For the last 40 years or so republicans have caused bad economies that democrats come in and fix. Biden broke that pattern a bit by being less fiscally responsible than Clinton or Obama, but now we’re nearing a deficit cliff and I’m not sure who’s going to save us from whatever catastrophe Trump and co cause.
It's fairly hard to compare Biden with Clinton/Obama when neither of the latter two inherited such a historically distinct economic situation amidst a global pandemic. Rising interest rates were global in nature and those created the current deficit problem way more than any legislation Biden passed.
That’s partially true but it’s not the whole story. Biden also passed a lot of really big spending bills that exacerbated inflationary pressures, even after COVID was basically over. Some I agreed with, some I didn’t, but they were all basically unfunded spending increases which is not fiscally responsible.
His two biggest bills were the Covid stimulus bill and the IRA. The former was too big but big picture, necessary to keep businesses afloat. And inflation declined as disbursements from the latter started going out (I'm not saying there's a correlation there, but there's little evidence showing the IRA contributed significantly to inflation)
The only surprising thing is that anyone is surprised. This was totally predictable. The arithmetic is simple, and long known. It’s mind boggling that any thinking human believes the self-proclaimed “king of debt” has the desire, or skill, to address this. His first term set the all time record for debt accumulation. DOGE is an authoritarian tool to break the civil service, not a fiscal tool. Wake up y’all, Don is a demented disaster. Good luck America.
We currently spend the same amount on interest payments as we do for defence.
That alone should be enough for most thinking people to understand we are wasting money on interest, and making even larger interest payments is not a good way to manage money.
While many of the cuts and layoffs from DOGE are appreciated, and tariffs help, there is nowhere near enough money saved to make a dent. Most money spent is on Social Security, Medicare, and Medicaid. Old people are already squeezed so much they work Walmart and Costco to pay the rent. Anyone who thinks cutting anything there is politically feasible delusional.
So what is left? Make more money. Tax. The standard deduction simplified taxes for almost everyone, the savings is on the folks so wealthy they still have to hire a CPA and a bevy of lawyers. As a person with a business I look carefully at taxes. There is tons of room to tax without even putting a material crimp in the lifestyles of the prosperous. Just look at some of the salaries for the people Vance is firing. Do we really need a DEI administrator who doesn't have to go to the office, ever, to make a half million dollars a year with hair down to his butt? What of the trustafarian who doesn't work and therefore pays no income tax at all, only capital gains?
Like Trump, I oppose cutting the benefits of Social Security and Medicare. Both programs are afflicted with bad design and I never would have done it that way. To be fair, FDR didn't want it that way either. He wanted something like individual accounts but his veto was overridden. However, here we are and many people depend on those programs to have any sort of retirement at all. They acted in good faith and were taxed to provide those benefits. The only way you can get out of that trap is to run a new system in parallel with the old one with any new entrants going into the old system. However, that is very expensive and can't happen until some of the other problems are solved. There is some room to cut expenditures by targeting fraud. It the case of Medicare, that is provider fraud. In the case of SS, it is to be found in the disability portion of the program and not so much in the retirement part.
Don't fall into the Paul Ryan heresy and conflate Medicaid with the other two. Medicaid is pure welfare.
Medicaid is the final backstop, the last resort for medical care for many millions of Americans. Cut it and many will suffer, and struggling hospitals (especially in rural areas) will finally give up the ghost. It is without question ‘welfare’ but aside from letting people get sick and die there doesn’t seem to be an alternative.
Agreed but it is different from the others two. I can think of a number of policy issues that would improve it while the other two have a contractual basis. (I know what the Supreme Court said but this is the same institution that said that free blacks aren't citizens. ). The issue that links the three is fraud and that should be addressed first. Supposedly Elon's war band has found billions in payments to the same SS number or to no number at all. Then hammer some sleazy providers in both Medicare and Medicaid. Then see if we need policy changes.
I don't doubt there is SSI fraud. People claiming a back problem and getting scrips for oxy. But we still need the program. Workers comp doesn't cover everything, and for kids orphaned or wives widowed it can be a godsend.
Similarly with Medicaid. For old people Medicare only covers a couple months in the hospital, then after you sell everything you own except the house Medicaid will pay for the nursing home until you die, and then when your widow dies they take the money from selling the house.
Currently our personal health insurance which covers just about everything is valued at around $36,000 on our W2, and we pay no taxes on that money. Most people where I live, our health insurance is about the same as their income. Poor people, or even people who work full time but don't make much money, they simply don't make enough to afford to go to the doctor. Medicaid pays for that.
There is a ton of ridiculous costs with health care, and half the price could be eliminated if someone like Musk went in there slashing and burning, but until we fix the private medical industry we still have to not let people die for lack of a doctor.
So we are stuck with the three imperfect programs, and there are lobbyists and campaign donations going to both parties.
True enough. The system is necessary but broken. If we can ever get our fiscal house in order (ha), we could fix some of that and set up a parallel system to replace SS for new entrants.
I mean, where have you been the past 40 years? This political deal - cut taxes, don’t cut spending - is the political glue that binds the GOP. You appear to be surprised by this?
"We have here a classic case of politicians searching in vain for political solutions to what is a substantive problem: The U.S. tax code does not raise enough revenue to pay for the spending that U.S. voters want the government to do."
Real leadership is to give the people what they need, not what they want.
Democrats suck at real leadership.
So do necon Republicans.
MAGA Republicans knew that the fix for what is broken is gonna' hurt. As long as we are moving forward making America great again, the pain will be accepted.
Oren, you are doing great work with Understanding America, Commonplace, and American Compass. Thank you.
Your Tax Trainwreck article and ones like it earlier do a great job of identifying the problem. However, if you have proposed a specific solution, I have missed it.
I was wondering if you ever communicate with Ray Dalio regarding his recent 3%, 3 Part solution. If I understand it correctly, he recommends cutting the budget deficit to 3% of GDP via a 4% cut in spending, a 4% increase in taxes, and a 1% cut in real interest rates.
It seems to me that combining your economic credibility and the influence you have over some very important politicians combined with Ray Dalio's economic/finance brilliance, could achieve true greatness for America.
You two may not be aligned on everything, but you two would simply have to come together in the same manner you say that the politicians do to get the main thing done. You two are both clearly focused on this subject.
The Republicans are not going to cut or reform Social Security neither are the Democrats. Someone should because it’s insolvent. In addition our rising national debt is out of control. My suggestion for Social Security is to means test it and use it to prevent seniors from sinking below the poverty level. The well off would rely on their own money for retirement. Also remove the income cap on Social Security taxes. As to the overall national debt add a value added tax (a form of sales tax) to the revenue mix. Yes it’s somewhat regressive but currently many pay no federal taxes at all and therefore have no skin in the game when it comes to spending.
The sad thing is there are Republicans on the Hill who see this as the moment to make some common sense reforms to SS, but with Trump declaring it off-the-table, he just made the third rail more electrified and they'll continue waxing on about frikkin' foreign aid.
It is always about congress wanting to spend more.
Not a single dime of new revenue via new, or higher taxes, are needed.
Indeed, the general public likes, and wants, spending that is beneficial, Directly to individuals. But, polling has shown consistent enormous support for auditing of govt agencies and cutting out the fraud, waste, and abuse.
The consensus, from the likes of the GAO, Musk’s efforts, congressional members, and think tanks like CATO and Hoover institute is that there is over $500billion in fraud and wastes. This is likely a low figure.
I don’t see the public being the problem as it relates to federal cuts. It is Congressional members who benefit, indirectly, from increased spending and current spending levels with little to no effective oversight.
"Indeed, the general public likes, and wants, spending that is beneficial, Directly to individuals. "
This just isn't reflective of reality. The reason why Congress keeps the spigot moving is the multitude of federal grant programs and contracts disbursed create a long chain of jobs. Literally millions of jobs across the country when you account for all of the down-streamers. Now, folks can argue about the efficiency of some of those jobs (conservatives seem loath to discuss how so much of defense contracting is essentially a federal jobs program that creates minimal return benefit to the median taxpayer) but you take away the grants and contracts, local businesses that have long relied on them will be angry, and call their congressman.
I don’t disagree with you on the contractors, but they ARE the ‘general public’. Moreover, this is true on grants, SS, Medicare, roads, bridges, govt paying for breakfast, lunch, dinner, and dessert at schools and low income individuals, etc.
Joe is ok with cutting X, but not for Y.
Jill is ok with cutting Y, but not for X.
Even at local levels. Don’t cut the library, but do cut the arts. Don’t cut the arts, which I enjoy, but do cut the library.
If you want to understand DT's view of debt, just look at two events 1) Video of Trump saying Debt renegotiation (ie default) is good for his company but not the country (at the time, debt was 19 Trillion. Now 34 Trillion) https://www.politico.com/video/2016/06/donald-trump-im-the-king-of-debt-059208) and 2) Warren Buffett's 1991 analysis of Trump's bankrupt situation. What did Republicans think they were getting in terms of any hint of fiscal (or moral) responsibility
“If Republicans spend the next year fighting over a tax bill that is a low priority outside the Beltway,”
I know this quote above was from Politico. But seriously. A ‘low priority’? I think they are badly mistaken.
If you are retired and don’t own a home with a mortgage, or you are young and making a decent income and don’t own a home with a mortgage (with interest and property taxes as a deduction) the expiration of the 2017 cuts are likely to double or triple your tax bill. Cutting the standard deduction by 50% (which is essentially the outcome for a two person household) with no offset pours all that money into the taxable category, at the marginal rate.
Talk about a train wreck. That would certainly send the economy into recession, pulling out hundreds of billions in spendable income.
This is definitely an issue outside the beltway and contrary to Politicos assertion, many of us are watching it like a hawk.
A more progressive tax policy that gave a break to people who actually spend their money while raising taxes on the people who just invest it might actually resolve that tension somewhat. Phase out the stepped-up basis for estates over 4 or 5 million (or individual inheritances over 2 million). Phase out the child tax credit as incomes increase.
It is DC's goofy math that makes rhe status quo look like a massive tax cut. Whether it is temporary tax cuts or temporary expenditure increases, the whole thing is a monument to short term thinking.
There are several plausible paths out of the budget mess. The first is growth. This is often oversold but real. It is focused too much on tax policy and not enough on regulatory policy. Regulatory overreach strangles small business to the benefit of oligarchs. Not so long ago, small business was the engine of growth. The second is Trump's tariffs. The argument is that foreign actors will devalue their currency to maintain market share leaving consumers no worse off while increasing revenues. The third is expenditure cuts. How many trillions have we spent being the world's policeman and sugar daddy. And who knew the level of dependency of NGOs on government funding.
Wonderful post, thank you. If only 1% of Americans say tax reform should be President Trump’s top priority perhaps American Compass can provide some econ 101 as part of its writing? Phrased differently, jobs, reindustrialization, helping the working class etc. will rate higher but people need to be continuously educated on the relationship between these issues and the current and capital accounts. Perhaps if a greater understanding can be had a better moral argument can be made for who you help and who you tax. As an example, my favorite economics comment was used by @michaelxpettis when he reference X "former Fed Chairman (1932-48) Marriner Eccles, ... from his memoir, Beckoning Frontiers (1966): As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth – not of existing wealth, but of wealth as it is currently produced – to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."
The problem is not that we don’t raise enough revenue it is that we’ve let expenditures rise much faster than revenue which has been growing at a fast clip
For the last 40 years or so republicans have caused bad economies that democrats come in and fix. Biden broke that pattern a bit by being less fiscally responsible than Clinton or Obama, but now we’re nearing a deficit cliff and I’m not sure who’s going to save us from whatever catastrophe Trump and co cause.
It's fairly hard to compare Biden with Clinton/Obama when neither of the latter two inherited such a historically distinct economic situation amidst a global pandemic. Rising interest rates were global in nature and those created the current deficit problem way more than any legislation Biden passed.
That’s partially true but it’s not the whole story. Biden also passed a lot of really big spending bills that exacerbated inflationary pressures, even after COVID was basically over. Some I agreed with, some I didn’t, but they were all basically unfunded spending increases which is not fiscally responsible.
His two biggest bills were the Covid stimulus bill and the IRA. The former was too big but big picture, necessary to keep businesses afloat. And inflation declined as disbursements from the latter started going out (I'm not saying there's a correlation there, but there's little evidence showing the IRA contributed significantly to inflation)
The only surprising thing is that anyone is surprised. This was totally predictable. The arithmetic is simple, and long known. It’s mind boggling that any thinking human believes the self-proclaimed “king of debt” has the desire, or skill, to address this. His first term set the all time record for debt accumulation. DOGE is an authoritarian tool to break the civil service, not a fiscal tool. Wake up y’all, Don is a demented disaster. Good luck America.
Isn’t underlying all of this the assumption that Congress will actually return to regular order for appropriations? I’ll believe that when I see it.
the anti-tax dogmatists are as untethered from practical economic reality as Stalinists. And they're presently running the country.
We currently spend the same amount on interest payments as we do for defence.
That alone should be enough for most thinking people to understand we are wasting money on interest, and making even larger interest payments is not a good way to manage money.
While many of the cuts and layoffs from DOGE are appreciated, and tariffs help, there is nowhere near enough money saved to make a dent. Most money spent is on Social Security, Medicare, and Medicaid. Old people are already squeezed so much they work Walmart and Costco to pay the rent. Anyone who thinks cutting anything there is politically feasible delusional.
So what is left? Make more money. Tax. The standard deduction simplified taxes for almost everyone, the savings is on the folks so wealthy they still have to hire a CPA and a bevy of lawyers. As a person with a business I look carefully at taxes. There is tons of room to tax without even putting a material crimp in the lifestyles of the prosperous. Just look at some of the salaries for the people Vance is firing. Do we really need a DEI administrator who doesn't have to go to the office, ever, to make a half million dollars a year with hair down to his butt? What of the trustafarian who doesn't work and therefore pays no income tax at all, only capital gains?
There is tons of room to tax.
Like Trump, I oppose cutting the benefits of Social Security and Medicare. Both programs are afflicted with bad design and I never would have done it that way. To be fair, FDR didn't want it that way either. He wanted something like individual accounts but his veto was overridden. However, here we are and many people depend on those programs to have any sort of retirement at all. They acted in good faith and were taxed to provide those benefits. The only way you can get out of that trap is to run a new system in parallel with the old one with any new entrants going into the old system. However, that is very expensive and can't happen until some of the other problems are solved. There is some room to cut expenditures by targeting fraud. It the case of Medicare, that is provider fraud. In the case of SS, it is to be found in the disability portion of the program and not so much in the retirement part.
Don't fall into the Paul Ryan heresy and conflate Medicaid with the other two. Medicaid is pure welfare.
Medicaid is the final backstop, the last resort for medical care for many millions of Americans. Cut it and many will suffer, and struggling hospitals (especially in rural areas) will finally give up the ghost. It is without question ‘welfare’ but aside from letting people get sick and die there doesn’t seem to be an alternative.
Agreed but it is different from the others two. I can think of a number of policy issues that would improve it while the other two have a contractual basis. (I know what the Supreme Court said but this is the same institution that said that free blacks aren't citizens. ). The issue that links the three is fraud and that should be addressed first. Supposedly Elon's war band has found billions in payments to the same SS number or to no number at all. Then hammer some sleazy providers in both Medicare and Medicaid. Then see if we need policy changes.
I don't doubt there is SSI fraud. People claiming a back problem and getting scrips for oxy. But we still need the program. Workers comp doesn't cover everything, and for kids orphaned or wives widowed it can be a godsend.
Similarly with Medicaid. For old people Medicare only covers a couple months in the hospital, then after you sell everything you own except the house Medicaid will pay for the nursing home until you die, and then when your widow dies they take the money from selling the house.
Currently our personal health insurance which covers just about everything is valued at around $36,000 on our W2, and we pay no taxes on that money. Most people where I live, our health insurance is about the same as their income. Poor people, or even people who work full time but don't make much money, they simply don't make enough to afford to go to the doctor. Medicaid pays for that.
There is a ton of ridiculous costs with health care, and half the price could be eliminated if someone like Musk went in there slashing and burning, but until we fix the private medical industry we still have to not let people die for lack of a doctor.
So we are stuck with the three imperfect programs, and there are lobbyists and campaign donations going to both parties.
True enough. The system is necessary but broken. If we can ever get our fiscal house in order (ha), we could fix some of that and set up a parallel system to replace SS for new entrants.
I mean, where have you been the past 40 years? This political deal - cut taxes, don’t cut spending - is the political glue that binds the GOP. You appear to be surprised by this?
"We have here a classic case of politicians searching in vain for political solutions to what is a substantive problem: The U.S. tax code does not raise enough revenue to pay for the spending that U.S. voters want the government to do."
Real leadership is to give the people what they need, not what they want.
Democrats suck at real leadership.
So do necon Republicans.
MAGA Republicans knew that the fix for what is broken is gonna' hurt. As long as we are moving forward making America great again, the pain will be accepted.
The Jenga tower is about to tip
Oren, you are doing great work with Understanding America, Commonplace, and American Compass. Thank you.
Your Tax Trainwreck article and ones like it earlier do a great job of identifying the problem. However, if you have proposed a specific solution, I have missed it.
I was wondering if you ever communicate with Ray Dalio regarding his recent 3%, 3 Part solution. If I understand it correctly, he recommends cutting the budget deficit to 3% of GDP via a 4% cut in spending, a 4% increase in taxes, and a 1% cut in real interest rates.
It seems to me that combining your economic credibility and the influence you have over some very important politicians combined with Ray Dalio's economic/finance brilliance, could achieve true greatness for America.
You two may not be aligned on everything, but you two would simply have to come together in the same manner you say that the politicians do to get the main thing done. You two are both clearly focused on this subject.
The Republicans are not going to cut or reform Social Security neither are the Democrats. Someone should because it’s insolvent. In addition our rising national debt is out of control. My suggestion for Social Security is to means test it and use it to prevent seniors from sinking below the poverty level. The well off would rely on their own money for retirement. Also remove the income cap on Social Security taxes. As to the overall national debt add a value added tax (a form of sales tax) to the revenue mix. Yes it’s somewhat regressive but currently many pay no federal taxes at all and therefore have no skin in the game when it comes to spending.
The sad thing is there are Republicans on the Hill who see this as the moment to make some common sense reforms to SS, but with Trump declaring it off-the-table, he just made the third rail more electrified and they'll continue waxing on about frikkin' foreign aid.
It is always about congress wanting to spend more.
Not a single dime of new revenue via new, or higher taxes, are needed.
Indeed, the general public likes, and wants, spending that is beneficial, Directly to individuals. But, polling has shown consistent enormous support for auditing of govt agencies and cutting out the fraud, waste, and abuse.
The consensus, from the likes of the GAO, Musk’s efforts, congressional members, and think tanks like CATO and Hoover institute is that there is over $500billion in fraud and wastes. This is likely a low figure.
I don’t see the public being the problem as it relates to federal cuts. It is Congressional members who benefit, indirectly, from increased spending and current spending levels with little to no effective oversight.
Cut!
Cut!
Cut!
"Indeed, the general public likes, and wants, spending that is beneficial, Directly to individuals. "
This just isn't reflective of reality. The reason why Congress keeps the spigot moving is the multitude of federal grant programs and contracts disbursed create a long chain of jobs. Literally millions of jobs across the country when you account for all of the down-streamers. Now, folks can argue about the efficiency of some of those jobs (conservatives seem loath to discuss how so much of defense contracting is essentially a federal jobs program that creates minimal return benefit to the median taxpayer) but you take away the grants and contracts, local businesses that have long relied on them will be angry, and call their congressman.
Btw, the contractors are not explicit to defense.
I don’t disagree with you on the contractors, but they ARE the ‘general public’. Moreover, this is true on grants, SS, Medicare, roads, bridges, govt paying for breakfast, lunch, dinner, and dessert at schools and low income individuals, etc.
Joe is ok with cutting X, but not for Y.
Jill is ok with cutting Y, but not for X.
Even at local levels. Don’t cut the library, but do cut the arts. Don’t cut the arts, which I enjoy, but do cut the library.
Cut them….. don’t cut me.
If you want to understand DT's view of debt, just look at two events 1) Video of Trump saying Debt renegotiation (ie default) is good for his company but not the country (at the time, debt was 19 Trillion. Now 34 Trillion) https://www.politico.com/video/2016/06/donald-trump-im-the-king-of-debt-059208) and 2) Warren Buffett's 1991 analysis of Trump's bankrupt situation. What did Republicans think they were getting in terms of any hint of fiscal (or moral) responsibility
“If Republicans spend the next year fighting over a tax bill that is a low priority outside the Beltway,”
I know this quote above was from Politico. But seriously. A ‘low priority’? I think they are badly mistaken.
If you are retired and don’t own a home with a mortgage, or you are young and making a decent income and don’t own a home with a mortgage (with interest and property taxes as a deduction) the expiration of the 2017 cuts are likely to double or triple your tax bill. Cutting the standard deduction by 50% (which is essentially the outcome for a two person household) with no offset pours all that money into the taxable category, at the marginal rate.
Talk about a train wreck. That would certainly send the economy into recession, pulling out hundreds of billions in spendable income.
This is definitely an issue outside the beltway and contrary to Politicos assertion, many of us are watching it like a hawk.
"are young and making a decent income and don’t own a home with a mortgage"
The pool of young people making over $400k and not having a mortgage is laughably small.
A more progressive tax policy that gave a break to people who actually spend their money while raising taxes on the people who just invest it might actually resolve that tension somewhat. Phase out the stepped-up basis for estates over 4 or 5 million (or individual inheritances over 2 million). Phase out the child tax credit as incomes increase.
It is DC's goofy math that makes rhe status quo look like a massive tax cut. Whether it is temporary tax cuts or temporary expenditure increases, the whole thing is a monument to short term thinking.
There are several plausible paths out of the budget mess. The first is growth. This is often oversold but real. It is focused too much on tax policy and not enough on regulatory policy. Regulatory overreach strangles small business to the benefit of oligarchs. Not so long ago, small business was the engine of growth. The second is Trump's tariffs. The argument is that foreign actors will devalue their currency to maintain market share leaving consumers no worse off while increasing revenues. The third is expenditure cuts. How many trillions have we spent being the world's policeman and sugar daddy. And who knew the level of dependency of NGOs on government funding.
Wonderful post, thank you. If only 1% of Americans say tax reform should be President Trump’s top priority perhaps American Compass can provide some econ 101 as part of its writing? Phrased differently, jobs, reindustrialization, helping the working class etc. will rate higher but people need to be continuously educated on the relationship between these issues and the current and capital accounts. Perhaps if a greater understanding can be had a better moral argument can be made for who you help and who you tax. As an example, my favorite economics comment was used by @michaelxpettis when he reference X "former Fed Chairman (1932-48) Marriner Eccles, ... from his memoir, Beckoning Frontiers (1966): As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth – not of existing wealth, but of wealth as it is currently produced – to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."
The problem is not that we don’t raise enough revenue it is that we’ve let expenditures rise much faster than revenue which has been growing at a fast clip