Senators fight over source of US deficit as default looms

Senators on the Budget Committee squabbled Tuesday over the root causes of the U.S. deficit as White House and congressional negotiators conduct last-minute talks to avoid a precedent-breaking default on the country’s debt.

While senators in both parties wrung their hands over the shortfall, Democrats focused almost exclusively on revenue shortages engendered by Republican tax cuts, and GOP senators targeted excessive spending in domestic programs.

“Together, the Bush and Trump tax cuts have added $10 trillion to the debt, and they account for 57 percent of the increase in debt-to-GDP ratio since 2001. But for those tax cuts, our debt would actually be declining as a share of the economy,” Budget Committee Chairman Sheldon Whitehouse (D-R.I.) said.

Whitehouse called out what he described as a familiar pattern on the part of Republicans: “Giant tax cuts that benefit wealthy and corporate donors, and debt limit hikes.” 

The debt limit was raised three times under former President Trump, he noted.

“The problem isn’t tax cuts,” ranking member Sen. Chuck Grassley (R-Iowa) countered, reminding Whitehouse of bipartisan support for prior tax cuts. “The problem is unchecked spending.”

Senators stuck largely to partisan talking points, not finding common ground on tackling the significantly larger drivers of the ballooning federal debt.

U.S. federal debt levels are a consequence of not collecting enough tax revenue to pay for the country’s services, including health care, pensions, the military and education, in addition to interest payments made to debt holders. Total U.S. debt stock is now about $31 trillion, which is more than U.S. annual gross domestic product.

The partisan sparring over the impact of tax cuts reflected the deep divides driving the U.S. closer to a potentially catastrophic default.

Republicans are currently seeking to make many of the tax cuts in the 2017 Tax Cuts and Jobs Act permanent, including business-specific cuts relating to interest deductibility and bonus depreciation.

Democrats, on the other hand, have been aiming for major expansions of pricey spending programs that include the earned income tax credit and the child tax credit, which lifted millions of children out of poverty during the pandemic.

Both objectives are directly at odds with addressing the long-term issue of the federal deficit. In the short-term, the debt ceiling impasse is generating increasing scorn from commentators.

“The US debt ceiling farce continues, with President Biden to cut short an international trip to see if congressional leaders are prepared to behave like adults over the issue,” UBS economist Paul Donovan wrote in a Wednesday note to investors. 

“If Congress behaved like adults, the debt ceiling would be eradicated permanently. More likely Congress will behave like surly teenagers, kicking the can down the road with a muttered ‘whatever,’” he wrote.

Commentary during the hearing from budgetary experts, most of whom fell neatly into Republican and Democratic ideological niches, did converge upon questioning from Sen. Chris Van Hollen (D-Md.) on the truism that tax cuts do not “pay for themselves” — a phrase often repeated by politicians about the stimulative benefits of reducing taxes.

“The Tax Foundation modeled every iteration of what became the [Trump Administration’s] Tax Cuts and Jobs Act from the beginning to the end, and at no time did our model ever predict that it would pay for itself,” Scott Hodge, president emeritus of the right-leaning Tax Foundation, a Washington think tank, told senators. 

“Our model is perhaps the most sophisticated in Washington, and it does not estimate that virtually any tax cut will pay for itself,” he said.

As measured by the U.S. debt-to-GDP ratio, the federal deficit has increased sharply three times since the last period of U.S. budgetary surplus at the end of the 1990s, lining up generally with periods of U.S. economic contraction.

It spiked in 2001, aligning with the Bush-era tax cuts that reduced the top four income tax rates as well as the rate on capital gains and dividends, and further propelled by the dot-com recession.

It spiked again in the wake of 2007-08 financial crisis and recession, which slashed revenues as output slowed. It started increasing once more following the Trump tax cuts of 2017 before falling off a cliff in 2020 due to the flash recession caused by the coronavirus pandemic, from which it has mostly recovered.