Back during the Vietnam war an antiwar senator is reputed to have said that the United States should just declare victory and go home. I've been reminded of this story watching the Tea Party element in Congress these last few days, because on the cusp of a more than respectable first-round victory, they're trying to declare defeat.

To get you quickly up to speed, the deadline for a budget agreement looms on Friday. Congress has already passed two stopgap spending bills to keep the government functioning – for three weeks, then two. Republicans say there'll be no more of those. Either there's a real deal or no deal. So, if there's no deal by Friday, all "non-essential" government operations will shut down. The museums of Washington will be closed on Saturday, for starters. On Monday, hundreds of thousands of federal workers will stay at home, without pay, and thousands of government functions from scientific research to community development, farming support and environmental protection will cease to be funded and carried out.

Republicans and Democrats agreed in principle last week to $33bn in domestic spending cuts and have been negotiating toward that goal, which splits the difference between the parties' starting points. But to the Tea Party-backed members of the Republican caucus, splitting the difference constitutes compromising with the socialists.

On Monday night, after meeting the caucus, House speaker John Boehner suddenly announced "$33bn is not enough". The figure would make for the largest single-year cut in what we call the domestic discretionary budget – that is, the social spending at the heart of our most heated debates – in modern history.

You'd think Republicans might settle for calling that a victory. But for the Tea Party faction it's a disgrace, a quisling number; and so, even after it seemed last week calmer heads had prevailed, there is again considerable doubt over whether Boehner can get enough Republicans to support any compromise. If Democratic and Republican leaders reach a theoretical deal and Boehner can't deliver enough Republican votes to pass it, Democrats will be celebrating – because Republicans will probably be blamed for the shutdown.

But before Democrats lace up their dancing shoes, they should be reminded of what a debacle this is from the point of view of progressive governance. The debate is being conducted entirely on Republican terms. It has been about whether the correct course on domestic spending is a five-year freeze (Barack Obama's opening proposal) or tens of billions in cuts. Meanwhile, a few things have been left largely undiscussed.

To begin with, the domestic discretionary portion of the budget has shrunk drastically over the years, from 22% of the budget in 1980 to 12% today. To be sure it has increased under Barack Obama – as it did under George W Bush – in raw terms, but overall it's a much smaller part of what government does. Why? First, because our entitlement programmes (social security, but especially Medicare and Medicaid) are eating up more of the budget. Second, because military spending has gone wild in recent years (turns out wars cost money, even though Bush tried to keep the wars off the books) up almost 60% over the last decade.

Third – and here's the big thing: the government is collecting far less in taxes, adjusted for inflation, than it used to. Especially from the rich. If wealthy Americans were paying taxes at the rate they did 50 years ago, says former Clinton labour secretary Robert Reich, the government would be taking in $350bn more a year: budget woes over.

But forget going back 50 years, when taxes were high even by my standards. If we merely went back to the 1980s, the days of the great conservative hero Ronald Reagan, we'd be in far better fiscal shape. Taxes on capital gains, rich people's chief income source, were 35% then. Now they're 15%. Inheritance taxes have been reduced to a fraction of what they were. All this as the super-rich have grown richer, controlling more and more wealth. And while income taxes for middle-income families have gone down a bit, they still pay a far higher percentage of their income in payroll taxes.

Obama and the Democrats must put these issues on the table. The Tea Party argument that there's bloat and waste in Washington will always fall on receptive ears in America. But the counter-argument isn't to quibble about how much to cut. The counter-argument is to say we believe in a society where the wealthy pay their share, which they plainly have not been doing. A political loser? So, for Democrats, is the coming debate about whether to slash healthcare for the poor by $4tn in a decade or a little less than that. We're on our way to a radically shrunken society, and the Democrats are helping take us there.