Biden and McCarthy Square Off Over the Debt Limit

House peaker Kevin McCarthy
Reuters
By Yuval Rosenberg

Happy Tuesday! President Joe Biden is still dealing with the politically damaging fallout from the discovery of classified documents at his house and former office. As that drama plays out and House Republicans gear up for a slew of other investigations into the Biden administration, another fight is already brewing — this one over the debt limit, which the Treasury Department expects to hit on Thursday. You won’t feel a thud when it happens, but we could all experience a crash a few months down the line if a partisan standoff prompted by Republicans results in a debt default.

Here's what’s happening.

Biden and McCarthy Square Off Over the Debt Ceiling

House Speaker Kevin McCarthy (R-CA) called on Democrats to begin talks immediately on raising the debt ceiling, a critical requirement that Republicans plan to use as leverage in their effort to slash federal spending. “I would like to sit down with all the leaders and especially the president and start having discussions,” McCarthy said Tuesday at the Capitol.

Treasury Secretary Janet Yellen warned last week that the federal government would run up against the federal debt ceiling on this Thursday, forcing the Treasury to start taking “extraordinary measures” that would provide liquidity roughly through June. McCarthy said he wants to start talks before the cash crunch gets too close. “Who wants to put the nation through some type of threat at the last minute with the debt ceiling? Nobody wants to do that,” he said.

The White House, however, made it clear that President Joe Biden – who called Republicans “fiscally demented” in comments over the weekend — has no plans to negotiate on the issue, and is demanding instead a clean vote to raise the debt limit.

Speaking to reporters Tuesday, White House Press Secretary Karine Jean-Pierre reiterated the administration’s position on the matter. “As President Biden has made clear, Congress must deal with the debt limit and must do so without conditions,” she said. “But congressional Republicans are threatening to hold the nation’s full faith and credit, a mandate of the Constitution, hostage to their demands to cut Social Security, to cut Medicare and to cut Medicaid — brinksmanship that threatens the global economy.”

McCarthy rejected the White House position, saying he didn’t see why you would “continue the past behavior” that produced the current fiscal situation. Instead, he said he wants to negotiate with Democrats to “set a budget, set a path to get us to a balanced budget and let’s start paying this debt off.”

The new Republican speaker indicated that the country’s main social welfare programs were fair game for negotiations as far as he is concerned, along with discretionary spending. “Let’s sit down and find a place where we can protect Medicare and Social Security for the future generations, let’s put our house in order in how we are going to spend,” McCarthy said.

What’s the plan? House Republicans are reportedly working on a contingency plan for what to do if the standoff goes badly, and the U.S. veers toward default. The plan is expected to call on the Treasury Department to meet certain obligations — with the must-pay group including Treasury instruments, Social Security, Medicare and the military — while leaving other bills unpaid.

However, it’s not clear that the Treasury has the ability to prioritize its payments in that way, or that Republicans could force it to do so. In any event, skipping some payments while making others would be sure to cause major disruptions in the economy — and major headaches politically for Republicans. “Any plan to pay bondholders but not fund school lunches or the FAA or food safety or XYZ is just target practice for us,” a senior Democratic aide told The Washington Post’s Jeff Stein, Leigh Ann Caldwell and Theodoric Meyer.

The White House’s Jean-Pierre called the contingency plan “a recipe for economic catastrophe,” while previewing a line of attack that would likely get a lot of use in the event of a partial default. “Their latest idea is that rather than paying its bills, the United States should make payments to wealthy bondholders, including foreign investors, and stop payments for border security, food safety, nursing homes, school lunches, the FAA, drug enforcement, and other programs Americans rely on every single day,” she said. “This so-called ‘privatization’ scheme makes Republicans’ priorities pretty clear — crystal clear, if I may add. They want to put wealthy bondholders over ordinary Americans who want safe food, safe skies, safe communities, and secure borders.”

A word of warning: So how will this play out? Lines are being drawn, with no clear solutions in sight. As Politico’s Olivia Beavers, Caitlin Emma and Zachary Warmbrodt put it Tuesday, “The Biden administration and House Republicans are heading toward an initial Thursday debt ceiling deadline without even a hint of an endgame, ensuring a months-long standoff that’s poised to rattle financial markets amid worries about a recession this year.”

The Wall Street Journal Editorial Board, a deeply conservative group sympathetic to the drive to cut spending, warned Republicans about the difficulties they may face in the coming weeks. “The first rule of political negotiation is never take a hostage you’re not prepared to shoot,” they wrote. “That’s advice for House Republicans to contemplate as they gear up for a high-stakes showdown with President Biden over raising the federal borrowing limit.”

State-Level Push for Wealth Taxes Coming This Week: Report

The progressive push to tax the rich is trying a new approach, The Washington Post’s Julie Zauzmer Weil reports:

“A group of legislators in statehouses across the country have coordinated to introduce bills simultaneously in seven states later this week. … Some of the state bills resemble the ‘wealth tax’ that Sen. Elizabeth Warren (D-Mass.) pitched during her 2020 presidential candidacy. It’s a form of taxation never before attempted in the United States, in which very wealthy people would have to pay taxes annually on assets that they own, rather than just their income that year. Other bills focus on raising money from more conventional forms of taxation, including capital gains taxes and estate taxes.”

The states involved reportedly are California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington. The California proposal, for example, would reportedly impose a 1.5% tax on those with more than $1 billion in assets. Some states will look to tax the unrealized capital gains or to raise capital gains tax rates for wealthy residents, while others will consider higher income tax rates on top earners.

Weil notes that some opponents of a wealth tax think the idea makes even less sense at the state level since the rich being targeted can move to a different state more easily than they might leave the country.

The renewed push for wealth taxes comes as Oxfam, a non-profit focused on fighting inequality and poverty, said in a report Monday that the richest 1% of people on the planet got nearly two-thirds of all new wealth created over the past two years.

“Oxfam believes that, as a starting point, the world should aim to halve the wealth and number of billionaires between now and 2030, both by increasing taxes on the top 1% and adopting other billionaire-busting policies,” the new report says. “This would bring billionaire wealth and numbers back to where they were just a decade ago in 2012. The eventual aim should be to go further, and to abolish billionaires altogether, as part of a fairer, more rational distribution of the world’s wealth.”

Op-Ed of the Day: A Fix for Drug Shortages

In a Washington Post op-ed on Monday, Ezekiel Emanuel, a health policy expert at the University of Pennsylvania, examined the causes of the nationwide drug shortages plaguing the United States (and many European countries). “Why are so many drugs in short supply?” he asks. The answer: “Outsourcing.” But Emanual argues that Congress can fix the problem quickly and inexpensively:

“Fully 97 percent of U.S. antibiotics are made in China. The United States produces 28 percent of the active pharmaceutical ingredients in drugs used here; China and India now produce about a third of them. The number of registered pharmaceutical manufacturing plants in China more than doubled from 2010 to 2019. …
“Many Democratic and Republican politicians want to ‘reshore’ as much manufacturing as possible. After microchips, drugs may be the most important products to bring back home. There are many ways the federal government could encourage this. A bipartisan group of senators and representatives is sponsoring the American Made Pharmaceuticals Act. It focuses on creating a demonstration project and other ways for Medicare, Medicaid and other federal health programs to preferentially purchase generics that are produced domestically.
“A faster, simpler fix is to reinstitute the tax break for drug and device manufacturing in Puerto Rico — with two caveats. First, borrowing a provision of subsidies for electric vehicles, the tax break should require that with each year companies use a greater share of U.S.-produced ingredients and components until these are over 75 percent. Second, that companies demonstrate steady improvements in quality — fewer contamination problems.”

Read the full piece at The Washington Post.

The Mess at the IRS

The Internal Revenue Service is under intense scrutiny — and, in many ways, that’s understandable. As The Washington Post’s Editorial Board wrote last week: “For the past three years, the IRS has failed to do its most basic job: processing tax returns in a timely manner.”

As the Post also noted, there are many reasons for that problem: “The pandemic upended almost everything for a while. Years of staffing and budget cuts left the agency shorthanded. Ancient computer systems hampered operations. And Congress kept asking the IRS to do more: implement the sweeping 2017 GOP tax code overhaul, then send stimulus checks — three times — to the vast majority of Americans during the pandemic. Any one of these issues would have been tough to manage. Together, they nearly sunk an agency that is critical to funding the U.S. government.”

Republicans have piled on, making a bill to wipe out $72 billion in funding for the agency their priority after assuming control of the House this month.

Those developments, combined with a leadership transition at the agency, mean that this may be “the most important for U.S. tax administration since the income tax was put in place more than a century ago,” write Natasha Sarin, a Yale Law professor and former Biden Treasury official, and former Treasury Secretary Larry Summers.

If Republicans aren’t necessarily looking to help the IRS, Sarin and Summers nevertheless offer a number of observations about the mess at the IRS.

* $80 billion over 10 years may not be enough. The money provided by Democrats last year “was a vital first step toward improving the agency,” Sarin and Summers say, but the tech and staffing issues at the agency may require additional resources.

* Investing in tax collection pays off. The authors had previously found that funding the agency’s collection efforts could reduce the amount of unpaid taxes and yield more than $1 trillion over a decade. They now say the benefits could be even greater, as recent research suggests that successful audits tend to raise revenue from taxpayers in following years as well: “If their home office deduction is disallowed once, taxpayers do not attempt the same deduction again.”

* Better tax administration is only fair. While most Americans earn their income in ways that are reported to the IRS, the wealthiest tend to be subject to less of this kind of reporting. “A crucial priority for the IRS must be enhancing its capacity to ensure that the most financially sophisticated taxpayers meet their obligations,: Sarin and Summers say. “This would require making much greater use of data science, drawing to a greater extent on those with past experience representing these taxpayers and relying more on outside experts to help evaluate taxpayers’ claims.”

Read more at the Post.

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