If We Ran Congress for a Day: A Plan to Get the Debt Under Control, Step by Step

The federal government will run a deficit of about $2.1 trillion this fiscal year, roughly 6.6 percent of GDP. Debt held by the public sits at about 100 percent of GDP. Interest on that debt now costs more than $1 trillion a year, which is more than we spend on defense. Nobody handed us the gavel. But the arithmetic does not care who holds it, and this piece is about what the arithmetic demands, why, and who pays.

None of the numbers above is a crisis. Countries can carry a great deal of debt for a long time. What is a problem is the direction. The Congressional Budget Office's baseline has debt reaching 120 percent of GDP by 2036, 144 percent by 2046, and 175 percent by 2056, with interest costs rising from 3.3 percent of GDP to nearly 7. That path does not end in a specific disaster on a specific date. It ends with fewer options, higher rates, and a government that spends its first trillion dollars every year paying for decisions it made in the past.

So this is our attempt to do the thing pundits rarely do: write down a complete plan, with numbers, and explain every step as we go. We will define the terms, set a target, show where the money is, lay out the plan, run the math year by year, and then tell you where it breaks. Along the way we flag which items are load-bearing walls and which are bargaining chips, because that distinction is where fiscal plans live or die.

One warning up front. The ten-year figures below are rough. Most are drawn from CBO's published menu of deficit-reduction options and from the work of nonpartisan scorekeepers, adjusted for what has changed in 2026, and they should be read as accurate to within a third, not to the dollar. What matters is the shape of the plan and the order of magnitude of each piece.

Five terms and one equation

Deficit versus debt. The deficit is a flow: how much more the government spends than it collects in one year. The debt is a stock: the sum of every past deficit, less every past surplus. This year's deficit becomes next year's debt.

Gross debt versus debt held by the public. You will see headlines about a national debt approaching $40 trillion. That is gross debt, and roughly $8 trillion of it is money the government owes itself, mostly to the Social Security and Medicare trust funds. The number economists watch is debt held by the public, about $32 trillion, because that is the amount that has to be sold to actual investors. When we say debt-to-GDP in this piece, we mean this one, and it is right around 100 percent.

The primary deficit. This is the deficit excluding interest payments. It matters because interest is the consequence of past decisions and the primary deficit is the current one. If you want to know whether today's policy is sustainable, you look at the primary balance. Ours is roughly 3 percent of GDP in deficit, which is to say that before paying a dollar of interest, we are already short by about a trillion.

r and g. The letter r is the average interest rate the government pays on its debt. The letter g is the nominal growth rate of the economy, real growth plus inflation. These two numbers, and the gap between them, determine whether a given debt load shrinks or grows relative to the economy that carries it.

Everything in fiscal policy reduces to one line:

Plug in today's numbers. CBO puts the average rate on the debt near 3.4 percent and nominal growth near 4.3, so r − g is about −0.9. With debt at 100 percent of GDP, that term is worth about −0.9 points a year: growth is quietly eroding the debt for us. But the primary deficit is about +3 points. Net, debt-to-GDP rises about 2 points a year, and ten years of that takes you from 100 percent to 120, which is exactly CBO's number.

Read the equation once more, because it contains the entire strategy. There are only three ways to bend the line: shrink the primary deficit, raise g, or lower r. Congress controls the first directly, influences the second weakly, and controls the third barely at all. A plan that depends on r or g doing the work is a hope, not a plan.

Where we stand, September 2026

Two things in that table changed in 2026, and both matter.

First, the deficit was supposed to be $1.9 trillion. It is $2.1 trillion because in February the Supreme Court struck down the tariffs that had been imposed under emergency powers; about $100 billion has since been refunded, and the replacement tariffs raise less. CBO now expects customs revenue to come in $250 billion below what it projected in February. Keep this episode in mind. It is the reason for one of our rules later.

Second, rates went up, not down. The 10-year yield touched its highest level since late 2023 this month and the 30-year is above 5 percent. CBO's baseline assumed the Fed would be cutting this year; instead, after an oil shock pushed inflation above 4 percent in the spring, markets are pricing hikes. Every Treasury the government rolls over at 4.5 to 5.3 percent pushes r, the average rate on the whole stock of debt, closer to g. That −0.9 cushion in the equation is shrinking, and it is the single biggest change to the fiscal picture this year.

Why this isn't Greece: the dollar

Readers who remember Greece in 2010 or Argentina in any decade tend to ask the obvious question at this point: at 100 percent of GDP and rising, why has nothing snapped? The answer is the currency the debt is written in, and it cuts both ways.

The United States borrows in dollars, and the United States is the only entity on earth that can create dollars. That single fact removes the failure mode that destroyed Greece and Argentina. Greece borrowed in euros, a currency it could not print, so when the market stopped lending, the country was out of options: it could not pay, and it could not manufacture the money to pay. Argentina borrowed in dollars for the same reason, because nobody would lend it pesos at a tolerable rate, and every time the peso fell, its dollar debts grew in local terms until they were unpayable. A country that borrows in a currency it does not control can be forced into default by a change in market mood. A country that borrows in its own currency cannot, in the mechanical sense: there is always a buyer of last resort, the central bank, and there are always enough dollars to make the coupon payments.

That is the reassuring half. The other half is that the risk does not disappear; it changes shape. For a foreign-currency borrower, the risk is default. For an own-currency borrower, the risk is inflation and the currency: the government can always pay, but if it pays by leaning on the central bank, the dollars it pays with are worth less, and the people who lent them, along with everyone holding cash and fixed claims, absorb the loss. This is not a hypothetical. It is how every heavily indebted own-currency country in history has eventually reduced its real debt burden, including the United States after 1945, when a decade of inflation running above bond yields quietly erased a large share of the war debt in real terms. The British did it for thirty years. Bondholders were paid every penny they were promised, and the pennies bought much less.

The dollar has a second advantage that Greece never had: the world wants it. Roughly $9 trillion of Treasuries, close to 30 percent of the debt held by the public, sits in foreign hands, held by central banks as reserves, by exporters parking their surpluses, by anyone anywhere who needs a safe asset denominated in the currency that global trade and finance actually run on. That standing demand is why r has been so much lower for the United States than for any other country with similar debt, and it is worth a great deal: on $32 trillion, every quarter point of borrowing cost is $80 billion a year. Economists call it the exorbitant privilege. It is real, and it is also not a law of nature. It is a habit that other holders of capital could break if the trajectory ever looked unmanageable, and a habit is exactly what the 30-year yield at 5.3 percent is starting to test.

Two other own-currency borrowers show the range of outcomes. Japan carries gross debt above 200 percent of GDP without a crisis, because nearly all of it is owed to Japanese savers and to the Bank of Japan, at rates the central bank has kept near zero for decades; it has paid for that with a generation of stagnation and a currency that has lost much of its value. Britain, in the autumn of 2022, announced unfunded tax cuts and watched its bond market revolt within days, yields spiking until the government fell. Britain did not default and was never going to. It simply discovered that even a country that prints its own money is charged a price when lenders lose confidence, and the price is set in r.

So the dollar means there is no cliff, no single day on which the United States cannot pay. What there is instead is a slow ratchet, running through the interest rate and the price level, and the choice of which one absorbs the adjustment. That is the choice the next section takes up directly, and it is why, when we come to the investor section at the end, the question of whether the Fed will tolerate inflation turns out to matter more than any single line in the budget.

What actually stops us: the auction and the printing press

A reader put the sharpest version of the question to us this way. If the government can always create the dollars, what actually stops it from borrowing far more than it does? And if lenders ever balk, why not simply print the money and stop worrying about inflation? The honest answer is that nothing mechanical stops it. There is no number at which the machine seizes. What there is instead are two prices, both set by other people's expectations, and both of which feed back into the deficit itself.

The first price is the yield at auction. The Treasury sells new debt nearly every week: bills that mature in days or months, notes and bonds that run two to thirty years. Most of what it sells simply replaces debt that is maturing; the genuinely new borrowing, about $2 trillion a year, is the deficit. The buyers are primary dealers, a couple of dozen large banks and broker-dealers who are required, as a condition of their status, to bid for a share of every auction; foreign central banks and sovereign funds; pension funds and insurers; money-market funds; and, increasingly, hedge funds. Because the dealers must bid, a Treasury auction cannot fail the way a corporate bond deal fails, with the issuer walking away unfunded. What can happen, and what people mean when they call an auction weak, is that the debt clears at a lower price and a higher yield than the market expected an hour before the sale. A run of weak auctions at the long end, with foreign buyers stepping back and the dealers absorbing more than they want, is the market repricing the government's credit in the open.

Why does that matter more at 100 percent of GDP than it did at 35? Because of the loop. At today's debt, every one-point rise in the average rate the government pays adds about $320 billion a year to interest, roughly 1 percent of GDP, and the interest is borrowed too. Higher yields mean more issuance, more issuance means weaker auctions, weaker auctions mean higher yields. In the equation from section one, that is r rising toward and past g, and every row of the table in section seventeen tells you what it does to the path. This loop is the mechanism by which a country that cannot default still ends up in a crisis: the crisis is not a missed payment, it is the price. Britain in 2022 walked into it in a week. Italy in 2011 walked into it over a summer. Neither defaulted. Both governments fell.

The second price is the price level. "Printing money" has a precise modern form: the Federal Reserve buys Treasuries in the market and pays for them with newly created bank reserves. It did this by the trillions after 2008 and again in 2020, and in both cases the inflation that critics predicted did not arrive, because the economy had idle workers and idle factories and the new money mostly sat in bank reserves. That is the true half of the "just print it" argument, and it is worth conceding plainly: in a deep slump, the printing press is not inflationary, and refusing to use it is a mistake.

The other half arrived in 2021 and 2022. Roughly $5 trillion of pandemic spending, financed while the Fed was buying $120 billion of bonds a month, landed on an economy that was already back near capacity, and inflation reached 9 percent, its highest in forty years. That is the mild version. The severe version is the one every country that has funded itself at its own central bank eventually reached: Weimar Germany, Zimbabwe, Venezuela, Argentina repeatedly. Once an economy is producing everything it can, new dollars do not create new goods; they compete for the same goods, and the price of everything, including what the government itself buys, rises to absorb them. A government that finances itself by printing is running the same deficit as before, in a currency it is simultaneously devaluing, which is why the deficits of hyperinflating countries get larger in real terms, not smaller.

So why not accept, say, 5 or 6 percent inflation for a decade and let it erode the debt, as the country did after 1945? Four reasons, in ascending order of importance. First, inflation is a tax, and a badly designed one: it falls on cash, on wages that lag prices, on fixed pensions, and on anyone who saved in dollars, and nobody voted for it. Second, it only works by surprise. Once lenders expect 5 percent inflation, they demand 5 percentage points more yield to compensate, and the real cost of borrowing does not fall at all; the post-1945 erosion worked because the Fed held yields down by agreement with the Treasury until 1951 and because nobody expected the inflation, and that trick is not available twice. Third, once a country has surprised its lenders, it pays for the memory: they add a premium for the risk that it happens again, which is why Argentina borrows at double-digit real rates and the United States, which has not done it in living memory, borrows at about 2. The exorbitant privilege described in section three is, precisely, the market's confidence that the dollar will not be debased, and printing to fund the deficit spends that confidence to pay this year's bills. Fourth, and this is the institutional point, the Federal Reserve is independent for exactly this reason: so that no Congress can order the printing press turned on. Economists call the failure of that firewall fiscal dominance, the state in which the central bank sets rates to keep the Treasury solvent rather than to keep prices stable, and the current chair has said, about as plainly as a central banker can, that the Fed will not do it.

Which brings us to the answer. What stops the United States from borrowing without limit is not a wall; it is a slope. Two prices, the yield the market charges and the value of the dollar, rise as confidence falls, and both feed back into the deficit, so the slope steepens as you go. It is gentle for years, which is why nothing has snapped, and then, as Britain discovered, it is vertical for a week. Social Security is the version of this everyone can see, because the law forces it to pay out only what comes in and puts a date on the shortfall. The federal government has no such law. Its Social Security moment arrives not on a date but at a price, and the plan in the rest of this piece is, in the end, a plan for keeping that price low.

Why have debt at all?

A reasonable person, having seen the numbers above, asks why a government should carry debt in the first place. Why not pay it off, all $32 trillion, and never borrow again? The question deserves a real answer rather than a shrug, because the answer explains what "under control" should mean.

Start with what a Treasury security is to the rest of the financial system. It is the world's benchmark safe asset. Money-market funds hold it so that your cash is available tomorrow. Banks hold it as the liquid reserve regulators require. Pension funds and insurers hold it to match promises they have made decades out. The repo market, which moves trillions of dollars a day and keeps every other market functioning, runs almost entirely on Treasury collateral. The Federal Reserve conducts monetary policy by buying and selling it. Every corporate bond, mortgage, and municipal loan in the country is priced as a spread over it. A government with no debt has no Treasury market, and a modern financial system without one would have to invent something to replace it, on far worse terms.

This is not a thought experiment. In 2001, after four years of surpluses, CBO projected that the entire debt held by the public would be paid off by the early 2010s, and the Federal Reserve convened studies on what it would use for open-market operations, and what banks and pension funds would hold, in a world with no Treasuries. Then two wars, a tax cut, a new drug benefit, and a financial crisis arrived, and the question answered itself. But it was a genuine worry among serious people, and it should tell you that zero is not the goal.

The second reason is that debt is a shock absorber. Wars, recessions, and pandemics arrive without warning and cost a great deal, all at once. A government that could not borrow would have to raise taxes or cut spending in the middle of the emergency, deepening it; a government that can borrow spreads the cost over the years and the generations that benefit from the emergency having been handled. This is called tax smoothing, and it is the same logic by which a family takes a mortgage on a house rather than saving for thirty years and buying it in cash. Borrowing to buy a house you will live in for decades is sensible. Borrowing to pay this month's groceries is not. The federal analog of a mortgage is a war or a bridge; the analog of groceries is a permanent structural gap between what the government promises and what it collects. The problem is not that we have a mortgage. It is that we are putting groceries on the card.

The third reason is arithmetic. Paying off $32 trillion would require roughly fifteen years of surpluses near 10 percent of GDP, which is to say a decade and a half of tax increases and spending cuts far larger than anything in the plan below, sustained through at least one recession, with the deflationary effect of pulling that much money out of the economy every year. The United States has reached zero exactly once, in 1835 under Andrew Jackson, when the debt was $58 million and the federal government was a rounding error in the economy; Britain spent the century after Waterloo working its Napoleonic debt down, and never to zero. No large modern economy has done it, and none has tried.

So the right question is never "debt or no debt." It is the question a lender asks a business: is the debt growing faster than the borrower's capacity to carry it, and what is it being used for? A growing company with modest permanent leverage is normal and healthy. A company borrowing every year to cover operating losses, at rising rates, is not, whatever its history. That is the standard we are going to hold the federal government to, and it is why the target below is expressed as a ratio and a trajectory, not a number to be paid down to zero.

What "under control" means

There are two different goals people mean when they say "fix the debt," and they cost very different amounts.

Stabilization means debt-to-GDP stops rising. From the equation, that requires a primary deficit no larger than (g − r) × debt-to-GDP. With g − r at 0.9 and debt at 100 percent, you can run a primary deficit of about 0.9 percent of GDP forever and the ratio stays flat. That is roughly a $700 billion improvement from where we are today. Reduction means the ratio falls, which requires a primary balance better than the stabilizing level, and the only way to be sure of that, given that you do not control r − g, is a primary surplus.

Our target is reduction, defined precisely. First, the primary balance in surplus by 2034 and around +1 percent of GDP by the late 2030s. Second, the total deficit at or below 3 percent of GDP by the middle of the 2030s. Third, debt-to-GDP peaking before the trust funds run dry, and declining every year after.

Why 3 percent? Because in the long run, debt-to-GDP settles at the deficit divided by nominal growth. A 3 percent deficit with 4 percent nominal growth converges toward 75 percent of GDP, which is roughly where the country sat in the late 2010s, just before the pandemic, and where most rich economies other than Japan live comfortably. Three percent is the number in the bipartisan resolutions now pending in both chambers, the number the Treasury Secretary has publicly committed to, and, in Warren Buffett's half-serious proposal, the number above which every sitting member of Congress should be ineligible for re-election. We did not invent it. We are only showing what it takes.

Why not balance the budget? Because it is unnecessary and, done quickly, recessionary. Once the primary balance is in surplus, growth does the rest of the work for free. A country with a growing economy can carry a modest permanent deficit the way a growing company can carry modest permanent debt, and the record shows it: debt-to-GDP fell from 106 percent to 23 percent between 1946 and 1974 while the government ran a deficit in most of those years.

Two comforting stories, and where the money is

Before the plan, we need to retire the two most popular fantasies, one from each side of the aisle.

"Just tax the rich." The top 1 percent of households earn roughly a fifth of all income, call it $3.5 trillion. Raising their effective tax rate by ten full points, across every dollar and with no behavioral response, produces about $350 billion a year. The deficit is $2.1 trillion. Even confiscatory rates on the top do not close it, and real-world avoidance shrinks the take well before you get there. Taxing the top more is part of any honest plan. It is not most of one.

"Just cut the waste." All non-defense discretionary spending, which is every federal agency, program, and grant that is not the military or an entitlement, totals about $950 billion. Eliminating it entirely, every national park, air-traffic controller, and FBI agent, would close less than half the gap. The federal government is not primarily a collection of agencies. It is an insurance company with an army.

Here is what the government actually spends its money on:

Any plan that leaves the three big programs untouched is arithmetic theater. Likewise, revenue is about 17 percent of GDP against spending near 24, and no advanced economy closes a seven-point gap on income taxes alone; every one of them uses a broad consumption tax, and we are the outlier. So the plan has to touch the big three programs and the broad tax base. The only real question is how.

The plan: design rules

Every successful fiscal deal in modern history, from the 1983 Social Security rescue to the 1990 and 1993 budget agreements, shared a few features, and we adopted them as constraints. No group bears more than about 40 percent of the adjustment, because otherwise the coalition that has to pass it does not exist. Nobody within ten years of retirement sees a benefit change other than the inflation adjustment; this was the Greenspan Commission's rule in 1983, and it rests on a simple moral idea, that you can only change promises to people who have time to adjust. Everyone gives something and gets something; the sweeteners in Step 6 are not pork but the price of passage. Everything phases in over fifteen to twenty years, so no single Congress absorbs the whole political cost. And only revenue that requires an act of Congress counts, for reasons the tariff episode makes plain in Step 7.

What follows is organized the way a bill would be: the two big programs first, then revenue from the top, then revenue from the base, then discretionary spending, then the offsets, then the rules that hold it together.

Step 1: Social Security

Social Security is pay-as-you-go. Today's workers pay a 12.4 percent payroll tax, split between employer and employee, on wages up to a cap of $184,500, and that money pays today's retirees. The surpluses of the 1980s through the 2000s were parked in a trust fund. Costs now exceed income, the trust fund is being drawn down, and the retirement fund is projected to run dry in the fourth quarter of 2032. At that point, by law, benefits are cut across the board by about 22 percent, to every beneficiary, with no vote. The trustees' latest estimate of the 75-year shortfall is 4.42 percent of taxable payroll, up sharply from 3.82 percent a year ago, because last year's tax law reduced taxes on benefits and because immigration fell.

1a · Raise the full retirement age from 67 to 70, two months per year, starting with people currently under 55. Each year of delay is roughly a 6 to 7 percent cut in lifetime benefits, so this is a benefit reduction that arrives disguised as a calendar change. The case for it is longevity: life expectancy at 65 is about five years longer than when the program began. The objection is that it is regressive, because longevity gains have gone mostly to higher earners and a 68-year-old roofer cannot work three more years. Our answer is to pair it with a hardship pathway through disability insurance for physically demanding occupations, and with the progressive formula change in 1d. Ten-year savings are small, $100 to $350 billion depending on speed, because of the phase-in; the long-run effect is large, and by the 2040s this is one of the biggest items in the plan.

1b · Eliminate the payroll-tax cap, with no additional benefit credit above the current cap. Earnings above $184,500 currently pay no Social Security tax at all. Applying the 12.4 percent rate to every dollar of wages is the single largest revenue item available inside the program, and it restores the share of wages subject to the tax to roughly where it stood in the 1980s, before income concentrated at the top. The objection is a fair one: it turns Social Security from insurance, where contributions relate to benefits, into a plain tax on high earners. That is true, and we would rather say so plainly than let the fund run dry. Ten-year revenue is about $1.5 trillion, and on the actuaries' arithmetic it closes something like half to two-thirds of the 75-year gap; a year ago, against the smaller gap, it would have closed more. Load-bearing wall.

1c · Switch the annual cost-of-living adjustment to chained CPI. Benefits rise each year with a consumer price index. The chained version accounts for people substituting cheaper goods when prices rise and runs about a quarter point lower per year. Most economists consider it the more accurate measure, and a quarter point that compounds for decades is real money. The objection is that a quarter point a year is a 5 percent cut after twenty years, landing hardest on the very old, whose spending is heavy on medical care that chained CPI may not capture well. Our answer is a small "longevity bump" at age 85 that offsets the compounding for the oldest beneficiaries. Ten-year savings are $200 to $250 billion. This is a load-bearing wall for a reason that has nothing to do with the money: it is the only item that touches current beneficiaries, and it is what makes the rest of the package look fair to everyone else.

1d · Make the benefit formula more progressive. Benefits are computed by applying replacement rates to slices of a worker's average lifetime earnings: 90 percent of the first slice, 32 percent of the next, 15 percent of the top. Reduce that top factor from 15 to 10. It trims benefits only for the highest earners, the same people who gained the most from 1a's longevity math. Ten-year savings are $150 to $200 billion.

Step 2: Medicare

Medicare Part A, which pays hospitals, is funded by a 2.9 percent payroll tax, and its trust fund is projected to run short in the second quarter of 2033. Parts B and D, which pay doctors and for drugs, are about 75 percent funded from general revenue, with premiums covering the rest. That general-revenue share is where Medicare quietly drains the Treasury. Medicare is also the program whose future cost is least knowable: medical inflation of 5 to 6 percent a year breaks any plan, while a technology-driven slowdown would rescue one.

2a · Raise the eligibility age from 65 to 68, two months per year, with a subsidized bridge for people in the gap. This aligns Medicare with the new Social Security age. The honest truth is that it saves less than people think, $150 to $250 billion net, because most of the 65-to-67 cohort shifts to subsidized exchange plans, and because the bridge in Step 6 costs real money; it is also deeply unpopular. We keep it for consistency and as our first bargaining chip to trade away.

2b · Expand income-related premiums for Parts B and D. The standard Part B premium covers about a quarter of the program's cost, and higher earners already pay surcharges that push their share up. Extending that scale so that retirees with high incomes cover a larger share is means-testing without benefit cuts. Ten-year savings are about $300 billion.

2c · Expand drug-price negotiation. The 2022 law lets Medicare negotiate prices on a small, growing list of drugs. Extending it to any drug with more than $200 million in annual Medicare spending that has been on the market for seven years preserves most of the innovation incentive, because seven years of unconstrained pricing is where most of a drug's return is earned, while ending the arrangement in which the United States pays two to three times what other rich countries pay for identical molecules. Ten-year savings are $200 to $400 billion.

2d · Site-neutral payment. Medicare pays more for the same procedure in a hospital outpatient department than in a doctor's office. Paying the same rate for the same service ends the incentive that has driven hospital systems to buy physician practices purely to reclassify their billing. The Medicare payment advisory commission has recommended this for years. Ten-year savings are $200 to $250 billion, and the hospital lobby will fight it hardest.

2e · Fix Medicare Advantage coding. Private Medicare Advantage plans are paid more for sicker enrollees, as measured by diagnosis codes the plans themselves submit, and they have become very good at finding diagnoses. The advisory commission estimates the resulting overpayment in the tens of billions a year. Adjusting payments to neutralize the coding gap saves about $300 billion over ten years, and the large insurers will fight it as hard as the hospitals fight 2d.

Step 3: Capital and the top

This is the part of the plan people expect. It is necessary and it is not sufficient; keep the subtotal, about $1.6 trillion over ten years, in view against the $2.1 trillion annual deficit.

3a · Two new long-term capital gains brackets: 28 percent above $1 million of gains, 32 percent above $5 million, with the existing 3.8 percent investment-income surtax on top. Long-term gains are taxed today at 0, 15, or 20 percent depending on income, and the tax is due only when you sell, which is why raising the rate too far causes people to hold forever and revenue to fall. Estimates of the revenue-maximizing rate cluster in the high twenties to low thirties, and that is where we stop. Ten-year revenue is $100 to $200 billion, modest and mostly symbolic.

3b · End the step-up in basis at death, with a $5 million exemption per person and installment terms for farms and family businesses. Today, when you die, the cost basis of your assets resets to market value, and a lifetime of gains is never taxed. Combined with borrowing against appreciated assets while alive, this is the "buy, borrow, die" strategy. Of every item in the tax code, this is the hardest to defend on any principle and the cleanest to fix: gains would be taxed at death as if sold. Ten-year revenue is $200 to $300 billion. Load-bearing wall.

3c · Estate tax: exemption back to $5 million per person, rate to 45 percent, and close the trust-based workarounds. Wealth-transfer taxes have among the lowest economic costs of any tax; nobody works less because of a tax paid after dying. The current exemption of $15 million per person means the tax barely exists, and the bigger leak is the planning industry, the grantor trusts, dynasty trusts, and valuation discounts that a reform would need to address directly. Ten-year revenue is about $300 billion.

3d · Corporate rate from 21 to 25 percent. Estimates of how much of the corporate tax ultimately falls on workers through lower wages, rather than on shareholders, range from about a fifth to more than half, so this is less of a pure tax on capital than it looks. Above the high twenties, profit-shifting and inversions begin again; 25 is comfortably below that and below the pre-2017 rate. Full expensing for research and equipment stays in place to protect investment. Ten-year revenue is $450 to $500 billion.

3e · Close carried interest, tighten the pass-through deduction, and end like-kind exchanges outside real estate. Carried interest lets private-equity and hedge-fund managers treat their compensation as capital gains. The pass-through deduction gives a 20 percent deduction to business income earned through partnerships and S corporations, which mostly benefits high earners. Like-kind exchanges let investors defer gains indefinitely by swapping assets. Ten-year revenue is $150 to $250 billion combined.

3f · Raise the minimum tax on foreign profits to 15 percent, in line with the global agreement. U.S. multinationals pay a reduced rate on foreign earnings; aligning it with the 15 percent floor most other countries have adopted removes the incentive to book profits abroad. Ten-year revenue is about $200 billion.

Step 4: The broad base

This is the hard part, and the part that separates a real plan from a campaign speech.

4a · A 5 percent federal value-added tax, with a rebate for the bottom 40 percent of households. A VAT is a sales tax collected in stages: each business pays tax on its sales and receives credit for the tax paid on its purchases, so the tax lands on final consumption and is very hard to evade. Every other developed country has one, and a U.S. rate of 5 percent would still be a quarter of Europe's. It is the one lever that raises money at the scale of the problem, and it does not penalize saving or investment the way income taxes do; decades of evidence from other countries show consumption taxes have the smallest effect on growth of any major tax. The objection is that it is regressive, since poorer households spend a larger share of their income, and the answer is the rebate described in Step 6, which makes the net effect progressive through the middle of the distribution. Two more things to know: it produces a one-time step up in the price level of a few percent, which the Fed would need to look through rather than fight, and it takes about two years to build the administrative machinery. Ten-year revenue is $2.5 to $3 trillion gross, about $2 trillion net of the rebate. The load-bearing wall of the entire plan.

4b · Top income-tax bracket back to 39.6 percent above $600,000. This restores the pre-2017 top rate. Ten-year revenue is about $250 billion.

4c · A financial-transactions tax: 0.1 percent on stock trades, 0.02 percent on the notional value of derivatives. Ten cents per $100 traded: for a long-term investor, negligible; for a high-frequency strategy that turns over its book daily, existential. Supporters say it curbs churn; critics say it thins liquidity and pushes trading offshore, and several countries that tried one repealed it. It is the most economically debatable item in this plan, kept because the money is large, $700 to $800 billion over ten years, and it is a bargaining chip: we would trade it for a sixth point of VAT.

4d · A carbon tax at $40 per ton with a border adjustment, on a trigger. A carbon tax charges fossil fuels in proportion to their carbon content, and a border adjustment taxes imports the same way so that domestic producers are not disadvantaged; economists across the political spectrum favor it as the cheapest way to price emissions. But legislating a new fuel tax in the middle of an energy shock, with gasoline recently above $4, is a non-starter, so we write it into law now with a start date of 2030 or the first year oil averages below $70, whichever comes first. Ten-year revenue is $500 billion to $1 trillion, depending on when it triggers.

Step 5: Discretionary restraint

Discretionary spending is the roughly one-quarter of the budget that Congress appropriates each year: defense, and the agencies. Cap its growth at nominal GDP growth minus half a point for ten years, and require the Pentagon to pass an audit with efficiency targets attached. The 2011 caps, though loosened several times, restrained spending for most of a decade, and this is a milder version. Ten-year savings are $700 billion from the caps and $200 billion from defense efficiency. We put it last because it is the smallest lever, not because it is unimportant: it is what convinces people the entitlement changes are not the only sacrifice being asked.

Step 6: Sweeteners, and how the bridge works

You cannot take $10 trillion out of an economy and give nothing back, and no deal that passed ever tried. The 1983 Social Security rescue paired benefit taxation and payroll-tax increases with a retirement-age increase delayed so far into the future that nobody voting on it would feel it. The 1986 tax reform paired the closing of loopholes with lower rates. The 1990 agreement paired tax increases with spending rules both parties could point to. Sweeteners are how a package with something for everyone to hate becomes a package with something for everyone to defend. Here are ours, and, since readers asked, exactly how each one is supposed to work.

The VAT rebate, about $800 billion over ten years. Every adult in a household in the bottom 40 percent of the income distribution receives $800 a year, and every child $400, paid quarterly by the IRS as a refundable credit, the way Canada has paid its goods-and-services tax credit since that tax was introduced in 1991. The amounts are not arbitrary: at a 5 percent rate, $800 is the VAT paid on $16,000 of taxable spending per adult, which is roughly what a household in the bottom two quintiles spends on goods the tax reaches. The credit phases out between the 40th and 50th percentiles so there is no cliff. Eighty-five million adults and twenty-five million children at those amounts comes to about $80 billion a year, and the effect is that the bottom 40 percent pay no net VAT at all, the middle pays some, and the top pays it in full, which is what turns a regressive tax into a mildly progressive one.

The insurance bridge for ages 65 to 67, about $150 billion. This is the one that deserves the most explanation, because it is the difference between a Medicare age increase that saves money and one that merely shifts costs onto 66-year-olds. Here is the mechanism.

Expanded earned-income and child tax credits, about $400 billion. The earned-income credit is a refundable payment to low-wage workers that grows with earnings and then phases out; the child credit is a per-child reduction in tax that is only partly refundable to families whose incomes are too low to owe much. Raising the credit for childless workers, who currently receive very little, and making the child credit fully refundable puts about $40 billion a year back into the households most exposed to the VAT and the payroll tax. It is aimed at working families specifically because they are the group that gives the most in Step 4 and gets the least from Steps 1 through 3.

Permanent premium caps on the health exchanges, about $300 billion. Exchange subsidies have alternated between generous and stingy depending on which Congress last touched them. Making the generous version permanent, so that nobody's net premium exceeds a fixed share of income and the cliff at four times the poverty line is gone for good, is what makes the bridge in 2a credible; a 66-year-old is not going to accept a promise of exchange coverage whose subsidy expires with the next election.

Investment provisions for business, about $200 billion. Full expensing, the ability to deduct the cost of research and equipment in the year it is bought rather than over many years, is the single most pro-growth feature of the current tax code, and it stays in place at the higher corporate rate. On top of it, an investment credit for domestic manufacturing gives the companies paying 25 percent instead of 21 something concrete to build with. The point is to make the corporate rate increase a tax on profits, not on investment.

Step 7: The rules

This step is short and, we think, the most important thing in the piece, because the history of fiscal repair is a history of good plans being undone.

Rule 1 · Only statutory revenue counts. In February, CBO had about $3 trillion of ten-year deficit reduction on its books from tariffs. One Supreme Court ruling erased two-thirds of it in an afternoon. Revenue that exists at the discretion of one branch of government, or one court, is not revenue you can build a plan on. Nothing in this package rests on it.

Rule 2 · Automatic triggers. The equation in section one has a term Congress cannot control, r − g, so we pre-legislate the response. If the average interest rate on the debt exceeds nominal GDP growth for two consecutive fiscal years, or if debt-to-GDP fails to decline in any year after 2034, the VAT rate rises by half a point and the discretionary caps extend by two years, automatically, with no new vote. Switzerland and Sweden run their budgets under pre-legislated rules of this kind. The point is to stop the plan from being re-litigated every two years, and, as section seventeen shows, the triggers are worth about ten points of debt-to-GDP by mid-century in the scenarios where they fire.

Rule 3 · A commission with a fast-track vote. Bills to create a bipartisan fiscal commission have been introduced in both chambers in this Congress. The version that works is the one modeled on military base closures: the commission writes a single package, Congress gets one up-or-down vote, and no amendments are allowed. That is how you pass things nobody wants to own individually. Pair it with two-year budgeting, so that the annual shutdown theater stops consuming the calendar.

Rule 4 · The ten-year hold-harmless. Nobody within ten years of retirement sees anything but the inflation-adjustment change. This is non-negotiable, and it is what lets everything else through.

Adding it up

The effect ramps as the phase-ins bite: almost nothing in 2028, about $1.5 trillion a year by 2037, roughly 3 percent of that year's GDP. The chart below runs the equation forward on the primary balance alone, which is the number the plan actually controls.

With less debt to service and a smaller term premium, interest costs in the mid-2030s run near 3.5 to 4 percent of GDP instead of CBO's 4.6, so the total deficit lands near 3 percent. The 3 percent target is not a separate goal; it falls out of the arithmetic.

What it does to the debt

Here we have to be honest about what a plan can and cannot promise. We ran the package through the equation year by year, from 2026 to 2056, under four assumptions about r − g: CBO's long-run path, in which today's 0.9-point cushion narrows to about 0.3 as old low-coupon debt rolls off; today's cushion persisting unchanged; the rate on the debt catching up to growth, which is what the 2026 rate environment implies if it persists; rates staying half a point above growth; and, for the last two, the same scenarios with the Rule 2 triggers firing. The policy is identical in every line. The only thing that changes is the interest rate the market charges.

Read down the rows. Under the assumption that today's rate cushion lasts, the plan takes debt back to the high seventies by mid-century, roughly where it stood just before the pandemic. Under CBO's own long-run assumption, it lands in the low nineties, which is stabilization and a slow decline. If the rate on the debt catches up to growth and stays there, the same plan peaks near 117 percent in the mid-2030s and only crawls down afterward, which is stabilization and not much more, and the triggers are what turn that crawl into a real decline. And if rates stay above growth, the plan holds the debt flat at about 120 percent of GDP, which sounds like failure until you run the no-plan baseline at the same rates: it passes 200 percent of GDP in the 2050s.

That is the honest answer to "does this fix it." The plan controls the primary balance, and the primary balance is necessary, but the market decides how much credit you get for it. Which is exactly why Rule 2 exists.

One more subtlety, and it is the most important one for investors. The relationship runs both ways. A credible plan lowers r, because the term premium investors demand on long Treasuries is partly compensation for fiscal risk, and the 30-year yield at 5.3 percent is, in part, the market's vote on the current trajectory. Enact something like this and the bad rows become less likely on their own. Do nothing and they become more likely. Fiscal credibility is a self-fulfilling asset, and its absence is a self-fulfilling liability.

What could go wrong

The Medicare cost curve. This is the single biggest unknown. If medical inflation returns to 5 or 6 percent a year, the plan needs another $2 trillion from health reform. If new drugs and automation bend costs down even a point a year, and the weight-loss drugs have already changed projected diabetes and cardiac costs, the plan over-delivers. We would call it a coin flip.

Growth. CBO assumes real growth of roughly 1.8 percent and slowing, largely because the workforce is aging and immigration has fallen. Every half point of extra trend growth improves the thirty-year path by around 20 to 25 points of GDP. Immigration policy, permitting, and whether AI productivity gains show up in the aggregate data are the levers. We assumed nothing from any of them, which is the correct amount to assume when building a plan and probably the wrong amount when forecasting.

Recessions. You do not tighten into a downturn. The plan starts in 2028 and phases in, and the automatic stabilizers, unemployment insurance and falling tax receipts, remain in place. A recession in the phase-in years delays the path by two or three years; it does not invalidate it.

Political durability. In 2001 the government had a surplus and a projected path to zero debt. Within three years, tax cuts, two wars, and a new drug benefit had reversed it. Surpluses get spent. That is not cynicism; it is the empirical record, and it is why Rules 1 through 3 are in the plan rather than left to good intentions.

Why it hasn't happened

No piece of this plan could pass the current Congress on its own. The VAT is coded as a Republican idea and the carbon tax as a Democratic one, so neither party wants to own both. The entitlement changes are toxic to whoever moves first. And the bond market, while grumbling, has not forced the issue: auctions clear, the dollar remains the reserve currency, and 5.3 percent on a 30-year bond is uncomfortable but not a crisis.

Every major fiscal deal in modern history came with a deadline attached. The 1983 rescue happened months before the Social Security checks would have bounced; the 1990 and 2011 agreements came under debt-ceiling and market pressure. The next deadline is written on the calendar.

What would make it happen sooner is the thing nobody wants: a failed Treasury auction, a sharp move in long rates, or a ratings action that forces the question. What would make it happen later is a growth surprise that makes the problem look smaller for a few more years. Our guess is that the forcing event arrives before the trust-fund date, not after, and that the package that passes will look a great deal like the one above, assembled in a hurry by people who will insist they never wanted any of it.

What this means if you own assets

We will keep this general, because it is education and not advice. But readers of this newsletter are not here for civics.

The long end of the Treasury curve is where the fiscal story gets priced. The gap between the 30-year yield and short rates is unusually wide, and part of that gap is fiscal-risk premium. A credible plan compresses it; continued drift widens it. Long-duration assets of every kind, bonds and the equities valued off them, are exposed to which way that goes.

The inflation path is the other channel, and sections three and four explain why. Countries that borrow in their own currency have historically resolved this position through a decade of inflation running above the rate they pay on their bonds, quietly transferring wealth from savers to the Treasury. The current Fed leadership has been unusually explicit that it will not play that role. If that holds, the adjustment comes through real interest rates rather than through inflation, which is a different world for asset prices than the one most of us grew up in, and a better one for anyone holding cash and a worse one for anyone holding duration.

The tax items are worth reading twice. Step-up in basis, estate exemptions, and capital-gains brackets are the pieces of this plan most likely to appear, in some form, in whatever deal eventually passes, because they are where the bipartisan commissions overlap. Anyone doing multi-decade planning should assume the current rules on those are the ones most likely to change.

The best outcome for asset owners is a boring one. A phased, credible plan passed before a crisis produces lower long rates, a smaller risk premium, and a Fed that can actually cut into a slowdown. The worst outcome is a plan written in a week, under duress, after a market event. History says we usually get the second one. The arithmetic says we do not have to.

Sources and a note on the numbers

Current-year deficit, revenue, and interest figures are from CBO's Monthly Budget Review for August 2026 and its February 2026 Budget and Economic Outlook: 2026 to 2036. The effect of the tariff ruling is from CBO's July 31, 2026 update. Trust-fund dates and the 4.42-percent-of-payroll shortfall are from the 2026 Social Security and Medicare Trustees Reports. Yields are Treasury constant-maturity data via FRED. The bipartisan 3-percent resolutions are S.Res.654 and H.Res.981; the commission bills are summarized by the Committee for a Responsible Federal Budget. The Brookings update on the federal budget outlook (March 2026) is the best single overview of the long-run arithmetic.

The ten-year figures for individual policies are estimates assembled from CBO's Options for Reducing the Deficit and analyses by nonpartisan budget groups, scaled to the 2028–2037 window. They are static, rounded, and should be read as accurate to roughly a third. The debt trajectories in section seventeen are our own calculations using the equation in section one, with a baseline calibrated to CBO's published path; they are illustrative, not forecasts, and anyone with a spreadsheet can reproduce them from the equation and the assumptions stated in the text.

See it yourself: the equation in section one and the assumptions in section seventeen are enough to rebuild every line in Exhibit N. Start from 101 percent, add (r − g) times the debt ratio, add the primary deficit, repeat for thirty years, and change one assumption at a time. The exercise takes twenty minutes and is worth more than any forecast, ours included. For the mechanics of what higher long rates do to the businesses that borrow at them, our earlier piece on business development companies is here.

Disclosure: our model portfolios hold Treasury securities and other assets whose prices are sensitive to the interest-rate and fiscal developments discussed here; subscribers receive every position and every change as it happens. Nothing here is individualized investment advice, and nothing here is a prediction of what Congress will do. Our full Disclosure Policy applies.

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