Losing the Deficit Honestly

A Short-Term Proposal for Rebalancing Revenues and Costs

Welcome to the Civic Way journal, our quick take on the relevance of current events to America’s future governance. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving public agencies.

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We have to … attack powerful clients with weak claims. – David Stockman

Introduction

After the 1980 election, President Reagan appointed David Stockman as the Director of the Office of Management and Budget (OMB). Stockman, often called the "Father of Reaganomics,” served through Reagan’s first term. He was best known for his fierce commitment to eliminating the federal debt^[i].

Stockman, a former congressman from Michigan, in tackling the federal debt, recognized the distinction between the needy and greedy, that is, those who truly need a helping hand and those who only want to enrich themselves. Stockman hoped to end the so-called welfare state, but he knew that, to cut the federal debt, they would have to challenge the “powerful” who had “weak claims” on federal largess.

President Trump’s promise to extinguish the federal debt may or may not be sincere. If he supports the extension of the 2017 tax cuts, we will know that it is not. If, however, he is sincere, he will oppose more tax cuts and promote some version of the Urgent Care initiative we described in our last essay. This initiative, which is designed to stop the fiscal bleeding, includes three short-term measures: 1) Protect Entitlements, 2) Restore Revenues and 3) Cut Costs. These measures are summarized below.

Preserve Entitlement Programs

Based on the work of several nonpartisan organizations, such as the Congressional Budget Office (CBO) and Bipartisan Policy Center (BPC), several short-term changes should be made to the Social Security program. Together, they would improve the program’s financial condition by over $250 billion per year.

• Increase the Social Security payroll tax cap to at least $250,000.

• Increase taxes on the Social Security benefits of those with annual incomes of over $150,000 (individuals) and $300,000 (couples) or institute means testing for Social Security.

• Raise the program’s Full Retirement Age (FRA) to at least 70.

• Increase work requirements for Social Security Disability Insurance Applicants.

• Restore the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).

Several nonpartisan organizations, such as the CBO and BPC, have reviewed the Medicare and Medicaid programs and recommended modest short-term changes that could improve the financial viability of both programs. In the aggregate, these changes could impact their bottom line by $350 billion per year.

• Index Medicare Part B Premiums to income and raise premiums for high-income individuals

• Reduce Medicare Advantage (MA) costs related to preset pricing benchmarks^[ii], health risk subsidies upcoding^[iii]and overbilling^[iv].

• Reduce Medicare-related physician charges and costs (e.g., modify physician reimbursement schedules, reconstitute reimbursement advisory committee, rebalance specialist primary care compensation and allow qualified international doctors to practice in US).

• Reduce exorbitant prescription drug costs^[v] (e.g., overhaul the drug patent system to improve generic manufacturer access, and ban Pharmacy Benefit Manager spread pricing.

• Close the outlier payments program loophole that grants for-profit hospitals excess reimbursements (i.e., link prices to value rather than site).

• Reduce Medicaid costs (e.g., establish federal spending caps, reduce federal matching rates, restructure Medicaid Managed Care contracts and recover improper payments^[vi]).

• Pursue other healthcare savings (e.g., improve group purchasing organization controls and expand community health centers^[vii]).

These short-term measures also would relieve fiscal pressures on the federal budget.

Stabilize Short-Term Revenues

We can raise sufficient revenue, coupled with expenditure cuts, to eliminate federal deficits. There are four ways to do so: 1) eliminate or curtail special tax exemptions, deductions and loopholes, 2) institute short-term revenue reforms and wealthy taxpayer surcharges, 3) enhance other revenues and 4) augment IRS resources to audit, identify and collect delinquent taxpayers, especially high-income taxpayers. Together, these strategies could reduce the annual deficit by over $1.2 trillion per year.

• End tax expenditures^[viii], especially those that disproportionately benefit wealthy taxpayers and distort economic decisions (e.g., eliminate, phase out or cap itemized deductions^[ix], capital gains preference^[x], and employer-sponsored health insurance, retirement, net imputed rental income, carried interest and partnership basis shifting and corporate income tax loopholes).

• Increase individual income, corporate income and estate tax rates on wealthiest taxpayers (e.g., increase individual income tax rate on top brackets, impose surtax on AGI over $250,000, increase corporate income tax rate to one-half of 1978 rate, establish Corporate Alternative Minimum Tax, restore pre-2001 estate tax rates and exemption levels^[xi], and close step-up basis loophole).

• Increase other revenues (e.g., increase customs duties and sales/excise tax rates^[xii], user fees^[xiii], monetize underutilized real estate assets and increase employee pension contributions).

• Improve taxpayer compliance to reduce the tax collection gap^[xiv] (e.g., simplify tax forms, increase IRS enforcement funding to appropriate levels^[xv], upgrade or replace antiquated tax collection systems, and expand tax audits for high-income tax brackets and estate taxes^[xvi].

Of course, it will be virtually impossible to eliminate deficits or significantly reduce the federal debt if the GOP enacts its promised tax cuts. Extending the 2017 tax cuts will cost over $3.8 trillion and bloat the federal debt. The Trump administration can extend the tax cuts or eliminate the deficit, but not both.

Slash Short-Term Spending

Many knowledgeable nonpartisan groups have recommended short-term spending cuts that, paired with revenue enhancements like those above, could balance the federal budget. In the aggregate, the cost cutting strategies summarized below could reduce the deficit by at least $500 billion per year.

• End or phase out corporate welfare that favors private over public benefits (e.g., farm bill subsidies, fossil fuel subsidies, healthcare provider subsidies and economic development incentives).

• Make short-term improvements to agency procurement and contract management practices (e.g., Defense, Energy, NASA and VA).

• Reduce Defense Department expenditures^[xvii] (e.g., cancel or retire wasteful weapons systems^[xviii], streamline storage and distribution centers, end unearned contractor bonuses, cap basic pay increases and shift more commercial jobs to civilian employees).

• Phase in other department cost reductions (e.g., infrastructure projects with big cost overruns and delays, annual across-the-board pay adjustments for civilian employees, and selected student loan, international affairs, public broadcasting and state and local government grant programs).

• Exploit cost savings opportunities identified by the General Accounting Office^[xix].

In making short-term cost cuts, we should avoid cuts with perverse consequences. These include those that would likely damage the economy, increase long-term public costs or hurt the needy (e.g., SNAP, Head Start or Children’s Health Insurance programs). At the same time, if we don’t start making sensible cuts now, we will be forced to make more draconian cuts later.

Closing Thoughts

Regrettably, Elon Musk has shown far more interest in producing headlines and dismantling the federal government than reducing the federal debt. Calling USAID a “criminal organization.” Seizing control of the Treasury’s payment system. Accessing classified data. Firing or threatening federal employees. Virtually every DOGE action thus far has been an attack on the vulnerable. The rich and powerful—those with what Stockman called “weak claims”—are left to fatten their wallets.

President Trump appears to support Musk’s hostile takeover of the federal government. And Vice President Vance has called for seizing the “administrative state for our own purposes.” Increasingly, the DOGE effort resembles a purge or coup d’état more than a serious effort to reduce the federal debt. Constitutional guardrails like due process and the rule of law be damned.

Those of us alarmed by Musk’s arrogance—and Trump’s contempt for constitutional guardrails—should do everything we can under the law to challenge such blatantly illegal conduct. In addition, we also should start building a blueprint for restoring our republic and rebuilding our institutions when Musk and Trump are done trashing them. Eliminating the debt should be one element of that blueprint.

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^[i] On September 30, 1980, the federal fiscal year— President Carter's last—ended with a $79.0 billion deficit and a debt of $907.7 billion.

^[ii] According to the Physicians for National Health Program (PNHP), Medicare Advantage (MA) plans charge the federal government $140 billion per year more than traditional Medicare plans charge for similar care.

^[iii] In a December 29, 2024 article, the Wall Street Journal reported that UnitedHealth, a leading MA plan sponsor and physician employer, routinely urged physicians to upcode patients to more serious illnesses regardless of actual care.

^[iv] In 2024, the Medicare Payment Advisory Commission (MedPAC), established by Congress, estimated MA overbilling at $83 billion.

^[v] In 2022, US drug prices were 178 percent higher than in 33 other industrialized nations, according to a report funded by the Department of Health and Human Services.

^[vi] In 2023, according to the GAO, Medicare and Medicaid made $101 billion in improper payments.

^[vii] According to a study published in the American Journal of Public Health, community health centers save Medicaid $2,371 per enrollee.

^[viii] According to the US Treasury, the tax code has over 160 tax exclusions, exemptions, deductions, credits and preferences. Tax expenditures grew from $1.2 trillion in 2021 to nearly $2 trillion in 2024 costing more than Social Security, Medicare, national defense or the entire nondefense discretionary budget. The Tax Policy Center estimates that the top 13 tax expenditures cost $1.12 to $1.38 trillion per year.

^[ix] Itemized tax deductions include the mortgage interest, state and local government, charitable giving, qualified business income and pass-through business tax deductions.

^[x] Another option would be to treat all unrealized capital gains as taxable income.

^[xi] In 2021, the 2001 estate tax would have raised $145 billion (adjusted for inflation)—over seven times as much revenue as current estate tax generated that year.

^[xii] Federal excise taxes include alcoholic beverage, tobacco product and motor fuel taxes.

^[xiii] Federal user fees are or may be imposed on financial transactions, spectrum auctions, Border Patrol, TSA and Fannie Mae/Freddie Mac guarantee fees.

^[xiv] According to the IRS, the tax collection gap for 2021 was estimated at $688 billion, including underreported income, untimely payments, and underpayments.

^[xv] It is estimated that the IRS recovers $6 for every dollar it spends on auditing the top 10 percent taxpayers.

^[xvi] According to a 2021 Treasury Department report, the nation’s wealthiest taxpayers (i.e., those in the top 1 percent bracket) evade $163 billion in taxes per year.

^[xvii] According to the Congressional Budget Office's biennial Options for Reducing the Deficit, cutting Defense Department spending would save $995 billion over ten years.

^[xviii] Weapons systems considered for termination include the Ford Class Aircraft Carrier, Long-Range Standoff Weapon, Future Long-Range Assault Aircraft (FLRAA) program, Rockwell B-1 Lancer heavy bomber and F-22 Lockheed Martin/Boeing F-22 Raptor fighter.

^[xix] GAO cost savings opportunities include weapon systems acquisition, VA healthcare, toxic chemicals control, oil and gas resource management, national flood insurance, surface transportation funding, housing finance, USPS, tribal program management, small business emergency loans, unemployment insurance system, prison system management.