Edward Lotterman
The 119th Congress now deliberating in Washington is rewriting history. Having sat for only 135 days, but already over seven months into fiscal year 2025, it will grab the prize as most fiscally irresponsible Congress ever.
The 12th Congress, 1811-1813, held that status for two centuries. It declared war on England in June 1812 and adjourned without appropriating any money with which to fight. This was after refusing to recharter the First Bank of the United States, the best vehicle by which we might have borrowed the money.
We are not in a declared war now, thank God, yet there are conflicts at multiple points around the world. Our armed forces conduct combat operations daily. More importantly, the world economy is in peril amidst a trade war of our own making.
So what has this Congress done? Seven months and two weeks into the current fiscal year, Congress should be well into the task of writing the budget for FY 2026. That starts in 136 days. But it cannot quite finish a 2025 budget that will pass both houses and be signed by our president.
The general outline is clear, however. Total outlays will be up from FY 2024. Elon Musk’s delusional promises to reduce spending by $2 trillion have actually cut less than $100 billion. And some cuts were from necessary programs like air traffic control and income tax administration that will be restored. And in any case, DOGE’s cuts will be overwhelmed by higher outlays from the number of Social Security and Medicare beneficiaries ratcheting up by 1.5 million. Everyone knew this would happen.
Yet Congress proposes to cut taxes by about $90 billion a year compared to what they would be with no change in current policy. All this is madness.
The root cause of the trade deficits that trouble those in the administration is that Americans consume more than we produce. The fiscal deficit — our government paying out more than it takes in — is one underlying cause of perennial trade deficits that some see as evidence of our being cheated.
But that is a broader matter. What about details of what Congress is poised to do?
First, the 2017 tax cuts that overwhelmingly benefited high income people will be made permanent. This is obscene in its lack of fairness.
University of Chicago economist Raghuram G. Rajan pointed out 15 years ago that “The top 1 percent of households accounted for only 8.9 percent of income in 1976, but this share grew to 23.5 percent of the total income generated in the United States in 2007. Put differently, of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 percent of households.”
Those trends have continued. Forty years ago, our nation was in the fifth of nations with the most equal income distribution. Now we are in the fifth with the most unequal. Yes, high income households do pay a large fraction of total personal income taxes. But that is because they get such a large and growing fraction of total income. Yet the cuts they got eight years ago will continue.
So will the “carried interest” treatment for much of the compensation of hedge fund managers that results in their facing lower marginal tax rates than most school teachers or many truck drivers. This injustice has begged for correction for 30 years, but donations to inaugural balls and purchases of Donald and Melania’s crypto coins along with PAC contributions to key congressional races were investments that paid off handsomely to put it mildly.
Also, no one will pay income taxes on any Social Security benefits. That upends a bi-partisan consensus carefully crafted in 1984 to eliminate an unfair disparity between the taxation of public and private pension plans on one side with zero taxation of the fraction of Social Security paid for by employers’ share of FICA. It also served to keep Social Security funding solvent longer without further increases in FICA rates.
But responsible bi-partisan crafting when Congress still functioned cannot resist demagogues. And so, a fraction of us who are relatively well off will pay less in taxes. Our children and grandchildren will pay more.
The elimination of taxes on tip income will help some of them, although fewer than 2% of U.S. workers get tips and considerable fudging remains on the fraction still paid in cash. I
Hourly workers will not be taxed on overtime. The Fair Labor Standards Act, passed late in Franklin Roosevelt’s New Deal in 1938, requires wages at least one and a half times as high for any hours over 40 a week. All this was ordinary income subject to the individual income tax. But now only pay for the first 40 hours a week will get hit.
There is some apparent fairness in these two measures. If you’re giving many billions to millionaires, give at least a couple of billions to wait staff, truck drivers and assembly-line and warehouse workers.
The problem is that in doing so, you introduce other incentives that skew efficient use of resources as people try to milk the new tax preference for all they can.
Lower tax rates on capital gains than on salaries created the sham of hedge fund managers being compensated with “carried interest.” Decades earlier, a lower tax rate on sales of “livestock held for breeding purposes,” meant that female pigs raised for slaughter would be bred to give one litter of baby pigs before being sent to packing plants, while these sows’ male littermates were sent as soon as fat for slaughter.
Such tax-reducing fiddling wastes resources. They only make sense to people doing them because of the tax code quirks. This year’s tax changes create large incentives for more of the shame — er, same.
Hospitality owners already try to shift compensation from wages toward “tips.” One can already read how that might get extended to other sectors.
Brazil once had a similar experiment with tax-free overtime. Workers who regularly had been working 40 hours a week started to clock 32 one week, 48 the next and so on. Total hours worked didn’t change, but fiddled timecards meant 10% to15% of pay was not taxed.
Could major employers here get away with this? Probably not. What about small construction, office cleaning, independent retail and similar firms? Don’t bet against it. Yet over-the-road truckers earning by the mile or others on piecework won’t benefit a cent.
Public finance economists evaluate the “burden” of taxes. This includes the total cost to society of the taxes actually paid to the government plus the administrative costs of complying with the tax. It also includes the losses in national output caused by inefficient use of resources motivated only by tax avoidance. Breeding young sows to have one litter of pigs to lower income tax liability took more real resources of feed, labor and facilities per pound of pork available to households.
Congress’s 2025 actions make our economy less efficient, less fair, and less sustainable than it was on Jan. 1. It already was shot through with problems then. Why do we accept going backwards?
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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