A recent G20 proposal for a globally coordinated wealth tax on the world’s billionaires highlights an under-discussed risk of the tools being developed by the Organisation for Economic Co-operation and Development (OECD). Its new system for international corporate tax harmonization sets a precedent for additional global taxes on individuals and other economic activities.

I’ve written extensively about the fundamental problems with the OECD’s proposals to raise taxes on American businesses and how its plan to rewrite international tax rules will destabilize the global tax system and depress international investment. This current OECD work program is cause enough for Congress to zero out the organization’s US funding and instruct the president to withdraw from the organizing convention.

However, the long-run threat of the OECD’s corporate tax project extends beyond corporate taxes. If the Inclusive Framework’s progeny—Pillar One’s redistribution of taxing rights and Pillar Two’s global minimum tax—are seen as successful, it will embolden future efforts, using similar tools, to force global tax increases on personal income, investment wealth, and politically unpopular energy sources.

In a recent article for Geopolitical Intelligence Services, I highlight how international tax activists are already shifting their focus from corporate taxes to other sources of potential revenue. In preparation for the G20 summit hosted by Brazil,

the finance and economy ministers of Germany, Spain, Brazil and South Africa proposed a global minimum tax on the world’s wealthiest families to pay for transnational redistribution and “social justice” programs. The EU Tax Observatory, a European Union-funded advocacy group for higher taxes, developed the proposal. France’s finance minister agreed with the thrust of the proposal, saying that “by 2027, we should have a global agreement on … taxation of the wealthiest people.” 

Most recently, a group of progressive US lawmakers endorsed the G20 proposal in a letter to President Joe Biden and Treasury Secretary Janet Yellen, who has voiced skepticism of the idea. For more on the folly of wealth taxes and their economics, see Cato’s Chris Edwards’ bulletin “Taxing Wealth and Capital Income.” 

The Tax Observatory’s global wealth tax report praises the OECD’s efforts over the past 15 years to reduce administrative hurdles to implementing a global wealth tax. It notes, “the world is in a better situation to successfully implement the proposal” today due to the erosion of financial privacy and increased cooperation on international taxpayer information reporting.

This is the OECD’s long game: incremental reforms that grease the wheels for more intrusive tax and regulatory systems on ever-expanding types of economic activity. For the last two decades, the OECD has laid the groundwork for a multi-pronged global tax system to support additional wealth redistribution and centralized economic planning.

As I noted in my July 2023 testimony for the Ways and Means Committee:

today’s OECD has largely devolved into a taxpayer-funded advocacy group for higher taxes, more intrusive government, burdensome regulation, and climate activism. The OECD’s recent work spans numerous projects that recommend very progressive, primarily government-centric interventions in labor markets, housing markets, and private associations…. The OECD has also expanded its work on climate policy…. Its solution is a centralized multilateral tool to ensure that every country meets the OECD’s climate goals.

The OECD doesn’t stop at suggesting new supranational tax schemes; it also recommends higher domestic taxes on Americans at home. Dan Mitchell summarizes the recent recommendation for higher taxes made by the OECD in its Economic Survey of the United States: 

OECD bureaucrats think “higher taxes” is the answer for almost any question…. Everything from higher corporate tax rates to increased double taxation of dividends and capital gains. As well as higher individual tax rates, busting the wage-base cap, and expanding the death tax…. The bureaucrats also want a carbon tax and an increase in the payroll tax rate.

The Economic Survey also recommends modest spending reforms but pairs them with additional welfare spending, childcare subsidies, and a new paid parental leave entitlement.

The OECD has outlived its useful life. Allowing the OECD’s two-pillar tax system to advance without challenge will only encourage those who wish to use similar tactics to implement other, more aggressive global tax hikes. The United States should not fund or be a member of an organization that consistently advocates for one-size-fits-all “whole-of-government strategies” that increase costs, reduce economic mobility, and limit individual freedom. 

In the first presidential debate of the 2024 cycle, former president Donald Trump is likely to talk up some version of his proposals to raise tariffs on Americans. He has previously suggested using the revenue to replace the income tax, lower the corporate income tax, and extend the 2017 Tax Cuts and Jobs Act (TCJA).

Using tariffs to offset other tax cuts is economically illogical. Trump has tried a version of this before. His first-term tariffs undermined the economic benefits of the 2017 tax cuts, blunting the effects of his signature legislative accomplishment. 

The Trump tax cuts—particularly the business tax cuts—were designed to boost investment, which in turn drives economic growth and wage gains. Figure 1 shows that Trump’s trade war eroded some of the early success of the 2017 tax cuts.

The top panel shows Congressional Budget Office (CBO) economic forecasts for investment growth from June 2017 (pre-TCJA) and April 2018 (post-TCJA), compared to actual investment growth. The second panel shows the annual change in revenue from federal customs duties, a measure of the increase in tariff rates. 

The CBO projected a significant and sustained increase in investment growth compared to its pre-TCJA baseline. The orange line shows that actual investment growth exceeded the CBO’s post-TCJA forecast for three quarters following the tax cuts. This is what should be expected because the CBO uses lower-bound estimates of investment response to tax cuts.

At the end of 2018, investment growth slowed rather dramatically, falling below the post-TCJA forecast. In its January 2020 economic outlook, the CBO notes that the slowdown in business investment “was due, in part, to the suspension of deliveries of the Boeing 737 MAX aircraft, rising business uncertainty about future trade policies, and reduced drilling activity” (emphasis added). When tariff revenue spiked, business investment growth plummeted.

Cutting taxes should only temporarily increase the growth rate of investment until a new, larger capital stock is reached. As shown in Figure 1, the CBO projected an initial boost in the growth rate of new investment, gradually falling back to the previous trend. The temporarily higher growth rate leaves behind a permanently higher total investment level. Similarly, the high growth rate in duties revenue left behind permanently higher tariffs. Between 2017 and 2020, the average tariff rate on dutiable imports increased from 4.7 percent to 8.9 percent. 

More formal analysis has made similar observations. The Tax Foundation found that Trump’s tariffs on steel, aluminum, and China eroded about 12 percent of the total long-run impact of the TCJA before factoring in other trade actions, retaliatory tariffs, and broader trade policy uncertainty. Academic research also shows that trade policy uncertainty and tariff announcements depress business investment. Other work from the Tax Foundation and the Penn Warton Budget Model estimate that Trump’s imposed and proposed tariffs could have entirely eroded the benefits of the tax cuts to all but the highest-income individuals (because the cost of tariffs falls more heavily on lower-income people).

There are many other reasons to be against imposing tariffs on American consumers beyond the offsetting economic impact of other tax cuts. For example, Tax Foundation’s Erica York and Cato’s Scott Lincicome have explained in detail why it is mathematically impossible to replace the income tax with tariffs, how tariffs ultimately backfire on domestic industries and fail to meet their primary policy goal, why tariffs lead to cascading protectionism and corruption, and how tariffs ultimately raise costs for American consumers.

But for Trump and other Republicans, perhaps the most compelling reason to think twice about imposing new tariffs is that the last time tariffs were paired with tax cuts, they blunted the expected economic benefits.

Few challenges loom as ominously as the exploding national debt. The US government has grown into an ever-swelling leviathan that’s increasingly oriented towards doling out cash and health benefits to America’s electorally potent seniors—without consideration of the burden this imposes on younger working Americans. The result: unsustainable spending that demands an innovative solution that works.

Among the more promising ideas to gain traction recently is my proposal for a BRAC-like fiscal commission—a mechanism reminiscent of the Base Realignment and Closure process that once effectively restructured US military infrastructure by eliminating obsolete bases and freeing up resources for new growth. An idea that’s both elegant in its simplicity and potent in its potential, a BRAC-like fiscal commission may just be the missing piece in bending the spending and debt curve before the US enters into a debt doom loop of rapidly accelerating interest costs and inflation.

I was invited to share my proposal at the Coolidge Conference on Debt, an event steeped in the values of prudence and restraint that defined Calvin Coolidge’s presidential tenure. I was beyond thrilled to join an esteemed panel with two of my heroes, the Hon. Paul Ryan, former Speaker of the House of Representatives, and Steve Forbes, chairman of Forbes Media, moderated by Ambassador Richard Graber, president and CEO of the Bradley Foundation. During Q&A following our panel, a student rose to ask Ryan his thoughts about my BRAC-like commission proposal. The student asked:

“What is your opinion on Ms. Boccia’s BRAC plan? I was personally really enamored by it. I was wondering whether you guys can see any issues or potential problems with that kind of commission.”

Ryan’s response, delivered with his characteristic blend of erudition and practicality, provides a compelling lens through which to view this proposal. His insights, formed by years at the nexus of policy and politics, illuminate both the promise and the pitfalls of a commission designed to shield legislators from the details of making tough decisions while still ensuring that legislators are ultimately responsible for spending and tax decisions—wielding the power of the purse—as enshrined in the US Constitution.

Paul Ryan responded:

On Romina’s bill, the toughest vote is the initial one. It’s where you, as someone who has counted votes for a long time, identify where the difficult vote lies; it’s at the beginning, with just the creation of this thing. Because if it self-executes, it’s more likely than not that it will occur, and you don’t have to delve into the gruesome details. You’re essentially saying, ‘I want to solve the problem and be vague about what the solution is.’

To her credit, that places the tougher but easier vote at the start, and either way, you’re better off if you fast-track it. If you require Congress to vote on it, and you can’t dodge it through a filibuster, that’s a process, a step in the right direction. Obviously, you’re already in a better position with the design of that policy.

What gives me pause, and what I’d like to think about more—and I’d be curious to hear what Jeb or Chris, the guys who served with me in Congress, think—is that … I mean, I got BRAC-ed. I lost a base in Milwaukee, a fighter wing; you know, and I blamed BRAC, and that’s just how it worked in those days. So, it’s true, that approach works.

But on Medicare and Social Security, it’s pretty inconceivable to me that there wouldn’t be a vote of disapproval; it’s inconceivable that no one in Congress would say, ‘No, we’re not going to allow this.’ So, I think that vote will happen anyway, and it would be to disapprove of it. And I don’t know if it’s that much of a different vote, approval or disapproval. However you vote, it’s going to affect the outcome, and as a politician, you’re going to be blamed for the vote, no matter what.

So, let’s just say, ‘I’m not going to vote to disapprove of this cut to Medicare or Social Security benefits.’ You’re still going to have ads run against you; you’re still going to be blamed. So, I think it’s almost the same thing. What you’re doing is shifting the climax to the end and making it more likely that you’ll reach a resolution. That’s probably what you achieve with that versus other approaches. And the further you progress towards a solution, the better off you are.

So, you’re going to have that non-committal vote in both the House and the Senate, no matter what, I think. And the question is, are there events, like Steve and I were just discussing, such that critical members can honestly say, ‘We have a crisis in front of us, and if we don’t solve this problem, the collateral damage—the dollar, your benefits, the benefit cuts—that’s what they have to weigh it against.’ So, that’s the only thing that I think resolves this: a politician can say, ‘It’s either chaos or this plan you don’t like, but that’s better than the chaos. I’m going with this plan.’ That’s essentially how you defend it.

Paul Ryan’s response to my proposal underscores the likely necessity of a crisis to create the political environment for a BRAC-like fiscal commission to proceed. While Ryan acknowledges the strategic merits of fast-tracking decisions and circumventing filibusters, the former Speaker of the House also highlights that contentious big issues like Medicare and Social Security reform might still face inevitable votes of disapproval. Politicians must weigh the plan against the potential chaos of inaction, framing it as the preferable option over a debt-driven fiscal crisis to secure support. Ultimately, a perceived crisis may be the crucial factor in compelling Congress to embrace any pragmatic approach to fiscal reform.

This raises another question: whether an independent commission process will produce an outcome that respects individual liberty and secures the foundations for economic growth and prosperity better than political decision-making during a crisis would. As Cato’s Ryan Bourne has argued:

[P]olicymaking during emergencies can be extremely destructive. If we were to experience an acute fiscal crisis, it seems highly likely that politicians would panic and reach for measures like wealth expropriation to ease the inevitable cocktail of defaults, rapid deficit reduction, and higher inflation. That erosion of property rights would undermine people’s willingness to save and invest in the United States.

I place greater confidence in the commission to safeguard liberty and promote economic prosperity more reliably than the volatile nature of crisis-driven decision-making by politicians with their pants on fire.

See here for my remarks, explaining the BRAC-like fiscal commission and how it would work in greater detail.

It has been nearly seven years since the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. Most of the law expires at the end of 2025 when taxes will increase by more than $400 billion a year, hitting Americans at every income level.

As Congress debates the future of the tax code, it is also important to revisit key questions about the past. There remain many misperceptions about the 2017 reforms. Clarifying a few central questions will allow policymakers to pursue better policy for 2026 and beyond.

The TCJA cut individual and corporate tax rates, shifted more than 29 million Americans to the simpler standard deduction, consolidated family tax benefits, and overhauled the international tax system, among many other reforms. However, the law was not perfect. For example, the vast majority of the individual tax changes and crucial incentives for investment are temporary, blunting the economic effects and hiding the law’s true fiscal cost.

The following piece answers some of the most commonly asked questions about the TCJA. They include:

1. Who received a tax cut?
2. Who received the biggest tax cut?
3. Did the SALT limit raise taxes on the middle class?
4. What’s the difference between tax reform and tax cuts?
5. Did the tax cut affect the economy?
6. Did workers see wage increases?
7. How much did the tax cut add to the deficit?

You can download a consolidated one-page version of these FAQs and a summary of all the major tax changes here. For a compendium of future tax reform options for Congress to build on the success of the TCJA in 2025, see the recent Cato Policy Analysis, “Slashing Tax Rates and Cutting Loopholes.”

1. Who received a tax cut?

The tax code has seven income tax brackets, which tax Americans at progressively higher rates as they earn more income. The TCJA cut the top rate from 39.6 percent to 37 percent, intermediate rates were also cut, and bracket thresholds—the points at which income is taxed at higher rates—were expanded so that more income is taxed at lower rates.

Combined with all the other changes in the law, the Tax Policy Center estimated that the tax cuts would result in 80 percent of taxpayers receiving a tax cut and 15 percent seeing no change in taxes paid. Five percent of taxpayers were estimated to pay more in 2018 than they did in 2017.

2. Who received the biggest tax cuts?

Estimates from the Tax Policy Center and the Heritage Foundation indicate the average taxpayer received a tax cut of roughly $1,500 and double that for a family of four in 2018.

The top 10 percent of taxpayers pay about 76 percent of the income tax. The lowest-income half of taxpayers pay 2.3 percent of income tax collections. Because of this imbalance in who pays the majority of the tax burden, the highest-income Americans benefited from the largest tax cuts in dollar terms. It is hard to cut taxes for people who already aren’t paying any income tax.

A more informative way to look at the distribution of tax cuts is as a portion of what people were already paying. Figure 1 uses IRS data from before and after the TJCA to show that the largest tax cuts went to Americans in the bottom 75 percent of income earners. The lowest-income 50 percent of individuals saw a 9.3 percent reduction in their tax bill, compared to a 0.04 percent tax cut for the highest-income 1 percent. 

3. Did the SALT cap raise taxes on the middle class?

In 2017, taxpayers who chose to itemize and were not subject to the alternative minimum tax (AMT) could deduct their full state and local tax (SALT) payments from their federal income. The TCJA limited the SALT deduction to $10,000. So even if only 5 percent of all taxpayers paid higher taxes, there could be significant variation across the country, with higher income and higher tax areas being hit harder.

A Heritage Foundation analysis looked at the tax cuts by congressional district and found no district had more than 12 percent of taxpayers with a tax increase. Those who did see tax increases tend to be high-income earners.

For most taxpayers, the SALT cap was more than offset by a larger (almost doubled) standard deduction and lower tax rates. Due to the tax code’s complexity, many higher-income Americans may also not have realized that changes to the AMT also offset the SALT cap. (The AMT is a parallel minimum tax system with slightly lower rates and fewer deductions, including full denial of the SALT deduction.) Raising the AMT exemption limit reduced the number of AMT taxpayers from 5.3 percent to less than half a percent. For these taxpayers, the SALT deduction increased from $0 to $10,000.

4. What’s the difference between tax reform and tax cuts?

A tax cut lowers tax rates, increases deductions, or expands tax credits to lower tax revenue. Tax reform can also cut taxes but, more importantly, includes significant measures that improve the tax base and simplify complex provisions.

On net, the TCJA lowered revenue by about $1.5 trillion over ten years. However, the Joint Committee on Taxation estimated more than 60 different changes to the tax code that increased revenue by approximately $4 trillion. The higher revenue from base broadening and other one-time changes allowed the TCJA to cut taxes by $5.5 trillion on a gross basis. Figure 2 summarizes categories of provisions with the largest changes in revenue in the 2017 law. 

5. Did the tax cut affect the economy?

Not all tax cuts are created equal. Some tax cuts—like individual and business tax credits—put money back in people’s pockets or pad industry profits but have only small effects on the long-run trajectory of the economy. Permanent tax cuts that improve incentives to work and investment tend to have the largest effects on long-run economic growth.

The most economically powerful changes in the TCJA were the reduction of the corporate tax rate from 35 percent to 21 percent and the allowance of full deductions for business investments (called full expensing). 

Estimates of the law’s economic effects from independent organizations found that TCJA would increase investment (growing the capital stock) and boost GDP by between 0.8 percent and 1.7 percent. Multiple years after the law took effect, empirical investigations of the actual economic outcomes have confirmed positive economic results.

Kyle Pomerleau and Donald Schneider find that in the years immediately after 2017, “real GDP, consumption, business investment, and payrolls grew more rapidly than expected” by pre-reform forecasts from the Congressional Budget Office (Figure 3). Gabriel Chodorow-Reich and coauthors use variation in how firms were impacted by the tax cuts to estimate the TCJA will result in a long-run increase to the capital stock of 7.2 percent, roughly 50 percent larger than some of the most optimistic projections. This result implies a positive overall economic impact larger than the consensus range. 

6. Did workers see wage increases?

Wages rise when workers are more productive by using new tools and technologies. Tax cuts that are designed to increase investment are thus also designed to raise wages by making workers more productive. Much of this effect will be realized over many years and is likely still playing out today.

Estimates of the law’s effect on wages ranged from a roughly $550 to $2,000 increase in annual personal wages over time. Immediately following the tax cuts, there were clear indications that the labor market improved, including a significant increase in wage growth at the beginning of 2018. Compared to the pre-TCJA wage trend, the average production and nonsupervisory worker received about $1,400 more in above-trend annualized earnings as of April 2020 (before the pandemic disruptions).

7. How much did the tax cut add to the deficit?

The Joint Committee on Taxation estimated the TJCA would add $1.5 trillion to the deficit over ten years. The Tax Foundation found that accounting for the dynamic effects of economic growth, the ten-year deficit effect would be $448 billion, more than $1 trillion less than the official static estimate.

Because significant portions of the law are temporary, it is hard to assess its long-term budgetary impact. However, the dynamic revenue projections from 2017 indicate that federal revenues would break even in 2023—before most provisions began expiring. In this sense, the tax cuts were a one-time addition to the debt and not an ongoing contributor to the deficit. However, making the law permanent would lead to a multi-decade reduction in tax revenue and expansion of the deficit on an ongoing basis.

Congress should prioritize keeping taxes from rising, but any tax cuts must be paired with spending cuts or other reforms to ensure low taxes remain permanent. Since the 1980s, tax revenue has remained relatively stable as a percentage of GDP. Figure 4 shows that since 2000, Congress has allowed spending to grow faster than revenues and significantly faster than the economy. These trends are unsustainable, but raising revenue alone cannot fix out-of-control spending growth. 

The Congressional Budget Office’s (CBO) recently released budget projections cast a harsh light on the precarious financial future of the US. Politically entrenched old-age benefit programs, primarily Medicare and Social Security, are the key drivers of exploding federal debt. If Congress fails to act, seniors will face a 21 percent cut to their Social Security benefits in 2033 and an 11 percent cut to Medicare Part A benefits in 2036.

While these potential cuts underscore the need for legislative action, Medicare and Social Security are already contributing significantly to US deficits and debt. See the updated fact sheet at the link or at the end of this piece to better understand Medicare’s and Social Security’s finances.

The new CBO numbers are stark. According to the nonpartisan agency: “rising spending for Social Security and Medicare boosts mandatory outlays, discretionary spending as a share of GDP falls to historic lows, and higher interest rates and mounting debt cause net outlays for interest to increase.” In sum: major entitlements are driving the US deeper into debt and exploding interest costs in the process.

As CBO explains, “Beginning in 2025, interest costs are greater in relation to GDP than at any point since at least 1940 (the first year for which the Office of Management and Budget reports such data) and exceed outlays for defense and outlays for nondefense programs and activities.” In short, CBO has never seen interest costs of this magnitude in US history. Further reform delays will hurt Americans’ economic prospects, undermining growth and risking an eventual fiscal crisis that could unleash out-of-control inflation.

A Bipartisan Effort to Stabilize US Debt

There is, however, a glimmer of hope. The House Budget Committee recently passed a bill that proposes the creation of a bipartisan fiscal commission. This commission, comprising lawmakers from both parties, would be tasked with developing solutions to stabilize the US debt and address the unfunded obligations of Social Security and Medicare. While the Fiscal Commission Act of 2024 has yet to be considered by the full House of Representatives, its passage in committee is a positive step.

At a recent House Budget Committee hearing on Medicare and Social Security, Stephen Goss, the Social Security Administration’s chief actuary, expressed optimism about the potential of such a commission: “We have a large list of provisions and proposals up on our website to sort of look at and choose from. A commission that would look through all of those possibilities and come to a consensus would be a really good thing.”

Indeed, the establishment of a bipartisan commission could pave the way for the comprehensive reforms needed to ensure the longevity not only of these programs but of the engine that fuels the US economy.

Fast Facts about Medicare and Social Security

Medicare and Social Security, the two largest and fastest-growing government programs, are unsustainable as currently structured. Medicare consists of four parts which provide inpatient care (Part A), outpatient care (Part B), prescription drug coverage (Part D), and subsidies for seniors to choose alternative health insurance providers through Medicare Advantage (Part C). Social Security consists of Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). For the purposes of this fact sheet, Social Security will refer to OASI. Here are key fiscal details legislators and the public should know about Medicare and Social Security to examine their finances.

Medicare

• Medicare is the second largest federal government program, spending $1 trillion in 2023, or an amount equal to 3.8 percent of gross domestic product (GDP).

  • Medicare spending will double to $2 trillion or 5.1 percent of GDP by 2033.

  • That’s twice what the US government is estimated to spend on defense that year.

  • 67 million Americans receive Medicare at an average cost of $16,698 per beneficiary, with taxpayers covering $13,150 on average. By 2033, Medicare will spend an average of $27,890 per beneficiary.

  • One‐third of Medicare spending provides no value for patients: it makes them no healthier or happier.

  • Medicare increased total hospital spending by 37 percent over five years.

• Medicare adds significantly to federal deficits and faces increasing budget shortfalls.

  • Medicare was responsible for $449 billion in deficits (including associated interest costs), or 27 percent of the entire 2023 federal budget deficit.

  • Medicare’s trust fund holds no real assets, and only Medicare Part A is funded by payroll taxes. The majority (65 percent) of Medicare spending is financed by borrowing, premiums, and other taxes.

  • When the Medicare Hospital Insurance (Part A) trust fund ledger goes to 0 by 2036, inpatient providers will face a reimbursement cut of 11 percent.

  • $48.5 trillion or 62 percent of the $78.4 trillion in 75‐​year unfunded obligations for Medicare and Social Security is due to spending on Medicare Parts B and D, with taxpayers on the hook for the difference between what beneficiaries pay in premiums and the benefits they receive. For context, Medicare Part A accounts for $4.6 trillion in 75-year unfunded obligations.

  • If Congress raised payroll taxes just to cover Medicare Part A’s 75‐​year unfunded obligations, a median wage earner ($48,000/year) would face an additional $168 in payroll taxes, annually.

Social Security

• Social Security is the single largest federal government program, spending $1.2 trillion in 2023 or 4.4 percent of GDP.

  • Social Security spending will double to $2.1 trillion or 5.1 percent of GDP by 2033. By then, the government is estimated to spend more on Social Security annually than on the entire defense and nondefense discretionary budget.

  • By 2025, the number of beneficiaries will exceed a record 60 million.

  • The average monthly benefit for an individual was $1,760 in 2023.

  • The maximum monthly benefit for an individual is $4,873.

  • Because initial benefit levels are indexed to wage growth, Social Security benefits are growing much faster than inflation. A maximum-benefit-eligible beneficiary, retiring in 2045, would receive over $23,000 more in annual benefits that year, after adjusting for inflation, than a comparable worker who retired in 2020.

  • Since the program’s inception, life expectancy at birth has increased by nearly 16 years. Yet, Social Security’s eligibility age has only increased by 2 years.

• Social Security is already contributing to federal deficits with rising cash-flow shortfalls.

  • Social Security was responsible for $106 billion in deficits (including associated interest costs), or 6 percent of the entire 2023 federal budget deficit.

  • Social Security’s trust fund is a liability, not an asset. Social Security holds no real assets beyond IOUs against future US taxpayers. Those IOUs, which amount to $2.6 trillion as of 2024, are part of the $34.7 trillion gross national debt.

  • When the Social Security trust fund ledger depletes by 2033, all beneficiaries, regardless of age, income, or need, will face a 21 percent benefit cut.

  • Social Security’s 75-year unfunded obligation (combined OASI and DI)—the difference between the present value of tax revenues and spending—is $25.2 trillion, comparable in size to nearly the entire publicly held debt of $27.6 trillion in 2024.

  • If Congress raised the payroll tax to cover 75 years of Social Security’s unfunded obligations, median wage earners ($48,000/year) would have to pay an additional $1,598 in payroll taxes, annually.
     

Further reading:

• Cato Handbook for Policymakers: Medicare
  “In dollar terms, Medicare is the largest purchaser of medical care goods and services in the world—in part because it pays excessive prices to health care providers and wastes hundreds of billions of dollars on medical care that provides no value to enrollees.”

• Social Security Pays Excessive Benefits to the Highest‐Income Earners: A UK Comparison
  “Reducing benefits for higher‐​income earners to keep program costs in check, and especially as part of a more fundamental rethinking of the proper purpose of an old‐​age‐​income support program, is a better alternative than raising taxes on current workers.”

• Medicare and Social Security Are Responsible for 100 Percent of US Unfunded Obligations
  “[L]egislators will make little progress on averting a fiscal crisis until they grapple with excess spending growth in old‐​age benefit programs.”

The Supreme Court’s opinion in Moore v. United States is disappointing, but the Court’s narrow reasoning did not open the door to a future federal wealth tax. Justice Brett Kavanaugh’s majority opinion carefully avoided endorsing the government’s broad arguments, meaning the decision is unlikely to have serious negative effects beyond the realm of corporate tax law.

In 2017, Congress imposed an unusual one-time-only tax on certain Americans who owned shares of foreign corporations, a tax called the Mandatory Repatriation Tax (MRT). The MRT treated a corporation’s income for the previous 30 years as if it were the income of its shareholders, even if those shareholders never saw any dividends and even if those shareholders had only recently purchased their shares. Charles and Kathleen Moore were shareholders of a foreign corporation who received a tax bill under the MRT, and they sued to challenge the law as unconstitutional.

Under the Sixteenth Amendment, a federal tax like the MRT is only constitutional if it qualifies as a tax on “income.” The question presented in Moore was whether the MRT does qualify as an “income” tax. 

In an opinion by Justice Kavanaugh for five justices (joined by two additional justices only in the judgment), the Supreme Court held that the MRT is a permissible tax on “income.” The Court reasoned that a corporation’s untaxed earnings may be treated as the income of its shareholders under a “pass-through” theory. The Court noted that this theory had been endorsed in several previous Supreme Court and lower court cases. On that basis, the Court endorsed the MRT as a permissible tax on “pass-through” corporate income because it qualified as “(i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income.”

Crucially, Justice Kavanaugh’s opinion for the Court declined to endorse the far broader reasoning proposed by the government, which had argued that an income tax may be imposed even when no entity realizes income. As Justice Kavanaugh stressed, the Supreme Court’s analysis was limited to scenarios where a corporation has in fact realized income, and the Court did not address “the distinct issues that would be raised by … taxes on holdings, wealth, or net worth.” In a separate concurrence, Justice Ketanji Brown Jackson strongly suggested that she leaned toward the government’s view and that she likely would have held that realization is not required had the Court reached that question.

In the Cato Institute’s amicus brief supporting the Moores, we urged the Court to find that the MRT is unlike other “pass-through” taxes because it applies to corporate earnings extending far into the past, well beyond the time when shareholders may have first purchased their shares. The Court treated that theory of retroactivity as a “due process” claim, which it considered the Moores to have waived and thus did not address. That means other shareholders subject to the MRT could still potentially challenge the MRT on a due process theory, especially if they first purchased their shares in 2017 or soon before.

But as Justice Clarence Thomas explained in his dissent (joined by Justice Neil Gorsuch), the extreme retroactivity of the MRT is also relevant to the Sixteenth Amendment question, not only the due process question. The MRT’s retroactivity undermines the theory that a corporation’s income in the 1980s can be treated as the income of all its shareholders, even those who may have first purchased shares in 2017. As Justice Thomas put it, the MRT “turns solely on the ownership of stock on a certain date.” It is gratifying that Justice Thomas’s dissent bolstered this reasoning by citing the scholarship of Fenwick & West attorney Sean McElroy, one of the principal authors of Cato’s brief, who first put this issue on the legal map.

Justice Thomas also rejected the majority’s broad rule that an entity’s untaxed, undistributed income can always be taxed as if it were the income of the entity’s shareholders. Thomas argued that the precedents cited by the majority supported only a narrower rule, that “Congress may attribute income to the entity or individual who actually controlled it when necessary to defeat attempts to evade tax liability.”

Justice Amy Coney Barrett concurred only in the judgment, joined by Justice Samuel Alito. Justice Barrett thought the majority went too far in endorsing pass-through taxation for shareholders of all types of corporate entities. Barrett argued that the question is more case-specific. Rather than holding Congress to have “carte blanche to attribute corporate income to a shareholder,” she argued that the permissibility of pass-through taxation “depends on the relationship between the shareholder and the income.” 

Justice Barrett declined to express a view on whether the income of a closely held foreign corporation can permissibly be attributed to its shareholders. But because the Moores chose not to focus on that question in their challenge to the MRT, Barrett concluded that they had not met their burden to show that the connection was too attenuated. 

The majority opinion in Moore did not firmly close the door on a federal wealth tax, and that is unfortunate. But it is important to recognize that it has not opened that door either. 

On the heels of a new Congressional Budget Office (CBO) report that highlights the need for Congress and the White House to get serious about reining in federal spending and debt, it’s critical to understand that high debt levels are not just numbers on a page; they have real-world consequences. As debt grows and interest costs rise, irresponsible spending by Congress and the White House is taking a larger toll on American workers, reducing economic opportunity and their take-home incomes significantly. It also puts our nation at greater risk of a sudden fiscal crisis.

The High Price of High Debt

Under highly optimistic assumptions that do not reflect already anticipated congressional moves to adjust tax and spending policies, the CBO projects that debt will reach 122 percent of GDP by 2034, as interest on that debt will exceed spending on defense this fiscal year. A previous CBO report illustrated how rising debt would make Americans poorer, reducing per-person income by $14,500 in the year 2054, based on CBO projections that assume the debt will rise to nearly three times the size of the US economy. Excessive government debt drags down the economy by crowding out more productive investments that improve American living standards.

Additionally, as debt grows unabated, there is the risk of a sudden loss of confidence in bond markets, with investors demanding much higher interest rates that could trigger a debt doom loop and broader fiscal crisis. The 2009 Greek debt crisis and the UK’s 2022 bond market turmoil demonstrate how a relatively small catalyst can disrupt financial markets and lead to a rapid surge in interest rates that forces severe austerity measures, from sudden spending cuts to ill-conceived tax increases.

Congress and the Biden administration should cut spending now while the economy is growing and conditions are favorable for deficit reduction, alleviating pressure on interest rates and the federal debt to grow, and before a fiscal crisis forces their hands. US legislators should learn lessons from what happened in the UK and Greece where a sudden change in investor perceptions triggered crises, instead of repeating their mistakes.

Beware of Entering a Debt Doom Loop

If Congress and the White House continue to spend with reckless abandon, high and rising US debt may trigger a debt doom loop, which might play out like this: Something could trigger investors to determine that the risk of holding US government debt has increased, whether that’s a change in perception about a higher risk of default, greater inflation, or some other economic or political event. At that point, investors would demand higher bond yields to continue lending to the US government. Higher bond yields can then create a feedback loop by increasing the cost of servicing the national debt, which then leads to more borrowing just to pay the additional interest on the debt. Should a bond yield surge be sudden, large, and unmitigated, this self-perpetuating cycle can quickly escalate into a fiscal crisis.

The classic example of this doom loop dynamic is the 2009 Greek debt crisis. As Cato’s Ryan Bourne explains:

“Greece was able to borrow relatively cheaply until suddenly it wasn’t (Figure 7). There, the trigger for the crisis was the newly elected government’s revelation that in 2009 the country was running a mammoth deficit of almost 12.5 percent of GDP, much higher than the previous government had estimated.²⁴ That shifted perceptions about the country’s fiscal sustainability and creditworthiness, leading to its 10‐​year bond yield jumping from 6.5 percent to 29.2 percent within two years. This was a precursor to a severe dose of enforced austerity alongside three international bailouts.”

Of course, the US has many advantages that set it apart from Greece, including providing the world’s primary reserve currency, strong financial institutions, transparent government fiscal reporting, a large economy, and debt that is primarily held by domestic institutions and investors. This limits US exposure to a Greek-like debt doom loop, but it doesn’t insulate it from doom loop dynamics completely.

Over the long run, an expectation that the US might come to rely on money-printing to inflate away its unsustainable debt obligations may result in sudden shifts in investor sentiment with potentially dire economic consequences. To better understand how poor fiscal governance can rock the boat, it’s worth considering recent occurrences in the UK, which offers a much better comparison with the US.

In late September 2022, the UK government unveiled a mini-budget that included energy subsidies (with large, unbounded costs), unfunded tax cuts, and increased borrowing. The announcement led to a sharp sell-off in the UK’s sovereign bonds (gilts), and investors demanded higher yields to compensate for the perceived increase in risk. The pound dropped to a 37-year historic low, and mortgage rates surged. The Bank of England stepped in, temporarily expanding its balance sheet by purchasing £19.3 billion of gilts. The government also walked back its irresponsible deficit spending plans, contributing to a subsequent decline in 30-year gilt yields.

One key takeaway from these incidents is that a sudden bond crisis can propagate from a single catalyst in unanticipated ways. Fiscal crises can often be difficult to predict, even if they appear obvious in hindsight, and can cause unforeseen financial disruption. In the UK, for example, the bond yield surge exposed over-leveraged pension funds, threatening the UK’s retirement system. In Greece, the fiscal crisis and the following austerity resulted in social unrest and economic stagnation. The key takeaway lesson for the US should be to err on the side of caution by addressing the unsustainable growth in the US debt before bond markets force corrective action.

It’s worth noting that the Bank of England’s intervention was compelled by the government’s tone-deaf fiscal policy. Legislators should pay closer attention to the interactions between fiscal policy and monetary policy, especially if they are serious about getting interest rates under control. With above-target US inflation that has only recently slowed down, the Biden administration and Congress would be wise to put forth credible deficit-reduction plans sooner rather than later to signal to investors that the US is getting its fiscal house in order and to reduce interest rates and inflation in a proactive manner.

Stabilize the Debt

Now is not the time to be sanguine about high debt and deficits. With interest rates unlikely to dip back to the lows seen in the 2010s as federal debt expands, government borrowing costs will rise. Legislators should be more wary of the risk of a debt doom loop, where a sudden loss of investor confidence can cause a feedback loop of surging bond yields, interest spending, and borrowing that leaves policy-making decisions between a rock and a hard place. The UK and Greece offer cautious tales about how economic conditions can suddenly turn sour in response to changing investor sentiments about a country’s fiscal stability.

US legislators should take measures today to stabilize the US debt-to-GDP ratio at no higher than 100 percent of GDP, putting downward pressure on interest rates by reducing spending and addressing unfunded entitlement program obligations. A fiscal commission offers the most promising pathway to overcome the political barriers to reform and avoid a sudden fiscal crisis and economic decline.