Why the Republicans Capitulated on the Debt Deal

The Republicans held out a little longer than I thought they would, but they capitulated in the end as I predicted (in a virtually riskless prediction). In return for a miniscule actual reduction in U.S. federal spending—estimated to be roughly $25 billion (from previously projected increases) in the current year, the only year that counts in Washington—they allowed the debt ceiling to be raised by more than $2 trillion.

Republicans claim to be against high government spending, but they are not against the cause of high government spending: altruism.

The only thing that the Republicans held out for is no increase in taxes on the wealthy. But that is the wrong thing to hold out for. Regardless of the amount of tax revenue, the amount of government spending is the amount of capital that the government exhausts. That capital is capital that the original owners of that capital cannot use. Who are the original owners of that capital—the poor? Who are the owners of Treasury securities that the government will not be able to pay off—the poor? Of course not. Deficit spending and inflation are another tax on the wealthy.

The current short-term capital gains tax rate is 25%. Consider this simple example. Suppose the annual rise in prices—caused by the government’s deficit spending and inflation of the money supply—is 4%. Suppose an investor realizes a paper profit of 6% on his capital for the year, which is 2% in real terms. But he must pay a capital gains tax of 1.5% of his capital (25% of 6%). In other words, he must pay a real tax of 75% of his real gain.

If an investor has a “bad” year and makes a paper profit of only 5%, then his real tax rate is 125%.

The Bush tax cuts did not help the wealthy, but merely changed the form of the tax.

Observe that in virtually every way—increases in government spending, increases in regulation of private industry, bailouts of private companies, stimulus plans, extension of entitlement programs, proliferation of czars, self-sacrificial police actions in Iraq and Afghanistan, betrayal of Israel, capitulation to Russia, China, Iran, North Korea—Obama is merely a more extreme version of George W. Bush. The only difference between the Obama Democrats and the Bush Republicans is on the issue of tax cuts for the wealthy. And that difference is really no difference. Either way, the wealthy are sacrificed.

The Republicans capitulated to the Democrats because they are just like the Democrats: they are sacrificers—sacrificing the producers to the nonproducers.

See also these recent posts:
Shared Sacrifice
“The Despoiling of Ability”
On the Backs of the Productive
What the Republicans Should Do

3 thoughts on “Why the Republicans Capitulated on the Debt Deal

  1. I agree with your points, Ron. However, I believe “they capitulated in the end” not primarily because of what manifests itself as altruism, which is, in this instance, a consequence of another driving force, selfishness.

    I don’t think they were motivated by altruism but by concern for their self-preservation (job-wise). Lacking guiding principles based on a coherent rational guiding philosophy concern-for-self caved to a debased agenda.

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