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What Republicans fail to understand about the debt crisis


John L. Campbell is the Class of 1925 Professor of Sociology Emeritus at Dartmouth College. His most recent book is “Institutions Under Siege: Donald Trump’s Attack on the Deep State.”

Congress is poised for another needless knock-down drag-out fight over the U.S. government’s finances. Why? The government reached its debt limit last week, currently $31.4 trillion.

Leaders of the Republican majority in the House threaten that unless the government slashes spending to reduce that debt, they will refuse to increase the debt ceiling. And if that happens, the government will begin defaulting on its debt payments for the first time in history, which according to most experts will plunge the national and world economies into a tailspin.

Economic Growth will stall, unemployment will rise, and millions of jobs will be lost. The mere threat of default in 2011 during another debt ceiling fight threw the financial markets into turmoil.

 

Treasury Secretary Janet Yellen says that the Biden administration will take “extraordinary measures” in the short term to prevent default and a debt crisis, but that in the long run, probably by June of this year, these steps will no longer be viable.

The looming fight between Republicans and Democrats will be over how much spending to cut to reach an agreement on raising the debt ceiling. But there is an alternative that nobody is discussing. If Republicans are serious about reducing the national debt, why not raise taxes, which would increase revenue and reduce the need to cut spending and borrowing? It is the same as if you got a salary increase, which would reduce your need to run up debt by borrowing on your credit card.

Raising additional revenue would not be that painful. For example, the Congressional Joint Committee on Taxation estimates that just raising the personal income tax on billionaires, that’s only 0.01% of all households in America, by requiring them to pay tax on their full income, including the unrealized appreciation of their assets, such as the increased value of their stocks and other financial investments, would raise $56 billion in additional revenue each year.

Furthermore, according to the Tax Policy Center, raising the average federal tax rate from the current 33.4% to 40% on the 1% of households with the highest incomes would generate $157 billion in additional revenue annually — and they would still take home at least $1 million after taxes.

The problem is that Republicans are adamantly opposed to raising taxes. They claim that taxes are already too high and that raising them would stifle economic investment and growth, destroy jobs, increase unemployment, and undermine American competitiveness in global markets. They are wrong.

First, taxes in the United States are not high. According to the OECD, in 2021 the top statutory personal income tax rate in the United States was lower than it was in 22 other advanced capitalist countries. And the statutory corporate income tax rate was lower than in 13 of the 20 largest capitalist economies.

Second, among the advanced capitalist countries, those that impose heavier tax burdens tend to be more, not less, competitive internationally than those with lighter tax burdens because their governments spend those revenues in ways that enhance innovation, infrastructure, public health, education, labor market flexibility and other things that boost economic performance. They also tend to have lower rates of poverty and economic inequality, which helps avoid the sort of fractious politics that have become prevalent in America, including in fights over raising the debt ceiling.

That last point is important. The spending cuts that Republicans favor would fall heavily on social programs like Medicare, Medicaid, and Social Security, which affect the most vulnerable populations in America (the elderly, disabled and poor) and that reduce inequality and poverty.

It is worth noting that the Nordic countries, which have some of the heaviest tax burdens and highest levels of government spending of all the advanced capitalist countries, also have some of the lowest rates of poverty and inequality and are among the most economically competitive and prosperous countries in the world.

Arguing that cutting taxes and spending is necessary to reduce debt and improve economic performance is a time-worn myth that Republicans have inherited from Ronald Reagan — the ideology of supply-side economics, which Reagan’s own vice president called “voodoo economics” because it was nonsense.

If Republicans were serious about reducing the national debt, they would recognize that raising taxes, particularly on the wealthy, is a viable alternative to cutting spending.





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