Last week I proposed a 10-word Democratic agenda for financial freedom:
Treat cost disease, reduce the debt, and save Social Security.
Cost disease is when prices in a sector go up faster than overall wages, year over year. Housing and healthcare are most afflicted. You can read my Substack or Economist essays about how to treat cost disease for the middle class.
This week, I moved on to reducing the debt. On Tuesday, I wrote about the politics of reaching a ratio of debt-to-gross-domestic-product (GDP) of 100% by 2040. Today: the policies.
There are three policy levers to reaching that 100% debt/GDP ratio by 2040. The first is the denominator – growing the economy. The other two are the numerator – increasing revenues and reducing spending.
Growing the economy: education, science, immigration, energy, and housing are five pro-growth levers
On education, I have previously proposed taxing the social media corporations’ digital advertising revenue (more than $250 billion annually) to fund 1:1, live-online, high-dosage tutoring for every K-12 student and to build 1,000 trade schools. This is not only the right thing to do for our children but would also radically improve productivity. Productivity growth = economic growth.
Like education, science funding improves productivity. For example, every dollar of funding from the National Institutes of Health returns more than twice that in economic activity. The United States, across both the public and private sectors, currently spends less than 3% of GDP on research. That’s behind other cutting-edge nations and indeed behind our own postwar pace. Washington should aim to double America’s research investments to 6% of GDP.
On immigration, the Dignity Act, bipartisan legislation that I am an original cosponsor of, would provide legal rights & responsibilities to the undocumented population, which budget analysts of all stripes predict would boost economic growth and surge tax revenue.
Lowering energy costs is a shot-in-the-arm to all sectors. Cheap, clean energy is a costless subsidy to industry that compounds across the economy. Nuclear is particularly promising: safe, reliable, and bipartisan. Congress already passed reforms to promote it last term. Building gigawatts more nuclear across the more than 100 already-viable sites around the nation must be the next mission.
Housing restrictions are a major impediment to economic mobility, which is declining and dragging down productivity with it. Cutting land-use and zoning red tape, especially near high-growth hubs, would improve the efficiency of labor markets and the productivity of individuals.
Increasing revenues with a simple, efficient, and progressive tax code
The tax code is so broken that it needs to be tossed out and rewritten from scratch. Tax codes generally have two aims: efficiency and fairness. Efficiency means raising the most revenue for the least distortion to economic activity. It’s (imperfectly) measurable. Fairness is more subjective; Americans have tended to believe that work & entrepreneurship should be rewarded, that inherited wealth or privileges should not, and that parents should get help to raise healthy and happy children.
The efficiency and fairness knobs in the tax code are all messed up at this point. It’s like a hotel shower with two knobs where you start twisting both around, the water is freezing, and you can no longer figure out which knob to twist which way. Just need to turn the shower off and start over.
Some efficient and fair tax policies to consider in a fresh-start code include:
End all preferential tax rates, exclusions, pass-through exceptions, and deductions. Keep the charitable deduction.
Lower the rate for all brackets, but maintain the progressive rate structure.
Levy inherited estates at 45% of current value, above a reasonable deduction for farms, small businesses, et al.
Enact the 15% global minimum effective corporate tax.
Enact a carbon fee through both a tax and a tariff.
Expand the child tax credit and make it fully refundable.
Levy a small value-added tax that excludes groceries, housing, education, and healthcare.
These policies would form the core of a tax code with which most people and firms could comply in one page. It would encourage work, saving, and philanthropy over passive wealth; end the marriage penalty & support children; support the clean-energy transition; and raise significant revenue.
Spending reform sorted by disease rather than policy
The federal government spends money in five big buckets:
Healthcare: Medicare, Medicaid, veterans
Social Security
Military
Debt service
Public goods (air traffic controllers, disaster relief, Postal Service, science, Head Start, food benefits, National Parks, et al)
Healthcare spending is the primary driver of growth in federal expenditures. Despite what DOGE might claim, cutting PBS and polio vaccines out of ‘public goods’, which is not a budget-busting bucket, has no impact on the federal deficit. While Social Security needs reforms to stay solvent (more on that in the future), and the military spends money inefficiently, neither have the budget trendlines of healthcare.
Due to the intersection of healthcare prices rising faster than GDP, graying demographics, and the increased incidence of chronic disease, the trendlines of healthcare spending are up and to the right. Healthcare reform often starts with payment models (fee-for-service versus value-based) and sectors (hospitals, insurers, pharmaceuticals). I would propose reforms that begin with disease groups. Medicare and Medicaid spend hundreds of billions of dollars on each of:
Heart disease: atrial fibrillation, coronary artery disease, heart failure
High blood pressure
High cholesterol
Diabetes
Arthritis
Chronic obstructive pulmonary disease
Chronic kidney disease
Alzheimer’s
From Michelle Obama to the MAHA movement, the burden of chronic disease has been increasingly recognized as an urgent issue for public health. It is also the fiscal challenge of our era. Reforms to health research, delivery, and payment may best be considered through the lens of disease groups. For each: Set metrics, identify the key drivers, and then marshal the interventions necessary, medical or otherwise. This method of enacting and communicating policy is more likely to resonate with the public and reduce in-fighting between healthcare sectors.
For more on tax, spending, and growth, you can review policies proposed 15 years ago, 13 major tax and spending reforms from the Penn Wharton Budget Model, or build your own proposal with the Committee for a Responsible Federal Budget.
All spot on, Jake, as is so often the case with you. The increase in the estate tax might affect my children, unfortunately, but it's the right thing to do.
I like the effort to reform the tax code. A simple principle - income is income. You did not apply this to capital gains. Lift basis based on inflation and then tax the selling price less this lifted basis as income. You also left out the biggest loophole exploited by the ultra wealth - sell nothing, just live on capital backed borrowing. So they have no taxes - find a way to stop this. Tax any loans as income that are not used for business / stock purchases.