The War on Tax

The debt crisis confronting the Obama administration is the product of war and taxes. There is little dispute that the origins of the crisis predate Obama’s election. When George W. Bush took office in 2001, the US had a $2 trillion budget surplus. Many believed that if the country merely continued on the path set by Bill Clinton, the national debt, then $5.7 trillion, would be eliminated by the end of the decade. Bush chose a different way. He cut taxes, reducing revenues by $1.8 trillion. He declared a general war on terror and waged two specific wars. Financed entirely by borrowing – a first in American history – the wars and related increases in defence spending added $1.5 trillion to the debt. The financial crisis and ensuing recession further reduced revenues. By the time he left office, Bush had squandered the surplus and nearly doubled the size of the debt, adding more to it than any president in US history.

However we got here, the current crisis is not financial but political. The US does not face the prospect of no longer being able to borrow because no one will lend to it; the convulsions are the result of entirely political contingencies: a statute from 1917, which requires Congress to authorise increases in the debt ceiling; a House of Representatives, controlled by Republicans, which seemed genuinely willing, again for the first time in American history, to vote down an increase; and a Democratic president who – whether for reasons of conviction, expedience or necessity – chose to co-operate with rather than confront the opposition. From this convergence arose the notion that if Congress did not authorise an increase in the debt ceiling by 2 August, the United States would default. That was never going to happen: the US had money in reserve (and incoming revenue) to pay its debts, and Obama would have cut back on other expenditure rather than default. Even so, with all the heat and hysteria that only Washington can muster, the consensus was that something had to be done at once.

Had politics not intruded and had Obama heeded the advice of centre-left economists, these are the steps he might have taken. First, do nothing about the debt, at least not now. The debt can be significantly reduced only if the economy improves. The best way to encourage that is for the government to spend, which will add to the debt in the short term but reduce it in the long term through revenues generated by growth. Second, once the economy is healthy, increase taxes, particularly on the wealthy. As a share of GDP, revenues are at their lowest levels since 1950. With the exception of a brief interregnum in the late 1980s and early 1990s, top marginal rates are the lowest they’ve been since 1931. Corporate taxes in the US are the lowest of any OECD country. The notion that taxes shouldn’t be raised, not only to fund necessary and desirable expenditure but also to cut the debt, runs counter to common sense. Last, cut military spending. As the economic journalist Doug Henwood has observed, if the US simply returned to the spending levels of 2000 – when ‘the Pentagon didn’t have to hold bake sales’ and spending was 3.7 per cent of GDP as opposed to the current 5.4 per cent – it could save $3.6 trillion in the next decade, 72 per cent more than the debt-ceiling deal negotiated by Obama and Congress will save.

Instead, Obama and Congress took the opposite path, which was paved 40 years ago by the anti-tax philosophy of the American right. In February 2010, Obama convened a bipartisan commission to balance the budget by 2015, effectively making debt reduction a top priority. After the November midterm election, when the Republicans took back the House with the help of the Tea Party, Obama froze the pay of federal workers and endorsed a more aggressive austerity programme. Cuts were proposed and tax increases dismissed: not just once (with the extension of the Bush tax cuts in December) but twice (with the first phase of the debt deal, which eliminates $900 billion solely through spending cuts) and now potentially a third time (with the second phase of the deal, which eliminates an additional $1.2 trillion solely through spending cuts if a congressional committee can’t produce an alternative package of tax increases and spending cuts by November). While the deal does include defence cuts – though it’s unclear if these are cuts or simply slower rates of growth, and whether and how most of them will happen – Obama’s latest comments, and those of his defence secretary, suggest they could be traded for benefit cuts.

By definition, the deal that was reached was politically feasible. Why it was feasible – and alternative paths were not – remains the subject of sharp dispute. Many blame the Republicans, who were willing to push the government to the brink in order to pursue their agenda of low taxes and minimal spending. Others blame Obama: his preternatural aversion to conflict and foolish belief in the good intentions of the Republicans and the value of bipartisanship. Constraints on presidential power in the United States are also cited: unlike the leader in a parliamentary system the president must deal with legislators from the opposition or from his own party whose electoral fortunes are not dependent on his. Some argue that it’s wrong to assume that Obama wanted an outcome substantially different from the one he got. In fact, he has long declared his desire to cut government spending; whether he thinks it will improve his chances of re-election, or has taken on board the neoliberal orthodoxies of the day, or simply spent too much time at the Friedmanite University of Chicago, he is not the progressive many imagine him to be. He got what he got because he wanted it or because he didn’t want something else badly enough.

Each of these arguments has something to recommend it, but with all the hindsight of a fortnight they seem to be missing a deeper dynamic. Historically, debt crises resulting from wars have catalysed politically progressive advances and even precipitated revolutions. Both Charles I and Louis XVI found themselves entangled in military conflicts their tax systems couldn’t fund. Debts eventually forced both into fatal confrontations: Charles with Parliament in 1640 and Louis with the Estates General in 1789. Beyond financial exigency, the revolutions that overthrew these sovereigns drew on arguments the kings themselves had to make in order to raise taxes and fund their wars. As Richard Tuck has suggested, it may have been Charles himself who opened the door to democracy in England. Levying an ancient tax on coastal towns (ship money) to fund a naval expedition against the Dutch, the Crown made the claim that the people’s safety was the highest ground for political action – an axiom of republicans through the ages – superseding any law or constitution. Though used to justify absolutism, Charles’s rhetoric about the ‘interests of the people’ carried a subversive democratic implication: these are not my wars, they’re yours, and you ought to do everything you can to see that they are won. Parliamentary forces could counter that if the interests and safety of the people were the gold standard of politics, it should be the people’s elected representatives who decided what that interest or safety consisted in and how it ought to be secured.

In the wake of 9/11 many liberals hoped that the war on terror would open a new chapter in American social democracy, with calls for patriotic sacrifice generating an ethic of social solidarity. Instead, Bush slashed taxes, borrowed through the nose and turned the war on terror into a spectator sport rather than a people’s war. Late modern sovereigns, it seems, push their polities away from democracy by mustering mercenary armies and tapping into flush credit markets. As a result, no one in the United States need claim ownership over anything common or collective: not its wars or debts, not its government, and certainly not its ever more impoverished and precarious citizenry.

That’s why the current crisis has served as an opportunity for retrenchment and reaction rather than sparking a democratic revolt on the left. To that extent, it calls to mind similar crises in the Third World over the last three decades, which were used by elites to justify drastic cuts in government spending and the restructuring of social democratic economies. Or, for that matter, the New York City fiscal crisis of 1975, when Wall Street rallied to impose discipline and austerity on the one outpost of social democracy in America, in a move many have seen as a precursor of later experiments in Latin America and elsewhere. Obama’s persistent calls for austerity have been in keeping with the stance of Wall Street Democrats during the 1975 crisis and, in the wake of that crisis, a national party remade in the image of Wall Street.

There are two crucial differences, however, in the current moment. There is no threat of lenders shutting off the pump; international creditors seem perfectly willing to continue funding US indebtedness. Indeed, when the stock market crashed after Standard and Poor’s downgraded the US credit rating on 5 August, investors raced to put their money in US Treasury bonds. And where earlier crises provoked popular resistance, with the exception of unrest in states like Wisconsin, the only sign of mobilisation evident in this crisis – however ersatz it may be – is in support of further retrenchment.

If there’s a master text for this moment, it’s Marx’s Eighteenth Brumaire. Not the over-cited first time as tragedy, second time as farce line, but his astonishingly prescient analysis of the reactionary behaviour of the French peasantry during the Bourbon and July monarchies. Though the 1789 Revolution and Napoleon had liberated the peasants from their landlords, the next generation of peasants was left to confront the agricultural market from small private holdings that could not sustain them. They no longer had to pay their feudal dues, but now they had to pay their mortgages and taxes to a state that seemed to do little for them. What the state did provide, under Napoleon III, was imperial spectacle. That wasn’t nothing, as Marx noted, for in and through the army the peasants were ‘transformed into heroes, defending their new possessions against the outer world, glorifying their recently won nationality, plundering and revolutionising the world. The uniform was their own state dress; war was their poetry.’ This Marx called ‘the imperialism of the peasant class’.

In Marx’s analysis we see the populist underbelly of the debt crisis, indeed of the last four decades of the right-wing tax revolt, from Howard Jarvis’s Proposition 13 of 1978, which destroyed California’s finances by putting strict limits on property tax increases, to the Tea Party. Liberals often have a difficult time making sense of these movements – don’t taxes support good things? – because they don’t see how little the American state directly provides to its citizens, relative to their economic circumstances. Since the early 1970s, with a few brief exceptions, workers’ wages have stagnated. What has the state offered in response? Public transport is virtually non-existent. Even with Obama’s reforms, the state does not provide healthcare or insurance to most people. Outside wealthy communities, state schools often fail to deliver a real education. In such circumstances, is it any wonder ordinary citizens want their taxes cut? That at least is change they can believe in.

And here Democrats like Obama and his defenders, who bemoan the stranglehold of the Tea Party on American politics, have only themselves to blame. For decades, Democrats have collaborated in stripping back the American state in the vain hope that the market would work its magic. For a time it did, though mostly through debt; workers could compensate for stagnating wages with easy credit and low-interest mortgages. Now the debt’s due to be repaid, and wages – if people are lucky enough to be working – aren’t enough to cover the bills. The only thing that’s left for them is cutting taxes. And the imperialism of the peasants.

12 August