Tax policy experts debated whether rising federal debt poses an imminent fiscal crisis or a slower erosion of American living standards at an Urban-Brookings Tax Policy Center (TPC) event April 9, with wide-ranging discussion covering revenue options and the future of Social Security financing.
The Revenue Gap and How to Close It
Louise Sheiner, a senior fellow at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, opened by challenging the premise that mounting debt points inevitably toward sudden collapse. She argued that the primary effect of rising debt is a gradual reduction in future living standards rather than a looming catastrophe.
“It’s a slow, moving, gradual erosion of future living standards,” she said. “It’s not crisis or catastrophic.” Sheiner said the greater risks to fiscal stability are political rather than arithmetic, including threats to Federal Reserve independence, the credibility of statistical agencies, and the rule of law.
TPC Senior Fellow William Gale broadly agreed. He argued that the fiscal debate should not be reduced to “bean counting,” invoking a phrase he attributed to economist Charles Schultze: the debt is “termites in the woodwork, not the wolf at the door.” Gale said the right questions are what the government should be doing and how to pay for it. On the revenue side, he pointed to options including a value-added tax (VAT), converting the corporate tax to a cash flow tax, a carbon tax, and scaling back tax expenditures.
Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget (CRFB), cautioned against treating any fixed revenue-to-spending ratio as the measure of fiscal progress. “The ratio of spending to revenue doesn’t matter at all,” he said. “What matters is the specific policies that you choose.” He drew a distinction between reforms that correct economic distortions, such as addressing stepped-up basis at death, and those that simply raise statutory rates, arguing that fiscal consolidation should prioritize eliminating inefficiencies before pursuing broad rate increases.
OBBB Impact
The panel turned to the recently enacted One Big Beautiful Bill (OBBB), with Gale summarizing findings from a co-authored paper on the law’s fiscal effects. He said the legislation is expensive, regressive, and unlikely to generate meaningful economic growth.
He and co-author Alan Auerbach calculated that if interest rates are allowed to adjust to rising debt and the law’s temporary provisions are made permanent — which Gale said seems likely, given that the Senate assigned them no cost — the law would raise the debt-to-GDP ratio by 79 percentage points over 30 years.
Gale characterized the law’s tax cuts as “extremely regressive,” a judgment that deepens when Medicaid cuts and deficit financing are factored in. He also flagged the Senate’s use of a current-policy baseline, which assigned no cost to extending the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), as a departure from established budget norms that allowed temporary provisions to be made permanent under reconciliation rules.
Goldwein offered a pointed comparison with the TCJA. He said he opposed that law for adding to the deficit but credited it with improving tax simplicity on most fronts and being relatively pro-growth in design. The OBBB, he argued, moved in the opposite direction. “It wasn’t lower the rate, broaden the base — it was lower the rates, narrow the base,” he said, pointing to new exclusions for tip income and overtime pay as examples of provisions that erode the tax base without economic rationale.
Social Security and Looking Ahead
On Social Security, Sheiner challenged the widely repeated claim that trust fund depletion in 2034 would automatically trigger an across-the-board benefit cut. The legal situation, she said, more closely resembles a conflict between two statutes than a mandate for reductions. “The law says we can’t pay full benefits,” she said, yet it does not say whose benefits are cut or how it should be done.
She predicted that Congress would resolve any shortfall through general revenue financing and questioned whether the traditional link between dedicated payroll taxes and Social Security benefits still serves participants if preserving that link forecloses access to general revenues and leads to deeper cuts.
Asked whether a VAT is essential to closing the fiscal gap, the panelists said no. Gale called it an efficient option because it can raise substantial revenue with limited effects on saving and investment. Goldwein noted that payroll taxes function in some ways like a VAT and said there are also meaningful savings opportunities in healthcare, estimating that roughly $2 trillion over 10 years could be found there without dramatically affecting the quality of care.
Goldwein said that if he could change one tax provision to raise revenue efficiently, he would target stepped-up basis at death, calling it “just about the most distorting thing that we have in the tax code” on a per dollar basis.
“Right now, there is no solution that seems possible,” said Gale, but that “does not mean there will not eventually be a solution.” He offered that the solution is “something that’s currently thought to be impossible.”
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