The choice between tax reform and total disorder

Despite what progressives have been arguing lately, the United States does not have a tax problem. Federal revenues, even after last year’s extension of the Trump tax cuts, are running above their historical average as a share of gross domestic product. What America has is a spending problem so large that the Congressional Budget Office’s latest 10-year outlook reads less like a fiscal forecast than a warning label.

Between now and 2036, the CBO projects $94.6 trillion in federal spending against $70.2 trillion in revenue, a decade-long deficit of $24.4 trillion. Outlays reached 23.1% of GDP in 2025, nearly two full percentage points above the 50-year average, meaning annual spending growth is outpacing the economy itself. Debt held by the public is projected to hit 101% of GDP this year, which will surpass the post-World War II record of 106% by 2030, and climb to 120% by 2036.

The Trump administration says it wants to cut the deficit to 3% of GDP by the end of this term, roughly half the current trajectory. The CBO’s numbers show how far that ambition is from reality.

The cost of paying the interest is now the central story, and it’s a grim one. Net interest outlays will rise from about $1 trillion this year to more than $2.1 trillion by 2036, when interest payments alone are projected to consume more than a quarter of total tax revenues. The federal government will spend more on the costs of past borrowing than it spends on many of the programs the borrowing was supposed to fund.

The interest problem reflects both rising debt and the compounding effect of all that borrowing. As deficits raise indebtedness, interest payments increase, financed by additional borrowing. If interest rates rise more than projected, the dynamic accelerates.

These fiscal troubles are further intensified by spending on autopilot. Social Security, Medicare, Medicaid and net interest are projected to represent roughly 73% of total outlays by 2036 and absorb nearly all federal revenues.

Think about that: Virtually every dollar the government collects in taxes will pay for entitlements and interest before Congress appropriates even a single cent for defense, infrastructure, research or anything else. Congress’ room to maneuver shrinks each year, not because of the choices it’s making so much as the choices it’s not willing to make.

Nonetheless, politicians have been busy making things worse by further increasing the number of tax carveouts, which are better understood as spending through the tax code. The CBO notes that these tax expenditures, including no tax on tips and a new tax credit for seniors, equal 8% of GDP. In the coming decade, that cumulative revenue loss will amount to more than $34 trillion.

As always, the CBO’s report relies on various optimistic assumptions: that temporary tax provisions are allowed to expire on schedule; that planned spending reductions actually occur; that controversial tariffs remain in place; that interest rates remain where they are now. It also assumes that in 2032, when the Social Security Trust fund dries up, Congress will borrow enough to maintain all benefits at their current level without creating more inflation. Not all these things will happen.

On the other hand, the report does embed several assumptions that might be tilting the outlook in a more pessimistic direction. The CBO assumes less economic growth than some private-sector forecasts, which could suppress projected revenues and elevate projected debt ratios. Stronger productivity or labor-force growth would materially improve the fiscal picture. And, of course, if Congress decides against all expectations to reform Social Security (rather than slap on an expensive bandage), once the trust fund is exhausted, the long-term outlook would stabilize.

This is a two-party failure. Entitlement growth reflects demographic realities and long-standing, fixable design flaws. Recent tax legislation reduced revenue despite some welcomed spending offsets. The honest accounting is that both parties have contributed to this problem and neither has offered a plan equal to its scale. It’s why both sides should care.

It’s simply not possible to treat persistent, trillion-dollar budget deficits as an abstraction much longer. They divert capital away from productive private investment, raise real interest rates and slow growth. They also hollow politicians’ own fiscal capacity. When the next emergency hits, the government will start from a position of weakness. And in a stressed environment, every additional dollar of emergency borrowing comes at a higher cost than it should.

If policymakers refuse to align spending with revenues so as to reassure investors that America will pay its debt, the market’s adjustment will be painful. It will unleash higher inflation.

President Trump must make good on his deficit-reduction promise. Democrats must sign on. Reform is a choice. Disorder is what happens when that choice is deferred.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. This article was produced in collaboration with Creators Syndicate.