On January 3, Democrats in the House of Representatives will vote to install Nancy Pelosi as Speaker of the House. The intelligence and street smarts on display as Representative Pelosi went toe-to-toe with President Trump over the border wall reinforces the importance of this choice. No less consequential will be the votes that day on the rules that govern how the House conducts business. Two rules in particular that govern taxation and spending will determine how vigorously Democrats are able to pursue the bold agenda that gave them a 40-seat majority in the House.
On taxation, the Democratic leadership has already made clear that it will scrap a Republican rule that would make it difficult to raise taxes – a rule the Republicans were quick to waive when Trump’s tax cuts for the wealthy raised taxes on some middle-class families. The Democrats had considered leaving this rule in place for the bottom 80 percent of families. To see how this rule would have needlessly tied their hands, consider the following real-life example.
Members of Congress on both sides of the aisle have expressed support for some form of paid family and medical leave. Polls show that nearly 80 percent of voters (95 percent of Democrats and 61 percent of Republicans) support a national paid family and medical leave program. Senator Kirsten Gillibrand and Representative Rosa DeLauro have proposed legislation, the Family Act, that would establish an insurance fund to provide workers with income when they need to take a medical, parental or family leave. A worker earning $10 an hour would pay just 80 cents a week for insurance that provides a benefit of two-thirds of the worker’s weekly earnings for up to 12 weeks. A worker at the median, earning $18.48 an hour, would pay $1.48 a week while the highest paid workers would pay $1.88 a week.Keeping a modified version of the Republican tax rule in place would have meant that the House could not bring this legislation up for a vote in the next Congress, to the dismay of the millions of working families who lack any paid leave. With respect to taxes in general, low-income households have been effectively exempted from some taxes in the past through vouchers or subsidies. There are better ways to mitigate the effects of taxes on families struggling to make ends meet.
It is less clear which direction the House will take when it comes to the rules governing spending. Several weeks ago, soon-to-be Speaker Pelosi expressed interest in adopting pay-go – a House rule that requires that taxes must be raised or other entitlement programs cut in order to expand programs such as Medicaid or SNAP (food stamps). This rule was in place the last time Democrats were in power, in 2007 to 2010. In the worst years of the Great Recession it limited the ability of Democrats to expand programs that could help middle-class families that lost jobs and homes.
There is a strong objection to the pay-go rule among the new House majority. It would be unfortunate if the Democrats needlessly tied their own hands. Senate Republicans are highly unlikely to agree to expansions of existing entitlement programs or the introduction of new programs. But that should not prevent House Democrats from taking the opportunity to pass bold legislation that addresses the needs of vulnerable families and to lay out an agenda for 2020.
Even without a pay-go rule in the House, Congress faces a further hurdle to passing legislation that meets the pressing needs of families and communities. Congress is bound by a long-standing law, distinct from the House rule, known as the Pay-As-You-Go law. This law is supposed to trigger automatic, across-the-board cuts in entitlement programs when entitlement programs are expanded or taxes are cut without specifying how they will be paid for. However, Republicans were not deterred from meeting the demands of Wall Street companies and wealthy individuals for tax cuts by this law. The Republican-controlled Congress simply passed a new law waiving Pay-As-You-Go. A Democratic-controlled Congress can do the same.
Democrats were elected in November to provide real solutions to stagnant wages, unaffordable college, and unreasonable health care costs. Candidates promised to address the escalating challenges of climate change, to overhaul outdated energy and transportation policies, and to upgrade deteriorating public infrastructure. It will take a bold vision and major investments to address these problems. Democrats should not buy into the false narrative that the US is unable to pursue policies that meet the pressing challenges it faces and that assure the employment and economic security of all of its people.Of course, there are limits to government spending. But it is the nation’s available resources —workers, capital, and natural resources — that set the limits, not tax revenue. If there are resources that can be mobilized or repurposed, Democrats will not have to raise taxes to pursue the policies they were elected to put in place. It is true that once a nation’s economic resources are fully employed, further spending, whether by private companies or by government, will translate into higher inflation. Despite today’s low unemployment rate, however, the US economy has not hit that limit.
The massive tax cuts for the wealthy, passed by Republicans with nary a thought about how to pay for them, have led to huge increases in the deficit without a surge in inflation. Like the empty calories in a sugar high, the tax cuts gave the economy a boost without delivering much-needed investments to address problems high on the list of Americans’ concerns. It’s the lack of investment, not the size of the deficit, that makes these tax cuts worrying. The economy successfully mobilized the necessary resources to meet this increase in demand. How do we know this? Inflation remains below its target rate despite the increase in the deficit.
What will Democrats do if future increases in demand nudge the inflation rate above its target? For starters, they could reduce demand pressures by rolling back the Trump administration’s tax cuts for corporations and the wealthy.