The U.S. national debt has hit $40 trillion, causing concern over potential solutions. While options like reducing spending, cutting Medicare and Social Security, or eliminating tax loopholes are considered, the focus must shift toward revenue solutions.
Challenges in Cost-Cutting Solutions
Medicare costs nearly $1 trillion annually and cutting it entirely, though unlikely, would only address half of the current deficit. Social Security expenses, at $1.7 trillion annually, are too substantial to eliminate. Even removing entire federal agencies often labeled as ‘waste’—such as the EPA, Department of Education, and State Department—affects merely 13–14% of the federal budget.
No feasible cost-cutting plan sufficiently narrows the gap. Thus, increasing revenue becomes necessary.
Revenue-Driven Solutions
The Congressional Budget Office projects total federal spending at about $7.7 trillion for fiscal 2026. Around 73%, or $5.6 trillion, represent mandatory expenses for programs like Social Security, Medicare, and Medicaid.
Discretionary spending, totaling $2 trillion, consists of $900 billion for defense and approximately $1.1 trillion for other areas often perceived as wasteful.
In addition, interest payments on the national debt are projected to reach about $1.1 trillion in fiscal 2026. Federal debt surpasses $32 trillion, and an estimated $10 trillion requires refinancing within the next year. Each one-point increase in interest rates costs $300-$400 billion annually.
Implementing a Value-Added Tax (VAT)
Introducing a tax that generates significant revenue alongside sensible budget cuts is essential. Many developed nations utilize a value-added tax (VAT), taxing value added during production stages. Exempting necessities such as food and clothing reduces regressiveness.
Although prices may rise, a VAT provides a potent solution for a $40 trillion deficit. Standard VAT rates in Europe hover around 21%; proposing a 10% U.S. VAT places liability at half that rate.
A VAT may initially seem regressive, impacting lower-income households more acutely. Yet, this is addressable—exempt necessities from taxation and implement a rebate for low-income families akin to Canada’s GST credit.
Facing Financial Reality
Failure to act could result in a financial and stock market crisis surpassing that of 2008-2009. It’s imperative for Congress to consider these solutions and address the national debt effectively.