There are many reasons why Dick Cheney is considered, arguably, the least popular politician of the last generation. The former vice-president, who served in four Republican administrations, was the single biggest proponent of torture policies, outed an undercover CIA spy, and told a senior member of the United States Senate to “go fuck [himself].” He also shot a donor in the face during a hunting trip. In fairness to Cheney, the shooting was accidental, but it certainly added to this his legend as the most sinister figure in Washington. Yet, even the most ardent Cheney detractors, of which I am one, must admit that when he infamously declared that “deficits don’t matter,” it might have been the most honest and prophetic statement that man has ever made.
Unless you have had your head firmly entrenched in the sand over the past four years, you have probably heard that this country has a bit of a debt problem. Something in the neighborhood of $16 trillion. The debt has become such a paramount political issue that it was the basis of a grassroots, populist movement, The Tea Party, that spearheaded the biggest shift in congressional power (in favor of Republicans) since 1994. The media have similarly devoted many hours to analyzing and deploring the “massive” budget deficit. And with another fight over the debt ceiling looming, the fixation with deficit is going to get worse before it gets better.
I’m not here to debate the merits of whether deficits matter in terms of sound economic policy. I will leave that to Nobel Prize winning economists like Paul Krugman and Joseph Stiglitz. However, I can say with some degree of certainty that as a matter of politics, deficits don’t matter to the American people. Sure, we complain about the deficit in theory, but in practice, we’re not prepared to take steps necessary to address it in a serious and concerted manner. If we were, the solution is relatively simple: We need to raise taxes on everyone.
It is a fairly simple proposition. The federal government, much like a business, takes in revenue and spends it. And how the government raises revenues is through taxation. In fiscal year 2011, the federal government spent $3.6 trillion. Of that $3.6 trillion, $2.2 trillion was financed by federal tax revenues, and $83 billion by excess profits on assets held by the Federal Reserve. The remaining $1.3 trillion, which constitutes the deficit, was financed by borrowing.
It would follow, then, that if we wished to reduce and/or eliminate that deficit, then we would need to do two things: cut spending and raise taxes. There is a general consensus that spending cuts are necessary. It’s just a matter of what programs will be cut and by how much. Those critical details can and will be worked out. Raising taxes, however, is a different matter entirely. One party doesn’t want to raise taxes at all and the other only wants to raise taxes on the top 1-percent of income earners. Neither scenario is sufficient. If this deficit is, as advertised, a crisis of epic proportions, then it requires shared sacrifice on the part of all Americans. Otherwise, we all need to cease and desist complaining about it.
I make this policy recommendation secure in the knowledge that I will never seek public office (and if I did, my opponent would make me rue the day I ever wrote this). Raising taxes, particularly on the middle class, is the third rail of politics. Indeed, the last presidential candidate that deigned to talk about across-the-board tax increases was Walter Mondale, who ran against President Ronald Reagan in 1984. In his acceptance speech at the Democratic National Convention in San Francisco, Mondale stated:
The American people will have to pay Mr. Reagan’s bills. The budget will be squeezed. Taxes will go up… It must be done. Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.
For his candor, Mondale was treated to one of the biggest landslide losses in American history. Reagan won 49 out of 50 states and 525 of 538 Electoral College votes. Mondale was ultimately vindicated, as Reagan ended up increasing taxes in 1984, 1985, 1986, and 1987. In total, Reagan actually raised taxes 11 times during his two terms in office. Of course, this fact was a small consolation prize to Mondale, who would never again hold public office.
Despite his numerous tax increases, Reagan still managed to nearly triple the federal debt, which went from $997 billion in 1981 to $2.85 trillion in 1989 due, in large part, to increased federal spending on defense. In his farewell address, Reagan cited the deficit as one of his biggest regrets as president. The task of dealing with this deficit was left to his vice-president and successor George H.W. Bush. During the 1988 presidential campaign, Bush proclaimed that he would not raise taxes under any circumstances (“Read my lips, no new taxes”). Once in office, however, Bush was concerned about the impact of the yawning deficit on the United States’ standing as a world leader. He confided to his journal that raising taxes “could mean a one term presidency, but it’s that important for the country.” To his credit, Bush compromised with congressional Democrats and broke his pledge not to raise taxes, incurring the wrath of his own party and the American people. As he predicted, Bush lost his re-election bid to Bill Clinton in 1992.
In 1993, President Clinton proposed raising the top tax rate from 31-percent to 39.6-percent (along with various other tax increases) to help close the Reagan/Bush deficits. Every single Republican in Congress voted no (as did a number of Democrats). The Republicans also predicted massive jobs losses. The legislation passed, by the narrowest of margins, and the tax increase went into effect. The results: 23 million jobs were created by the end of Clinton’s second term and a budget surplus. But, in the interim, there was a hefty political price to pay for the Democrats. They suffered historic losses in the 1994 mid-term elections. The Republicans gained 54 seats in the House and 8 seats in the Senate to win control of both chambers of Congress for the first time since 1952.
Recognizing the toxicity of even hinting at raising taxes and determined to avoid Mondale and Bush’s political self-immolation, both parties have learned to tread very lightly on the subject of taxes. In fact, they have become obsessed with cutting taxes.
President Obama often touts the fact that he has cut taxes on small businesses 18 times. Roughly one third of his controversial $862 billion stimulus package went to tax cuts. The president also extended the Bush Tax Cuts, which contained over $850 million in tax cuts, for two years in December 2010. The same deal included a one-year Social Security tax cut, tax breaks for college students, and extensions of the earned income tax credit and $1,000-per-child tax credit. The Bush Tax Cuts were set to expire at the end of 2012 but, like clockwork, the president and Congress agreed to extend them permanently for over 99 percent of Americans.
In addition, the president wants to reduce the top corporate tax rate from 35 percent to 28 percent, despite the fact that it is estimated that non-financial U.S. corporations have over $2 trillion in cash reserves and another trillion held overseas. More than two dozen Fortune 500 companies paid no federal income taxes between 2008 and 20011; others actually received rebates from the government. This begs the question: Do these corporations really need another tax break? Perhaps the answer is yes, but it will likely come at the expense of the deficit.
Cutting taxes has long been part of conservative orthodoxy. The whole theory of trickle-down economics, to which Republicans have sworn fealty for the past 30 years, is based on the notion that tax cuts to businesses and the wealthy (or “job creators” as they are known in Republican parlance) will lead to increased economic growth.
Republicans are so doctrinally devoted to the tax cuts that, as of November 2012, nearly every Republican in Congress—238 of 242 House Republicans and 41 out of 47 Senate Republicans—has signed a “Taxpayer Protection Pledge” to oppose any increases in marginal income tax rates for individuals and businesses, as well as net reductions or eliminations of deductions and credits without a matching reduced tax rate. Signatories of the pledge, which was drafted by Grover Norquist of Americans for Tax Reform, includes the Speaker of the House John Boehner, Senate Minority Leader Mitch McConnell, presidential nominee Mitt Romney and vice-presidential nominee Paul Ryan. How effective has the pledge been in uniting Republicans against raising taxes? Until the recent fiscal cliff deal, which raised taxes on individuals making over $400,000, no Republican in Congress had voted for a tax increase since 1990 – a period of over 20 years.
However, there is ample evidence debunking the theory that tax cuts spur economic growth. The highest period of economic growth in U.S. history (1933-1973) coincided with the highest tax rates on the rich: 70 to 91 percent. When George W. Bush was elected in 2000, he and the Republicans in Congress initiated two rounds of tax cuts: $1.4 trillion in 2001 and $550 billion in 2003. The 2003 tax cut was the first time in American history that taxes were cut during a war (much two less concurrent wars). Both tax cuts, along with the unfunded wars in Afghanistan and Iraq and the similarly unpaid Medicare prescription drug program, eradicated the budget surplus inherited from Clinton. Furthermore, according to the Wall Street Journal, Bush had “the worst track record for job creation since the government began keeping records.” He created only three million jobs in eight years in office, leaving his successor with a $1.2 trillion deficit for 2009 and the worst recession since the 1930′s.
As if we needed more evidence of the failure of trickle-down economics, the Congressional Research Service, which functions as the non-partisan public policy research arm for members of Congress, recently completed a report that found no correlation between top tax rates and economic growth and job creation. However, the report was never officially released because Senate Republicans raised concerns about its findings and tone.
Republicans are often lampooned for their unwavering commitment to cutting taxes. However, if people were to sift through the rhetoric, they would quickly realize that there is very little daylight between the parties on the issue of taxes. The only point on which they are discordant is with respect to upper-income earners.
The Democrats have carefully carved out a narrow exception to the general aversion to tax increases. They target the wealthy. President Obama made raising taxes on the “wealthiest Americans” a major issue in the campaign. Exit polls indicate that the vast majority of Americans agree with this approach. More specifically, 60 percent of voters said they favor raising taxes on high-income Americans to help reduce the federal deficit. This kind of generosity with other people’s money is reminiscent of the famous quote from the late U.S. Senator Russell Long: “Tax reform means, ‘Don’t tax you, don’t tax me. Tax that fellow behind the tree.’”
Republicans, on the other hand, seem to regard taxes as an all or nothing proposition— either everyone, including the top 1 percent of income earners, gets a tax cut or no one gets a tax. They have shown that they are willing hold tax cuts for the other 99 percent hostage until they get what they want. Republicans used this strategy of brinksmanship to force President Obama to extend the Bush Tax Cuts for everyone in 2010 and to scuttle a deficit reduction deal during the debt ceiling negotiations in the summer of 2011.
It should be noted, however, that raising taxes on the “wealthy” is not a panacea for the deficit. In fact, the recent fiscal cliff deal, which raised taxes on those individuals making over $400,000 and married couples making over than $450,000, will actually add $4 trillion to the deficit over the next decade, according to the Congressional Budget Office. Also, even if we seized 100 percent of the 400 richest Americans’ combined net worth of $1.5 trillion in assets and income, it wouldn’t even cover 2011′s budget deficit of $1.6 trillion. Nevertheless,, the “rich” can and should pay more in taxes. They have done phenomenally well over the last 30 years, and if the deficit is the greatest challenge facing this country going forward, as many claim it is, then they certainly need to contribute more. But to suggest that the deficit can be solved without affecting the majority of Americans, as President Obama and Democrats come perilously close to doing, is grossly misleading. Additional measures will have to be taken.
Neither party will admit to one indisputable fact: Taxes are too low in this country. That’s right… you read that last sentence properly. Taxes are too low, despite protestations to the contrary. By any standard, Americans are now paying federal taxes at or near historically low levels. For example, in terms of tax brackets, top marginal rate in 1945 was 94 percent. It was at 70 percent as recently as 1980. Today, it stands at 35 percent. Overall, according to the Congressional Budget Office, the average federal tax rates in 2008 and 2009—at 18 percent and 17.4 percent—were the lowest in the last three decades. Also, in terms of the actual amount of federal taxes collected as a percentage of overall economic activity, tax revenue in 2011 equaled 14.8 percent of the national gross domestic product, the lowest level since 1950.
The weak economy is largely responsible for the low tax receipts, as incomes are down and unemployment is up. However, a growing number of tax cuts and tax breaks have also contributed. Although Mitt Romney was roundly criticized for saying it, there are, in fact, 47 percent of Americans who don’t pay any federal income tax at all. I’m not denigrating these people (unlike Romney), just simply stating a fact. Various credits, deductions, and exemptions cancel out all or much of the income tax they would otherwise owe. But, according to the Bureau of Economic Analysis, even if we include all taxes—federal, state, and local—the percentage of personal income that’s paid in taxes under President Obama is still at its lowest level since 1950.
The lack of tax revenue, combined with increases in spending, has required the federal government to borrow 40 cents for every dollar it has spent in recent years. Every politician within earshot of a microphone will tell us, over and over again, that this is an unsustainable course of action. Yet, for all of their lamenting of the deficit, they don’t want to take the steps necessary to directly address the problem. And neither do the American people. That’s fine. We can just move on with our lives and let our grandchildren pay for the deficit. And the good news is that some of us won’t be around to hear them complain about it.