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Destructive Tax Policies One Reason for the Debt Crisis

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Message Elaine Cullen

On November 19th, 2009, 11 Congressional House members, including Dave Obey, the Chairman of the House Appropriations Committee and Congressman John Murtha, the Chairman of the Defense Appropriations Subcommittee, introduced legislation that would end the practice of paying for the war in Afghanistan with borrowed money by imposing a war surtax beginning in 2011.

The issue of how and from what sources U.S. budget needs are being funded is a vital one and not just for war expenditures in Afghanistan.
Historically, a large percentage of the U.S. budget was funded by taxes. In the United States, after World War Two, the levels of national debt remained relatively stable until 1980. In the 1980's, with the Reagan administration in office and with the new Federal Reserve Chairman Paul Volcker, an economic policy was initiated where instead of paying for the yearly national budgets primarily through tax revenues, a much larger percentage of the budget was funded by debt securities, such as U.S. treasury bonds and U.S. savings bonds.

During the Reagan administration, although spending in areas such as defense spending were increased, the Reagan administration pushed through massive tax cuts. Instead of funding the budget costs with taxes, as had historically been the case, a policy was initiated where large amounts of U.S. national debt securities were used to fund the budget, instead of tax revenues.

With the outstanding debt from the debt securities and the added interest payments on the debt securities, something that does not have to be paid if the budget is paid with taxes, this resulted in a massive piling up of the national debt in the 1980's.With the interest rates as high as 20% in the 1980's, this resulted in a massive amount of interest payments being owed for budget funding that had historically been funded through taxes.

By the end of the Reagan administration, the U.S. national debt had tripled. The U.S. had gone from being the largest creditor nation in the world to the largest debtor nation. The majority of the national debt was interest payments on the debt securities that had been used for national budget funding.

The 11 congressional members introduced legislation to fund Afghanistan war budget costs through tax revenues, instead of debt securities, starting in 2011. The question is, why isn't the majority of the U.S. national budget being funded with tax revenues instead of debt securities, and now instead of 2011?

The massive levels of U.S. national debt have not been caused by increased spending, but by a shift of paying for U.S. budget needs by U.S. debt securities and having to pay both the deferred payments and the interest rates as well.

The correlation between a disastrous national economic and tax policy contributing to the national debt is evident by what has occurred since the 1980's. In the mid to late 1990s, during the Clinton administration, taxes were raised to meet budget needs, which cut the use of debt securities for the funding of the national budget. By the late 1990's, the U.S. was running budget surpluses and there were estimates then that by the year 2010, the U.S. could clear it's national debt.
The reason that didn't happen was because of a return to the financially destructive tax policies of funding the U.S. budget with debt securities instead of tax revenues, during the Bush, and now, Obama administrations.

In 2001, the Bush administration, along with the U.S. Congress pushed through massive tax cuts at the same time that budget expenses were rising due to increased defense spending because of the war on terrorism and military actions in Afghanistan and Iraq. As U.S. budget expenses have continued to rise in the last eight years, tax cuts continued to be pushed through throughout the Bush administration. The last Bush administration tax cut was in 2008, the last in a series of tax cuts throughout the Bush administration's time in office.

During the Bush presidency, the total U.S. national debt increased from $5.5 trillion in January 2001 to $10.7 trillion by December 2008, rising from 54% of GDP to 75% of GDP. The December 2008, $10.7 trillion national debt was ten times the level of national debt the U.S. had in 1980, when the U.S. started paying for a much larger percentage of it's budget funding with U.S. debt securities, instead of taxes.
The same disastrous tax policies have continued under the current Obama administration, increasing the U.S. national debt further. Although during his presidential campaign, President Obama promised to roll back the 2001 tax cuts that had favored the wealthiest Americans, in fact he has not kept that promise since taking office. The American Recovery and Reinvestment Act passed by Congress on February 13, 2009, at a cost of $787 billion, included $288 billion in tax cuts.

As well as being massively destructive financially, this policy of funding U.S. budgets with the sale of U.S. national debt securities instead of tax revenues, leaves the U.S. in the short term economically vulnerable to the economic decisions of large institutional investors, and financial companies and in some cases, foreign nations as to whether they want to continue to purchase the U.S. national debt securities that pay for the U.S. budget. This creates the possibility that a pullout of purchasing of U.S. debt securities could leave the U.S. in a short term budget crunch and economic crisis, with the two options open at that point, being to either issue more dollars, inflating the U.S. dollar to cover budget needs or raise the needed revenue through taxes at that point.

The decreased tax revenues that the U.S. is taking in in relation to expenditures is being seen in other countries where decreased national tax revenues are also contributing to actions whereby the nations instead of raising the needed revenues through taxes or inflating their currencies, are massively adding to their debt levels by issuing debt securities with added interest rates, which is one of the primary factors in the current debt crisis.

This article is part of an overall site on Germany and Japan worldwide hegemony at:
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Elaine Cullen Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

My interests are in international politics and economics.I have a journalism degree and post graduate study in economics. I have worked in the automobile and airline industry.
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