May 9, 2023
Steve Wamhoff
Federal Policy Director
May 9, 2023
President Biden has called on Congress to raise the statutory limit on the amount of debt the federal government can issue, as it has more than 100 times since World War II. Congress raised the debt limit three times during the Trump administration, including twice when Republicans controlled both chambers of Congress. Those were “clean” debt limit increases, meaning no one attempted to force former President Trump to make concessions in order to raise the debt limit because lawmakers of both parties acknowledged that allowing the country to breach the limit would lead the federal government to default on its debts, unleashing financial havoc beyond our imagination.
But now House Republicans pretend things are different. House Speaker Kevin McCarthy has insisted that his members will not vote for a clean increase in the debt limit but will instead demand dramatic budget cuts in return for increasing the limit. The bill they passed in April would provide a short-term increase in the debt ceiling but would also dramatically cut public investments that Americans need to work their way into the middle class while scaling back efforts to ensure that the richest Americans pay their taxes.
Recently Rep. Jared Golden (D-Maine) has suggested that Democrats and Republicans should negotiate a deal, one that could include tax increases for the rich and corporations to reduce the budget deficit.
Congress absolutely should raise taxes on the rich and on corporations to generate revenue and improve the fairness of our tax code. President Biden has several proposals to do exactly that. But this is an entirely separate question from whether we should raise the debt ceiling to honor the debts the nation has already incurred and avoid an economic apocalypse.
Raising the Debt Ceiling is About Facing Decisions Congress Already Made, Not Future Budgets
The debt ceiling as it exists today was actually created to make it easier, not harder, for the federal government to issue debt. Before 1917, Congress would enact legislation allowing the issuance of bonds to fund a particular project with specific conditions. Lawmakers came to see this as onerous and in 1917 enacted legislation that allowed the federal government to issue bonds for all purposes up to a level that seemed appropriate at the time. And Congress has since increased that debt limit many times.
But now Congress has created a bizarre situation by legislating a federal debt limit and then enacting legislation that requires borrowing beyond that amount. The tax laws enacted by Congress do not raise enough revenue to cover the spending provisions enacted by Congress. The mismatch between the two is the federal deficit and requires government borrowing and will soon require borrowing beyond the current debt ceiling.
If Congress does not raise the debt ceiling, the President has no way of executing all the laws that Congress has enacted. Either the President stops enforcing the debt ceiling, or he stops enforcing the various spending laws – laws requiring payments of everything from Social Security benefits to soldiers’ salaries to interest payments for lenders. And there is a strong argument that the latter option, failing to carry out spending laws, is barred by the Constitution’s requirement that “the validity of the public debt of the United States… shall not be questioned.”
Rather than creating a bizarre constitutional crisis (and chaos in financial markets) with its conflicting laws, Congress should raise the debt ceiling. Doing so really has nothing to do with Congress’ tax and spending decisions going forward, but instead is about honoring the decisions it has already made, paying the bills it has already incurred.
Of course, some current members of Congress might object that they are not the same members who racked up that debt. But they are not entirely different people, either. All current members of the House GOP leadership were in Congress back in 2017 when Republicans enacted the Trump tax cuts without a single Democratic vote, despite projections that it would increase the debt by $1.5 trillion over a decade. Of the 221 Republicans in the House today, 87 were also in the House back in 2017. This includes Jason Smith, the Ways and Means Committee Chairman who has jurisdiction over tax legislation that could reduce the budget deficit but who instead supported the Trump tax cuts.
These people are threatening to breach the debt ceiling – and thus cause economic cataclysm – unless other people make sacrifices to pay for the debts they (at least partly) racked up. One thing they were right about during the Trump administration is that the need to increase the debt limit is entirely separate from questions of how much revenue we should collect or how much money we should spend.
Congress Has Many Options to Improve Our Fiscal Health by Raising Revenue
Let’s assume, against all evidence, that Congressional GOP leaders really are concerned with the budget deficit. What options to reduce that deficit have they not considered? Options that would raise revenue.
And lawmakers should consider these options because the various tax cuts enacted by Congress over the last several years are a root cause of the budget deficits we face today. A recent report from the Center for American Progress explains that as recently as 2012, the Congressional Budget Office projected the federal government would indefinitely collect more than enough revenue to cover federal spending outside of interest payments on the debt, meaning the debt would fall over time.
But the situation changed that year when Congressional Republicans pushed to extend the Bush tax cuts past their expiration date at the end of 2012 and then-President Obama compromised and made some of the tax cuts permanent. The fiscal outlook further deteriorated with the enactment of the Trump tax cuts in 2017 (which House Republicans propose to make permanent and which mainly benefits the richest households).
So, it would be entirely reasonable for lawmakers to consider ways to reverse this trend and raise taxes, at least for the richest Americans and profitable corporations. A recent ITEP report explains that President Biden’s most recent budget plan has plenty of options along these lines.
Partially Reverse Trump’s Corporate Tax Giveaways: $1.3 trillion
Instead of extending all the temporary parts of the Trump tax law as Republicans propose, Congress should move in the opposite direction and scale back the permanent parts of the 2017 law. The most important of the permanent provisions are the law’s corporate tax cuts. The 2017 law slashed the corporate tax rate from a progressive structure with a top rate of 35 percent for the very largest corporations to a flat rate of 21 percent.
Conservative lawmakers claimed this was a necessary reform to make the United States more competitive. In reality, most corporations paid effective rates far below the top statutory rate due to the numerous deductions and credits written into the tax code. The United States was a highly desirable place to do business before the Trump law, and it doesn’t appear that has changed much. President Biden proposes to partly reverse that cut by raising the corporate income tax rate to 28 percent, which would raise more than $1.3 trillion over the next decade.
Make Multinational Corporations Pay What They Owe: $1.3 trillion
Next, Congress could enact legislation to implement the global agreement to end offshore corporate tax dodging. Recognizing the international tax system is ripe for abuse, the White House has proposed reforms that would raise an additional $1.3 trillion. Multinational corporations slash their tax bills by opening P.O. boxes in tiny nations with negligible tax rates and then telling the IRS that’s where they earned all their income. Some 18,000 corporations are “headquartered” in a single five-story building in the Cayman Islands, and in 2019, American corporations claimed to have earned profits equaling more than ten times the size of the entire nation’s economy there. It is a preposterous abuse of international laws, and Congress could end it tomorrow.
End the Advantageous Tax Treatment of Millionaires and Billionaires: $650 billion
Congress could also raise another $650 billion by requiring the super wealthy to pay taxes on their income every year just like everyone else. Unlike normal Americans who pay taxes with every paycheck, the uber-rich get to choose when they pay taxes. Logically, a billionaire whose net worth increases from one year to the next has received income, but often this income is asset appreciation that escapes taxation under the current rules. Taxes are due only when the asset generating the income is sold. Even worse, billionaires like Elon Musk can take loans against their assets to buy things like social media companies and then tell the IRS they never received any income. Even when they sell assets and realize the profits as income, it is taxed at a lower rate than income from work. As insane as it sounds, the tax code often asks people who work 50 or 60 hours a week to provide for their families to pay higher tax rates than uber-wealthy investors who make money by simply having money.
Stabilize Medicare for the Next Generation: $650 billion
The White House also has a plan to protect one of the nation’s most essential programs for retirees. The President has proposed raising Medicare taxes by 1.2 percentage points for people making more than $400,000 and closing a loophole that rich business owners use to avoid paying Medicare taxes altogether. These two reforms would ensure the solvency of the Medicare trust fund for another 25 to 30 years past current estimates. It’s a commonsense proposal, yet Republican lawmakers (who insist they will not cut Medicare) have said the reforms “will not see the light of day.”
These are just the biggest revenue-raising proposals in Biden’s plan. In total, the budget blueprint would raise nearly $5 trillion in new revenue over the next decade—which is coincidentally the exact amount that the Director of the Congressional Budget Office says is necessary to bring the budget shortfall back to historic levels. To be clear, there should be no debate over whether the government will pay the bills Congress has already incurred. But if Congressional Republicans are remotely serious about lowering the deficit, then they should abandon their push for lower taxes and acknowledge that revenue is at least part of the solution.
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FAQs
Has Congress raised the debt ceiling? ›
The debt limit increased three times under Trump's term in the White House, ending up at about $22 trillion. One of the increases was approved during his administration but effective in Biden's.
What happens if the U.S. raises the debt ceiling? ›Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession.
What is debt ceiling issue? ›November 2021) In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay by borrowing more money, on the debt it already borrowed.
What does it mean to raise the debt ceiling? ›Over time, the debt ceiling has been raised whenever the United States has approached the limit. By hitting the limit and failing to pay interest payments to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.
What is the U.S. bill debt ceiling? ›The debt ceiling is technically about $31.38 trillion, which the U.S. surpassed in January, but Treasury Secretary Janet Yellen took what she's called “extraordinary measures” to prevent a default.
What does the 14th Amendment say about debt ceiling? ›Fourteenth Amendment Equal Protection and Other Rights
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. "It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration. The U.S. borrows money by selling bonds.
How many times has the US hit the debt ceiling? ›The debt ceiling was raised 74 times from March 1962 to May 2011, including 18 times under Ronald Reagan, eight times under Bill Clinton, and seven times under George W. Bush. In practice, the debt ceiling has never been reduced, even though the public debt itself may have reduced.
Can us ever pay off debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
What happens if the U.S. defaults on its debt 2023? ›Right away, government workers might stop getting paid. Businesses that have contracts with the government might not get paid, and that could mean a lot of layoffs. Social Security checks could stop going out. Also, Wolfers says it would shock financial markets, might even cause a panic.
Why does the U.S. have a debt ceiling? ›
It's a restriction Congress has put on how much money the federal government can borrow to pay its bills, which has been in place since 1917. Because the government usually spends more than it takes in, Congress needs to raise the debt ceiling fairly frequently to pay for its operations.
Who owns US debt? ›There are two major categories for federal debt: debt held by the public and intragovernmental holdings. The debt held by the public has increased by 106% since 2013. Intragovernmental holdings increased by 40% since 2013.
What happens if government doesn't raise debt ceiling? ›If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.
When was the last debt ceiling crisis? ›The debt ceiling had been increased multiple times since the 2013 debt ceiling standoff, all without budgetary preconditions attached; the most recent increase was in December 2021.
Why is the U.S. the most in debt? ›America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...
Is the U.S. in the most debt? ›In December 2021, debt held by the public was estimated at 96.19% of GDP, and approximately 33% of this public debt was owned by foreigners (government and private). The United States has the largest external debt in the world.
How high is the U.S. debt? ›Nearly all of that debt – about $31.38 trillion – is subject to the statutory debt limit, leaving just $25 million in unused borrowing capacity. For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022.
What happens if the US defaults? ›A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
Who does the US owe the most money to? ›Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.
Has the US ever not been in debt? ›As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.
What countries have no debt? ›
| Characteristic | National debt in relation to GDP |
|---|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 2.92% |
| Hong Kong SAR | 4.26% |
Between 1980 and 1990, the debt more than tripled as the government borrowed money to fund military build-ups and many elaborate new policies, such as "the war on drugs." Americans began relying more and more on credit cards and jumbo mortgages, and being "in debt" became a new way of life in America.
When was the U.S. debt the lowest? ›However, President Andrew Jackson shrank that debt to zero in 1835. It was the only time in U.S. history when the country was free of debt.
Why has the U.S. debt increased over time? ›Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.
How much is US in debt to China? ›| Rank | Country | U.S. Treasury Holdings |
|---|---|---|
| 1 | 🇯🇵 Japan | $1,076B |
| 2 | 🇨🇳 China | $867B |
| 3 | 🇬🇧 United Kingdom | $655B |
| 4 | 🇧🇪 Belgium | $354B |
International Monetary Fund data show China's explicit local government debt nearly doubled over five years to the equivalent of $5.14 trillion — or 35.34 trillion yuan — last year.
Can you live in America without debt? ›It might appear impossible, but many consumers succeed in living their entire lives without any debt. People of a variety of ages and income levels have made this choice. It's not an easy feat, but if it's something you truly want, don't let naysayers talk you out of it.
Does the US owe most of its debt to itself? ›Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
Will the stock market crash if the US defaults on its debt? ›A US debt default could spark a 45% crash in the stock market and generate a deep recession akin to the 2008 Great Financial Crisis, the White House's Council of Economic Advisers warned earlier this month.
How to become debt free in 2023? ›- Make a commitment to become debt free. ...
- Work out exactly what you owe. ...
- Make as much room as possible in your budget for debt repayments. ...
- Make a plan. ...
- Bottom line.
Why can't the US make more money to get out of debt? ›
The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.
Is the US the only country with a debt ceiling? ›Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP. The US Congress began using the measure in 1917 and modified the financing law in 1939 to give the treasury more flexibility in issuing debt.
How could a US debt ceiling default hit regular Americans? ›The mass layoffs that normally come with recession could be weeks away following a default. More immediately, hundreds of billions of dollars in federal spending could be withheld from the economy. Doctors' offices, hospitals and insurance companies could be among the first to get stiffed.
Does China have more debt than the US? ›The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.
How long will it take to pay off the US national debt? ›To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.
Is China in a debt crisis? ›China's debt is nearly 44% of its GDP and its local governments owe nearly $5.14 trillion. With the economic slowdown and collapse of land sales revenue, provinces and local governments in China are facing an embarrassing situation.
What was the largest debt crisis in history? ›This was the worst financial and economic disaster of the 20th century. Many believe that the Great Depression was triggered by the Wall Street crash of 1929 and later exacerbated by the poor policy decisions of the U.S. government.
Does the debt ceiling affect Social Security payments? ›Among the ramifications of a debt ceiling standoff, any payment issued by the federal government — like Social Security, Medicare, tax refunds, military paychecks and ample others — may be delayed.
Is the debt ceiling constitutional? ›Congress has maintained some form of a debt limit, without constitutional controversy, since the dawn of the republic. According to widely held legal principles, its existence creates no conflict with the Constitution, and the Supreme Court would almost certainly reject any attempt to argue otherwise.
Who does the U.S. owe debt to? ›Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.
Is the U.S. the only country with a debt ceiling? ›
Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP. The US Congress began using the measure in 1917 and modified the financing law in 1939 to give the treasury more flexibility in issuing debt.
Who owns most of U.S. debt? ›The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.
Who owns the most US government debt? ›Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
Why is the United States in so much debt? ›The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone. Decreases in federal revenue are largely due to either a decrease in tax rates or individuals or corporations making less money.
What US states are not in debt? ›States With the Least Debt in 2020
Mountain states, such as Idaho, Montana, Utah and Wyoming made the top-10 list, as did upper Midwest states like Nebraska, North Dakota and South Dakota. Alaska takes the No. 1 spot, with a tiny debt ratio of only 14.2%.
Fewer than one quarter of American households live debt-free. Learning ways to tackle debt can help you get a handle on your finances.