An Aggressive Plan for US Fiscal Reform

I have been watching with great interest the debate on the American Right over the so-called Big Beautiful Bill. (For background, see my earlier post.) The hostility from President Trump and his allies towards Thomas Massie has convinced me that “nothing stops this train” except an absolute financial crisis. However, even though I think in practicethat’s unfortunately what we’re likely to see, it is still possible in principle to turn the US fiscal ship around. 

In the present post, I’ll sketch out what an aggressive plan for US fiscal reform could look like. My purpose is twofold: (1) To show how difficult the current position is, and (2) to push partisans on both sides to think more deeply about their rationale for either supporting or opposing the BBB. Specifically, what would small-government reformers think of a plan that coupled massive tax cuts with genuine spending reduction, that increased the deficit in the short term but gave a balanced budget (with a much freer economy) in a ten-year window? I’m not here to push hard one way or the other, my point is rather to show that much of the online debate over the BBB seemed to overlook this type of possibility.

An Aggressive Plan for Fiscal Reform

Let’s jump right in. Below is a sketch of what an aggressive plan would look like, that—if followed—would turn the US fiscal ship around:

Hypothetical Fiscal Plan, billions $US

I’ll spend the rest of this post walking through the table:

First, the blue column contains the actual numbers for the various items, taken from this CBO report. Although we have a pretty good idea about how the 2025 numbers will shake out at this point, it was easier to get definitive figures for 2024, so that’s why I used those as the starting point. Also, note that the debt figure in the bottom row refers to federal debt held by the public, meaning it excludes intragovernmental debt such as the Treasury securities held in the so-called Social Security Trust Fund. (Consequently, this number is lower than the “debt ceiling” figure you see reported in the news, because the debt ceiling refers to the gross outstanding Treasury debt.)

Abolish the IRS

Second, the green rows show the elimination of the personal and corporate incomes taxes. (They are cut in half for 2025, and are zero thereafter.) In my view, such a bold move would provide a massive jumpstart to private sector economic growth. It alarmed me to see how many conservative and even libertarian voices on social media thought the planned expiration of the original Trump tax cuts—which would occur if the BBB didn’t make those cuts permanent—would simply be a wash, with government spending “paid for” today through explicit taxation rather than kicked down the road via higher debt.

However, this attitude overlooks the impact of incentives. As the Laffer Curve makes clear, at some point raising tax rates doesn’t increase tax revenues. Yet even before the so-called prohibitive zone of the Laffer Curve, you still have long-run impacts on tax revenue growth from higher and higher rates. In other words, if you impose what, on paper, seems to be a $5 trillion “tax hike” (measured over 10 years), in practice you won’t actually get an extra $5 trillion, because the tax base will grow more slowly than it otherwise would have.

To put the matter in simple terms: By eliminating some $3 trillion a year in income tax, the private sector will end up with much more than an extra $3 trillion in after-tax income, especially the further into the future we go. This is because Americans will choose to earn more income when they get to keep more of it, and this is especially true for the most productive entrepreneurs. (The table above assumes that the growth in other tax categories proceeds at 8 percent annually, and that relies on the idea that the economy grows rapidly because of the abolition of the IRS.)

Beyond the incentive effect, we also have the huge boon for financial privacy and efficiency by getting rid of the income tax. Businesses would no longer have to keep such extensive records. A large chunk of the total economic cost of the income tax is the compliance with it, over and above the actual dollars flowing to Washington.

Tariffs

The table assumes (see the yellow cells) that $500 billion in tariffs are levied in the first full year after the reform (it is phased in during 2025). Thereafter, the receipts for “Other” rise at an 8 percent annual rate, reflecting the humming economy.

Federal Asset Sales 

I assume $100 billion in federal asset sales per year, for the ten-year window (see purple). This is entirely feasible; way back in 2011 I wrote an article listing $1.6 trillion (at that time) worth of liquid federal assets, including real estate, oil, and gold. By spreading the sales out over a decade, it would minimize the impact on markets and avoid crashing the price of the items being auctioned off.

During the BBB debate, I was amazed to see ostensible conservatives balking at Senator Mike Lee’s original proposal—eventually removed—to sell off federal land. Yet before the issue became controversial, if you had casually asked these avowed opponents of socialism how much of the US land should be owned by the federal government, they probably wouldn’t say 29 percent. (And in the West, the feds own 47 percent.) The Treasury could easily raise many billions of dollars through privatizing federally owned real estate, without selling the Grand Canyon or Yellowstone to Disney.

Military Cuts

In order to rein in spending, I assume that the US abandons its global empire and resorts to a “Fortress America” approach; I shave $50 billion in spending in 2025 (compared to 2024 levels) and then cut it in half going forward. If this sounds dangerous, consider that the US currently spends as much on its military as the next 9 countries combined—and most of them are American allies:

Entitlement Spending: Massive One-Shot Cuts

Regarding Medicare and Medicaid, I assumed massive two-thirds reductions in 2026, followed by a 4 percent annual growth thereafter. The idea is that extensive relaxation of medical restrictions (such as the FDA’s stranglehold on pharmaceutical development) keep hospital and drug prices well above what they would be in a genuinely open market. (For more details, see the book I co-authored with ER doctor Doug McGuff.)

For Social Security, I modeled it as a one-third reduction in 2026, followed by 4 percent growth thereafter. Here I was cutting corners to keep the table as simple as possible. My actual proposal for Social Security reform allows people to opt out, so long as their doing so wouldn’t hurt the government’s bottom line. The intuition is that plenty of high-income earners would gladly forfeit their promised (future) Social Security benefits, if they could be exempt from paying FICA payroll deductions in their remaining work years. Yet to keep things simple, in the table above I simply kept the Payroll Tax the same level—and growing at 8 percent like the other tax receipts—and showed the future savings on Social Security being “pulled forward” to a one-shot reduction in the level in 2026.

Obviously, these assumptions are rather simplistic and arbitrary. For a much more detailed proposal on how to cut the federal budget, see David Stockman’s extensive advice to Elon Musk when DOGE first launched.

Interest Expense

 Because my fiscal plan involves a massive increase in the deficit initially, I explicitly modeled federal interest payments reflecting the stock of debt. Specifically, the CBO assumes in its latest long-term budget outlook that the average yield on Treasury debt will be 3.6 percent through 2050. Since my plan involves more debt, I assumed the yield would be 4.0 percent. Every year’s interest expense in the table above, is 4 percent of the prior year’s ending level of the debt.

Deficit (Surplus)

As the table shows, initially the federal deficit spikes to $3.1 trillion in 2025 (due to eliminating the income tax in the latter half), and the budget isn’t actually balanced until 2035. The federal debt (held by the public) at the end of the decade is some $44 trillion, much higher than its current level.

To repeat, part of my motivation in writing up this post was to force the conservative/libertarian critics of the BBB to really think through their principles. I understand why they oppose the BBB which cuts taxes but also allows massive growth in spending—even if the BBB “cuts” spending relative to an even bigger growth in the baseline. 

But what do these critics think of the type of plan outlined in the table above? If you want to say it’s risky because future Congresses wouldn’t abide by the spending cuts, fair enough. But that’s a separate argument from saying, “I oppose any bill that increases the deficit.” Again, my point here isn’t to tell readers they’re wrong, but rather to encourage a deeper introspection on these issues.

Related to this, during the argument over the BBB, Elon Musk circulated a video of Milton Friedman who argued that the true metric of the size of government was its spending. On that score, the plan showcased above definitely shrinks the government, right away and especially over time. Again, this is why I went through this exercise, to see if the people retweeting Elon on this point—to underscore why they hated the BBB—would actually be consistent and favor a plan that (a) genuinely cut federal spending but (b) cut federal taxes even more, hence increasing the deficit.

A Word on Inflation

Finally, let me say a word on inflation. In discussing these issues on social media, it became clear that many of the conservative/libertarian opponents of the BBB thought that an increase in the government deficit was the same thing as a hike in (future) inflation. But that’s not necessarily the case. In the table above, if the federal government actually followed through with the plan, then its budget would eventually be in surplus by the year 2035, after which the debt would slowly shrink, both in absolute terms and even more so as a percentage of GDP.

Consequently, because bond markets would see that there was a long-term plan to ensure solvency, there would be no need for the Federal Reserve to “monetize” the debt in order to contain interest rates, and so there would be no intrinsic pressure on the dollar. The outcome would be analogous to a spike in corporate borrowing, which wouldn’t necessarily cause prices to rise or the dollar to fall against other currencies. 

In summary, let me reiterate that the above is not my formal “Murphy plan” for reform. Rather, it is a hypothetical example of aggressive fiscal reform, showing how it could be done. And to say one last time, my purpose in detailing it is to distinguish several concepts that were being lumped together in the real-world debate over the BBB.

Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.

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