In partnership with | | | | Was this newsletter forwarded to you? Subscribe here | | Next week the Republican-led Congress plans to move President Trump's Big Beautiful Bill one step closer to law. The most recent CBO analysis factoring in interest rates, inflation, and economic growth put the cost to $2.8 trillion. Democrats have criticized the bill but haven't offered alternatives as they live up to their signature "right, but ineffective" brand. Not offering a contrasting bill is a missed opportunity. So here's my plan to reduce the deficit gradually, increase investments in future generations, and maintain economic growth. (Note: While healthcare and defense are ripe for cost-cutting, I've left them out of this analysis, as those are posts for another time.) | Bipartisan Hallucination | Economists frame the trade-off between defense spending and social welfare as guns vs. butter. As spending on guns increases, there's less money for butter, and vice versa. That's the theory, anyway. In practice, the GOP believes cutting taxes is the best strategy for growth (it isn't), and Democrats believe the government can fix social ills by throwing money at problems. So, in the sole act of bipartisanship that endures, we cut taxes and increase spending, resulting in massive deficits that amount to deferred taxes on the young. The result? The federal budget's fastest-growing line item isn't defense or entitlements, but interest on our debt. So, raise taxes or cut spending? The answer is … yes. | Three Choices | A budget involves three variables: time (costs and opportunities left for future generations), people (redistribution), and values. On my podcast, University of Michigan economics and public policy professor Justin Wolfers told me the question isn't whether a budget increases or decreases the deficit, but what is the right level. "The basic logic is we should stash away a bit of money when times are good, so we can splash cash when times are rough." Our current deficit-to-GDP ratio is 6.4%, meaning we're spending money as if we're combating a pandemic or the Great Recession. Instead, we need to run moderate surpluses that don't stifle economic growth and/or budget deficits that are below the forecast for GDP growth. Some back of the envelope math: To reduce our deficit-to-GDP to a 1% target over the next decade, we'd need spending cuts and revenue increases that net out to approximately $150 billion in annual deficit reduction. | | Money on the Table | The tax gap is the difference between the amount of taxes owed and the amount collected on time. According to the most recent IRS data, the tax gap in 2022 was $696b, meaning we'd make significant progress on our deficit-to-GDP target simply by cracking down on tax avoidance. Biden's Inflation Reduction Act (IRA) put us on that path. According to an analysis from the Yale Budget Lab, its $80b increase in IRS funding over 10 years (since rescinded) would've netted $637b in revenue over that period. Another analysis by Larry Summers and Natasha Sarin estimated that restoring tax compliance efforts to historical levels could generate over $1 trillion in the next decade. Neutering the IRS amounted to the most regressive tax in recent history: Lower- and middle-income tax returns are simple and easy to audit/enforce. However, the explosion in the tax code from 400 to 74,000 pages over the last century created an obstacle course that must be run at night. Wealthy households have experienced navigators (tax lawyers, advisers, etc.) to guide them. Reducing the agency's staff is a conscious decision to not enforce the tax code for the wealthy. We're gutting the fire department during wildfire season to save water. It's not stupidity — it's a(nother) conscious decision to transfer wealth from poor to rich as the effective tax on the wealthy plummets. | The lion's share of uncollected revenue ($381b) would come from individuals, unreported employment taxes ($111b), underpayments ($80b), and non-filings ($53b). One paper estimated the top 1% of earners are responsible for nearly 30% of unpaid taxes, as high earners incur greater tax liabilities, and their income tends to flow from opaque sources that aren't subject to third-party reporting. According to Summers and Sarin, every dollar invested in audits returns $7 in revenue. But since 1960 the audit rate has fallen from 3% to 0.36%. To paraphrase the bank robber Willie Sutton, audits are where the money is. According to a GAO report, AI could help the IRS deploy its limited resources to identify suspect returns, understand complex audits, and free up staff to improve customer service. | Dynasties vs. Decency | One of the most offensive provisions in Trump's Big Beautiful Bill is a permanent increase in the estate tax exemption to an inflation-indexed $15m, per person — letting couples pass $30m to their heirs tax-free while slashing food stamps. We're opting for dynasties over decency. Good governance is implementing taxes that are the least "taxing." That's the basis for a progressive tax system — I can more easily endure a high tax rate than a special needs teacher making $40k. Vastly reducing the inheritance exemption is likely the least taxing tax that could raise substantial revenue. Your kid inheriting $7m vs. $9m won't hurt. I know a lot of rich kids. The very rich are no happier than the rich; there are diminishing returns to happiness above a $200k annual in income. My proposal: Drop the exemption to $1 million and tax inheritances above that threshold at 40%, without loopholes. That would raise an estimated $118b in annual revenue, or more than $1 trillion over a decade. | Alternative Minimum Tax | In 1969, Congress learned that 155 taxpayers with incomes exceeding $200,000 (nearly $2m today) had paid no federal income tax in 1966. Representatives received more constituent letters about these 155 taxpayers than about the Vietnam War. In response to that outrage, Congress created an early version of the alternative minimum tax. Over the following decades, Congress tinkered with the AMT, but the basic idea was to compare an individual's income before and after they claimed certain deductions and dove into the torrent of loopholes inserted by lobbyists. | After a portion of their income is exempted, the taxpayer must pay tax on whichever amount is greater. The 2017 Tax Cuts and Jobs Act didn't eliminate the AMT, but it limited its scope, dropping the number of taxpayers affected by the tax from 5.2m to 200k. We should bring back the individual AMT with a $1m threshold taxed at 40% and a $10m threshold taxed at 60%. If 60% sounds high, historically … it isn't. This would raise $540b in revenue per year, while only affecting the top 0.2% of filers, or about 275k taxpayers, according to my back-of-the-envelope calculation. We could also do nothing, as the TCJA's assault on the AMT is set to expire this year if Congress doesn't act. | | Eliminate the Youth Tax | Lower long-term capital gains rates and mortgage interest deductions are nothing but a transfer of wealth from young to old, poor to rich. Who owns stocks/homes? A: The old/rich. Who rents and makes their money from a salary? A: The young/poor. Eliminating the capital gains tax deduction (taxing windfalls at the same rate as ordinary income) and the mortgage interest deduction would add $117b/annum to revenue. | Corporate Citizens | How many lobbyists does it take to change a light bulb? A: None, as they prefer to keep everyone in the dark. In 2024, U.S. businesses spent $4.4b on lobbying. It may be the greatest ROI in economic history. One study found that lobbying connected to a 2004 law that created a one-time tax holiday for repatriated profits delivered a 22,000% return. You can't ban lobbying, but you can make it less profitable by turning on the lights. In 2017 the TCJA did away with the corporate AMT, which had raised only $13b over the previous decade. The 2022 IRA brought back the corporate AMT, but it was so poorly executed that it fell far short of its projected $222b in revenue. Here's my idea: Lower the threshold to $500m, double the rate to 30%, and take a machete to the tax code. By limiting accelerated depreciation, restricting R&D and clean energy credits, capping deductions for net operating losses, and limiting foreign tax credits, we can design a corporate AMT that raises an estimated $300b in revenue over a decade, while affecting approximately 400 corporations, or fewer than 0.1% of all U.S. businesses. | | Third Rail | Since 1957 the share of Americans who are 65 and older has nearly doubled from 9% to 17%. At $1.5 trillion dollars, Social Security is the largest expenditure in the federal budget. U.S. seniors are the wealthiest cohort in history and the recipients of the largest redistribution in history. The program, which currently serves 69m Americans, is due to run out of money in eight years. Three trends are driving insolvency: more people reaching retirement age (good), people living longer into retirement (also good), and a decline in workforce participation (not good). If/when Social Security becomes insolvent, America's grandparents will likely put their retirement on their grandkids' credit cards. The fix is straightforward, but politically fraught: Means-test benefits and raise the retirement age (exempting people in physically demanding professions). According to a CBO analysis, increasing the full retirement age by two months per birth year until it reaches age 70 for Americans born in 1978 or later would decrease total federal outlays by $122b through 2032. Phasing out benefits for those with more than $150,000 of non-Social Security income would save an estimated $600b to $700b over a decade. We now spend $5 on seniors for every $1 on children. Enough already. Seniors who need Social Security should get it, but it shouldn't mean an upgrade from Carnival to Crystal Cruises for NaNa and PopPop. At current rates, within a decade, we'll spend half our federal budget on programs for seniors. (See above: The wealthiest generation in history.) | Planting Seeds | Last year, I gave a TED Talk that asked whether we love our children. Spoiler alert: We don't. Our policy choices rob from the young/poor and give to the old/wealthy. The Big Beautiful Bill is no exception, but it does contain one "concept of a plan" worth mentioning. "Trump Accounts" would give each child $1,000 in a tax-deferred savings account; parents would be able to add up to $5k annually. The problem isn't the $3.6b annual price tag, but the authoritarian branding gimmick. The tell? Only children born during Trump's second term receive the benefit; the rest of America's children are shit out of luck. | But there are other interesting "baby bond" proposals. Senator Cory Booker's American Opportunity Accounts Act would grant every American $1k at birth, plus an annual supplement of up to $2k, scaled by family income. The funds become available when the recipient turns 18 and can be used for education, homeownership, or retirement contributions. Financier Bill Ackman's Birthright proposal would grant every American $6,750 at birth at an estimated annual cost of $26b. The money would be invested in index funds until the recipient turns 65 — at an 8% rate of return, the bond would be worth $1m at maturity. Giving young people seed capital can grease the skids toward upward mobility, erode stark racial and regional wealth disparities, and renew the American dream. If our leaders do their job(s) and think long term, we'll adopt an Ackman-like plan and, in 30 years, see an end to Social Security. In another 30 years we'd likely register a decline in interest rates and our largest line item, interest on our debt. As an old Greek proverb says, "A society grows great when old men plant trees whose shade they know they will never sit under." | Tax Holiday | To combat high youth unemployment and stem the tide of young people leaving the country, Portugal announced a tax holiday for workers younger than 35. Under the plan, young people earning up to €28,000 a year receive a 100% tax exemption in their first year of work and reduced tax rates over the subsequent decade. U.S. youth unemployment is lower than in Portugal, and brain drain isn't an issue, unless you're a scientist or talented immigrant. Nevertheless, a tax holiday would benefit young Americans, as many of their challenges — education and housing affordability, stagnant wages, loneliness, declines in sex and dating, and a mental health crisis — reverse-engineer to income. My proposal: A federal tax holiday for workers under 35 earning less than $75k per year. (Note: These workers would still pay withholding taxes.) This would cost $110b annually, according to my back-of-the-envelope calculation. However, the extra cash — anywhere between $4,500 and $11,500 — would be a lifeline to struggling young people, and just as important, a rare sign that America actually loves its children. | Free Gift With Purchase | The first rule of holes is simple: Stop digging. For too long, Washington has been in a bipartisan shovel brigade. Somewhere on the horizon is a fiscal cliff. We don't have to turn on a dime, as we didn't get here overnight. But the moment we reverse course and signal that we're grown-ups, the bond markets will notice, and interest rates will likely come down. Or we can continue to fuck around and find out. For every percentage-point increase in the debt-to-GDP ratio, the interest on Treasuries increases 2 basis points, according to a CBO analysis. That's not much. But as Michigan's Wolfers told me, we're on track to raise the debt-to-GDP ratio by 25%, to 50%, in the coming years, resulting in a 1% increase on the interest we pay to borrow money. That translates to an additional $400b/year in interest costs. The more we spend servicing our debt, the more our creditors will worry about repayment. That means interest rates will continue to rise, and there won't be any fiscal room left to keep seniors out of poverty, lift up young people, pay for healthcare, and provide for the common defense. Even without modeling for behavioral changes, my rough calculations illustrate a stark directional choice: Continue our march toward that fiscal cliff, or find real savings and invest in our future over the next decade. | | Grow Up | Just as Big Tech weaponizes the "illusion of complexity" to convince us they just can't figure out how to fact-check, stop Nazi content from going viral, or age-gate their platform (spoiler alert: They're lying), lobbyists will fear-monger and claim these are complex issues with unintended consequences. The solutions are simple, but they're also hard, requiring us to resume the adult conversation that ended when George W. Bush told Americans we could prosecute a war and cut taxes at the same time. And we believed him. I've come to realize I'm not my sons' friend, but their father: Our difficult conversations instill a set of values which will serve them well in the future (I hope). We've been told we can have chocolate cake for dinner and not go to school if we don't feel like it. At some point, let's hope/trust an adult shows up. | Life is so rich, | | P.S. Our full conversation with economist Justin Wolfers on Prof G Markets is required listening for grown-ups. Here on Apple or Spotify or YouTube. | ____________sponsored content ____________ |
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