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This is an introductory article to a forthcoming series of pieces that will focus on individual tax expenditures that policymakers might consider eliminating or reforming to address America’s dire fiscal trajectory.
The nation’s fiscal situation has never been worse. Debt held by the public is currently 98% of GDP and is forecast to reach 166% [ [link removed] ] by 2054. If growth is slower or interest rates are higher than baseline models forecast, then public debt could reach [ [link removed] ] 217% of GDP over the coming 30 years. Today, interest payments on the debt exceed [ [link removed] ] our entire defense budget.
Throw $4 trillion in tax cut extensions [ [link removed] ] into the mix, as well as Social Security and Medicare’s $78 trillion 75-year funding shortfall [ [link removed] ], and we are heading toward fiscal crisis.
Given these grim realities, policymakers are going to have to consider how to stabilize our fiscal trajectory to prevent economic crisis and stagnation. Regardless of who wins the White House or congressional majorities in November, the topic of fiscal consolidation—that is, reducing debt by cutting spending and/or raising revenues—must be front and center for the next administration.
Focus Primarily on Spending Restraint
We know from an abundance of economic literature [ [link removed] ] that the most effective fiscal consolidations are those that focus primarily on spending restraint, with very modest increases in tax revenues—in other words, tax a little bit more but spend a lot less. Much of the empirical literature finds [ [link removed] ] that successful fiscal consolidations focus around three-quarters of the fiscal balance on spending reduction and restraint, and about one-quarter on raising revenues.
Spending cuts, rather than tax increases, are more likely to lead to lower interest rates [ [link removed] ] and an increase in private saving, which can help stimulate economic activity. These data also indicate that governments committed to fiscal consolidation are more inclined to reduce current expenditures, showcasing a dedication that makes significant consolidation more achievable.
Policymakers could show their dedication to spending restraint by implementing legally binding expenditure caps with broad application and few escape clauses. This would demonstrate a commitment to fiscal prudence, improve expectations and alleviate the fiscal crowd-out that occurs when taxation harms private economic activity and government borrowing competes with private investment.
Another option to restrain spending growth would be to devolve aspects of federal spending to the states, allowing them to fund and operate certain programs themselves. As the Cato Institute’s Chris Edwards notes [ [link removed] ], the federal government spends more than $1 trillion a year on state and local activities, and “it is better to fund government spending on domestic activities at the state level because state debt issuance is restricted.”
But Spending Reductions Alone Are Not Enough
While spending restraint should be the primary focus of any fiscal consolidation plan, spending reductions alone would not be enough to stabilize or reduce our debt ratio in the long term. As the economic literature suggests, to successfully consolidate our fiscal finances, policymakers should aim to include modest increases in revenues in any consolidation plan. Fortunately, there are some indications that proposals to raise tax revenues could gain more traction in Congress in the coming months.
Importantly, however, lawmakers should be careful to avoid seeking out new revenues in ways that would harm our economic potential. For example, the Biden administration and even some “conservative” policy groups [ [link removed] ] have called for raising corporate tax rates to 28%. This would be a mistake because corporate taxation is the most harmful tax [ [link removed] ] for economic growth, and our internationally competitive rate has led to a significant boost [ [link removed] ] in domestic corporate investment since the passing of the Tax Cuts and Jobs Act, which lowered the corporate rate from 35% to 21%.
While spending restraint should make up three-quarters of any plan to close our fiscal gap, the other quarter could be found in eliminating or reforming a handful of the many tax expenditures that distort markets and cost hundreds of billions, if not trillions, of dollars in forgone revenues.
The Treasury Department defines [ [link removed] ] tax expenditures as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’’ Some examples of tax expenditures include the state and local tax deduction (SALT), tax credits for the purchase of “clean vehicles” and tax credits for the construction of affordable housing.
Our tax code is like Swiss cheese with many holes represented by the dozens of credits, deductions and exemptions contained therein. While many of these tax expenditures are important and valuable, such as those that prevent the double taxation of retirement savings accounts, other provisions are more akin to corporate subsidies or tax redistribution.
Policymakers should focus their attention on the tax expenditures that distort markets, pervert economic incentives or effectively subsidize large corporations. These types of tax expenditure represent government-granted privilege, whereby the federal government picks winners and losers. As the Fraser Institute’s Matthew Mitchell notes [ [link removed] ], government-granted privilege “misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.”
In addition, policymakers should consider eliminating tax expenditures that redistribute the burden of taxation in regressive ways—that is, placing a higher burden on lower-income individuals who can ill afford it. Tax expenditures that shift the tax burden from state to federal taxpayers should also be considered for elimination or reform. Given the federal government’s dire fiscal situation, it should not be subsidizing the fiscal profligacy of irresponsible state governments.
The Path Forward
In the coming weeks, this series will examine specific tax expenditures that should be on the chopping block as part of any serious fiscal consolidation effort. These tax expenditures either distort markets, redistribute the tax burden regressively or subsidize irresponsible state governments at the expense of federal taxpayers. Eliminating or reforming these tax expenditures could raise significant revenues to complement spending restraint as part of a balanced approach to putting our nation’s finances on a sustainable path.
While no single tax-expenditure reform can solve our fiscal dilemma, scaling back or eliminating government-granted privilege in the tax code represents some relatively low-hanging fruit for raising revenues as part of a broader fiscal consolidation plan focused primarily on spending restraint.

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