WASHINGTON — The nation's fiscal crisis is a revenue crisis, not a spending problem.
Even when the economy operates at full capacity, deficits and national debt continue to grow. U.S. spending levels, measured as a share of GDP, largely align with or fall below predictions made over a decade ago. Revenue, by contrast, has plummeted.
The culprit: tax cuts enacted across multiple administrations that severed the connection between economic growth and money flowing into the Treasury.
This dynamic challenges Republicans' longstanding argument that overspending represents the core problem in Washington's budget wars. It also complicates Democrats' ability to fix the problem. Republicans broadly oppose any tax increases. Democrats will only consider raising taxes on households earning above $400,000—a threshold that excludes roughly 98 percent of Americans. The result: the federal tax base available for discussion is negligible.
Bobby Kogan of the Center for American Progress notes that in the post-World War II period from the mid-1940s to about 1980, the debt-to-GDP ratio fell sharply because economic growth exceeded interest rates and the government ran primary surpluses most years.
That changed in 1981. President Ronald Reagan introduced supply-side tax cuts premised on the theory that lower rates, chiefly benefiting investors, would generate enough growth to offset lost revenue. The claim contradicted existing evidence then and has been disproven since.
Reversing some of these tax cuts would address the revenue shortfall. But doing so faces steep political hurdles. Republicans have made tax-cut defense a core principle. Democrats hesitate to raise taxes on the middle class, citing legitimate affordability concerns as households struggle with basic costs.
The fiscal math is stark: the debt-to-GDP ratio is a function of growth rate, interest rate, and the primary balance—noninterest spending relative to revenues. Without revenue increases or spending cuts, that ratio will keep climbing.
