Free America's Fiscal Constitution by Bill White Page B

many Democratic and Republican leaders now assert that balancing the budget in the near future would cripple the economy. The fig leaf of claimed harm to the economy serves to hide the naked reality of the federal dependence on debt. In some sense, of course, any nation can use debt to shift consumption from the future to the present and create an illusion of sustainable growth. The prodigal son of the New Testament parable seemed prosperous until he finished spending his inheritance. When debt-financed consumption stops, there may be an adjustment similar to that of a consumer who stops writing checks on an account with insufficient funds. But living within one’s means is hardly tantamount to damaging the economy.
    American history highlights the unusual nature of the recent conversion of conservatives to the idea that federal spending should be financed with debt rather than tax revenues in order to foster economic growth. Fiscal conservatives in both parties successfully fought to amend the Employment Act of 1946 to remove language that could have been interpreted as condoning that very idea. Conservatives pushed for a constitutional amendment to balance the budget for years before Congress nearly passed it in 1995. In contrast, in 2011 various conservative organizations pressured Congress to kill that very constitutional amendment. This shift cannot be attributed to a plan to reduce the size of the federal government by “starving the beast” of tax revenues. History and common sense plainly refute the notion that debt-financed spending diminishes the size of government.
    The attitude of many Democrats concerning post-2001 debt was—for a time—less remarkable. They could blame a significant portion of new debt on tax cuts passed at the initiative of a Republican president and Congress, the extended occupation of two foreign countries, and the most severe economic downturn since the Great Depression. Democrats proposed to reduce deficits by raising tax rates on the very highest incomes and phasing out spending for the wars in Iraq and Afghanistan. By 2013 that program had been implemented, yet the White House continued to estimate federal funds borrowing in fiscal year 2014 of more than $800 billion, about $5,000 per employed American and 30 percent of federal funds spending. 1
    T HE L IMIT OF I NCOME T AXATION
    The federal personal income tax has generated revenue amounting to a remarkably stable level of national income since the end of the Korean War in 1953. Since then, Americans have paid personal income taxes within a range between 6.7 percent (in 1965) and 9.5 percent (in 2000) of national income. 2 Personal income tax revenues in fiscal year 2014 are projected to be 8.1 percent of national income, in line with the post-1953 average. 3 Personal income tax revenues expressed as a percent of reported gross taxable income—the top line of tax returns—has also fallen in a relatively stable range between 11.6 percent (in 1954) to 15.1 (in 2000). 4 The average has been about 13 percent of gross taxable income.
    There has been some political barrier, reflecting public opinion, when personal income taxation approaches 10 percent of national income. President Franklin Roosevelt insisted on higher personal income tax revenues than that when he vetoed a tax bill in 1944. Congress easily overrode that veto even though Americans at the time were willing to make enormous sacrifices in support of the war effort.
    Federal personal income taxes have always been based on the ability to pay. So a personal income tax that yields 10 percent of national income and 15 percent or so of gross taxable personal income (before deductions) signifies much higher tax rates applicable to high incomes. Five percent of households with the greatest taxable incomes in 2010—6.7 million households out of 135 million filing returns—earned a third of adjusted gross income and paid three-fifths of all federal income taxes. 5 When they are