Blowing Up the Deficit Is Part of the Plan

Republicans are hoping to use the deficits created by their own tax cuts to slash the social safety net—but they may end up setting the stage for tax hikes instead.

Paul Ryan goes before the House Rules Committee for final work on his budget to fund the government in fiscal year 2015, at the Capitol in Washington, D.C., on April 7, 2014. (J. Scott Applewhite / AP)

President Trump’s corporate tax cuts will likely generate enormous deficits, even if the administration’s rosiest economic forecasts come true, setting Republicans up to claim that the time has come to cut Social Security, Medicare, and welfare to reduce the expected $1 trillion deficit, created by those very tax cuts, over the next 10 years.

Speaker of the House Paul Ryan has already announced that the GOP plans to cut federal health care and anti-poverty programs because of a deficit that his party is about to balloon. “We’re going to have to get back next year at entitlement reform,” he said on a talk-radio show, “which is how you tackle the debt and the deficit.”

This is exactly how what President Ronald Reagan’s budget director, David Stockman, called “starving the beast” works. By creating a fiscal straitjacket through lower taxes, conservatives leave Washington with less money and raise the specter of deficits damaging the economy as a rationale to take away the benefits that millions of Americans depend on. If they are not fiscally conservative right now, they can be when it comes time to talk about spending on the poor and disadvantaged. While the right usually encounters a fierce backlash whenever they try to retrench specific federal benefits, as the GOP recently discovered with their failed attempt to repeal and replace the Affordable Care Act, cutting budgets in the name of deficit reduction has traditionally offered a less toxic mechanism for achieving the same goal.

Yet the unintended consequence of tax cuts of this scale and scope might be to create a political space for Democrats to push for higher taxes in the future. When the government fails to balance the books, it creates the conditions that give Democrats leeway to take the unpopular step of asking Americans to pay more to finance their obligations. Raising taxes has never been easy in American politics, even in the so-called heyday of New Deal and Great Society liberalism, but large deficits have repeatedly bolstered Democratic efforts like almost nothing else, much more than the appeal of political ideology or mass-movement pressure.

The creation of the mass income-tax system during World War II was in large part an effort to ensure that the federal government could finance the war against fascism without creating permanent, debilitating deficits. Secretary of the Treasury Henry Morgenthau, a fiscally conservative Democrat, insisted that the federal government would find responsible ways to pay for wartime mobilization, as well as the New Deal programs enacted in the previous decade. The Treasury moved through Congress measures that expanded the base of taxpayers from 4 million to 44 million and instituted withholding at the source, permanently transforming the fiscal capacity of government. “I paid my income tax today!,” Irving Berlin sang in a popular wartime jingle he wrote for the Treasury’s propaganda effort. “A thousand planes to bomb Berlin, they are all paid for and I chipped in. That certainly makes me feel okay!” Unlike in previous wars, the federal government did not dismantle the mass tax system when the war ended. While progressive politics was part of the mix, more important was the need to keep financing the national-security system in the Cold War.

Fifty years ago, President Lyndon Johnson pushed through Congress a 10 percent tax surcharge that was needed to finance the war in Vietnam and the Great Society. As federal coffers started to dwindle as a result of the skyrocketing costs of his programs, particularly the war, Johnson came under pressure to find funds. The conservative coalition of southern Democrats and Republicans on Capitol Hill, led by Ways and Means Committee Chairman Wilbur Mills, insisted that he cut social programs if he wanted the tax increase. Their strength had been bolstered by the midterm elections that cut into the liberal majorities born in November 1964. Johnson, who hesitated as long as possible to ask for a tax increase, finally bit the bullet in January 1967 and made his request to Congress based on the rising deficits and the inflationary pressure they brought. Johnson proposed a 6 percent tax surcharge, which he increased to 10 percent in August. After a tough legislative slog, with the president agreeing to larger spending cuts that his advisers wanted, Johnson persuaded Congress to move forward with the temporary 10 percent surcharge.

Federal deficits have also led Republicans to push for tax increases despite their best political instincts. After President Reagan pushed through his historic supply-side tax reduction, in 1981, Kansas Republican Robert Dole, then chairman of the Senate Finance Committee, worked with Republican Senator Pete Domenici of New Mexico to find support in Congress for the Tax Equity and Fiscal Responsibility Act of 1982. The legislation raised revenue by $98 billion over three years in response to a looming deficit of $200 billion. Reagan, who agreed that the tax hike was needed, took New York Representative Jack Kemp, a supply-side zealot, “to the woodshed” when the congressman voiced his opposition in a private meeting, according to one staffer. Dole, with Reagan’s support, won the battle. This was the largest peacetime tax hike since World War II.

Fast forward to 1990, when President George H. W. Bush took the controversial step of agreeing to support a tax increase as part of a broad, $492 million deficit-reduction package. The deficit had skyrocketed from $153 billion in fiscal year 1989 to $221 billion the following year. Breaking with his famous campaign pledge, “Read my lips, no new taxes,” he triggered an open revolt from Republicans such as then-Congressman Newt Gingrich, who would never forgive the president. “Read My Lips: I Lied” blared the headline of the New York Post, capturing the anger of many conservatives. He agreed to raise the top marginal rate from 28 to 31 percent. House Republicans overwhelmingly voted against the measure by a 126 to 47 margin. But the pressures to curb the deficit were such that the president felt he had no choice. “I paid a big price for that,” Bush said years later. The political turmoil that ensued has made it extremely difficult for any Republican president since to propose raising taxes.

The deficit did not disappear in the short term, and it remained an issue in the 1992 presidential election. When the independent candidate Ross Perot made the deficit one of his signature issues in the 1992 presidential campaign—he liked to say he could eliminate the deficit without “breaking a sweat”—President Bush and Bill Clinton, the Democratic candidate, felt the need to address this issue, despite the fact that each wanted to be talking about other things (For Bush, his victory in Operation Desert Storm; for Clinton, his domestic promises for the middle class). Everyone was a fiscal conservative by the time the campaign ended. And though Clinton as president positioned himself as a new-era Democrat who would break from the orthodoxies of the New Deal to win support in the conservative era, one of his first major acts was to push through Congress a substantial tax increase under the guise of deficit reduction. The legislation created a new bracket of 36 percent for income more than $115,000 and 39.6 percent for more than $250,000.

Obtaining support for the legislation was extremely difficult. It required a huge partisan push to ensure that nobody in the party defected. It cost one Democrat, Marjorie Margolies-Mezvinksy, her seat. Republicans chanted “Bye-bye, Margie” when the freshwoman switched her vote to save the bill. But the legislation stood as a major achievement for the new administration. “After all, after 12 years of the most rapid increase in deficits in our country’s history,” the president said when signing the bill, “the national debt went from $1 trillion to $4 trillion in only 12 years. This is the largest deficit-reduction plan in history, with $255 billion in real enforceable spending cuts in very specific areas, not generalized hot air and tomorrow’s promises but specific cuts.”

In January 2013, President Obama allowed the Bush-era tax cuts on the top income bracket to expire, which imposed an effective tax hike on wealthier Americans, as part of a deficit-reduction agreement with the Republican House of Representatives. The highest income tax bracket went back up to 39.6 percent. While Obama’s back had been to the wall politically since the Tea Party came to town in the 2010 midterm elections, the president found the political room that he needed to maneuver to take this step with the nation obsessed about the rising costs of government. He achieved this goal and won reelection at the end of the year. As the Princeton sociologist Paul Starr explains in my forthcoming edited collection, President Barack Obama: A First Historical Assessment, the tax increase had hugely progressive effects and was part of a broader agenda that reduced economic inequality.

To be sure, it is true that the full impact of massive slashes in the tax rates is hard to reverse. Over time, we don’t really get back to where we once were. We now live in the post-Reagan era where the corporate and individual rates will never return to the historic highs of the early Cold War era in the 1950s, with top rates over 90 percent.

But it is incorrect to say that large federal deficits only move politics rightward When it comes to taxes, the truth is that deficits have often been the basis for government to do one of the most liberal things possible: raise taxes to pay for government.

The impact of the Trump tax cuts can very easily be the same. Right now, if Democrats play their cards right, they are looking at a rosy future. The polls indicate that the 2018 midterms could be a good year for the party, with the possibility of flipping control of both branches of government, while the outlook for 2020 also looks good if President Trump keeps up with his current antics. If the deficits reach the level some expect as a result of this hugely unpopular tax package, the image of the GOP as a party incapable of governance, which has already taken huge blows as a result of the Tea Party and the current administration, will only get worse, giving Democrats a chance to show that they can do a better job balancing the books—even if that requires more sacrifice from the nation.

Although Democrats certainly have a great deal to be unhappy about with the first major legislative achievement from the Trump presidency, they would be foolish to give up on restoring a more robust and progressive tax system. Ironically, the tax cuts that just moved through Congress might be the very reason they can make the case for the need on higher taxes once again in the coming future.