lawmakers should consider these options because the various tax cuts enacted by Congress over the last several years are a root cause of the budget deficits we face today. A recent report from the Center for American Progress explains that as recently as 2012, the Congressional Budget Office projected the federal government would indefinitely collect more than enough revenue to cover federal spending outside of interest payments on the debt, meaning the debt would fall over time.
But the situation changed that year when Congressional Republicans pushed to extend the Bush tax cuts past their expiration date at the end of 2012 and then-President Obama compromised and made some of the tax cuts permanent. The fiscal outlook further deteriorated with the enactment of the Trump tax cuts in 2017 (which House Republicans propose to make permanent and which mainly benefits the richest households).
So, it would be entirely reasonable for lawmakers to consider ways to reverse this trend and raise taxes, at least for the richest Americans and profitable corporations. A recent ITEP report explains that President Biden’s most recent budget plan has plenty of options along these lines.
Partially Reverse Trump’s Corporate Tax Giveaways: $1.3 trillion
Instead of extending all the temporary parts of the Trump tax law as Republicans propose, Congress should move in the opposite direction and scale back the permanent parts of the 2017 law. The most important of the permanent provisions are the law’s corporate tax cuts. The 2017 law slashed the corporate tax rate from a progressive structure with a top rate of 35 percent for the very largest corporations to a flat rate of 21 percent.
Conservative lawmakers claimed this was a necessary reform to make the United States more competitive. In reality, most corporations paid effective rates far below the top statutory rate due to the numerous deductions and credits written into the tax code. The United States was a highly desirable place to do business before the Trump law, and it doesn’t appear that has changed much. President Biden proposes to partly reverse that cut by raising the corporate income tax rate to 28 percent, which would raise more than $1.3 trillion over the next decade.
Make Multinational Corporations Pay What They Owe: $1.3 trillion
Next, Congress could enact legislation to implement the global agreement to end offshore corporate tax dodging. Recognizing the international tax system is ripe for abuse, the White House has proposed reforms that would raise an additional $1.3 trillion. Multinational corporations slash their tax bills by opening P.O. boxes in tiny nations with negligible tax rates and then telling the IRS that’s where they earned all their income. Some 18,000 corporations are “headquartered” in a single five-story building in the Cayman Islands, and in 2019, American corporations claimed to have earned profits equaling more than ten times the size of the entire nation’s economy there. It is a preposterous abuse of international laws, and Congress could end it tomorrow.
End the Advantageous Tax Treatment of Millionaires and Billionaires: $650 billion
Congress could also raise another $650 billion by requiring the super wealthy to pay taxes on their income every year just like everyone else. Unlike normal Americans who pay taxes with every paycheck, the uber-rich get to choose when they pay taxes. Logically, a billionaire whose net worth increases from one year to the next has received income, but often this income is asset appreciation that escapes taxation under the current rules. Taxes are due only when the asset generating the income is sold. Even worse, billionaires like Elon Musk can take loans against their assets to buy things like social media companies and then tell the IRS they never received any income. Even when they sell assets and realize the profits as income, it is taxed at a lower rate than income from work. As insane as it sounds, the tax code often asks people who work 50 or 60 hours a week to provide for their families to pay higher tax rates than uber-wealthy investors who make money by simply having money.
Stabilize Medicare for the Next Generation: $650 billion
The White House also has a plan to protect one of the nation’s most essential programs for retirees. The President has proposed raising Medicare taxes by 1.2 percentage points for people making more than $400,000 and closing a loophole that rich business owners use to avoid paying Medicare taxes altogether. These two reforms would ensure the solvency of the Medicare trust fund for another 25 to 30 years past current estimates. It’s a commonsense proposal, yet Republican lawmakers (who insist they will not cut Medicare) have said the reforms “will not see the light of day.”
These are just the biggest revenue-raising proposals in Biden’s plan. In total, the budget blueprint would raise nearly $5 trillion in new revenue over the next decade—which is coincidentally the exact amount that the Director of the Congressional Budget Office says is necessary to bring the budget shortfall back to historic levels. To be clear, there should be no debate over whether the government will pay the bills Congress has already incurred. But if Congressional Republicans are remotely serious about lowering the deficit, then they should abandon their push for lower taxes and acknowledge that revenue is at least part of the solution.