“Should auld acquaintance be forgot and never brought to mind?” Many in DC seem to think so, especially when it comes to taxpayers. The federal government rang in Fiscal Year 2025 on October 1 like many fiscal years with a last-minute continuing resolution to prevent a government shutdown. To make matters worse, the national debt and fiscal instability seem to be topics both presidential candidates seem to be avoiding.
Many lawmakers in DC make resolutions to be more fiscally responsible, but much like our New Year’s resolutions, they rarely follow through. When it comes to resolutions, one must be willing to achieve small, actionable goals on the path to larger change.
The focus of tax policy should be to allow Americans to keep as much of their hard-earned money as possible. This will come from a combination of taxes and spending (discussed next) reforms.
A more manageable first-step should be to not further complicate the tax code. Last month, the Biden-Harris Administration published a 603-Page Rulebook for the new 15 percent corporate alternative minimum tax. The time, talent, and resources business deploy to comply with these Byzantine rules comes at the cost of putting those things toward research and development, hiring new employees, and increasing employee compensation, known as a deadweight loss. Stopping these rules from taking effect will save American businesses from the headache of compliance costs.
Stopping the expiration of the Tax Cuts and Jobs Act (TCJA) would also help Americans keep more of what they earn. The TCJA simplified individual income taxes and reduced tax rates across the board. While research shows that the TCJA will not pay for itself without serious spending cuts, it generated a significant amount of economic activity due to behavioral changes from Americans being able to keep more of their own money.
While eliminating taxes on income is a laudable goal, it’s just about as feasible as becoming an award-winning bodybuilder after spending only a week in an exercise routine.
A good start is for the federal government to stick to the Fiscal Responsibility Act of 2023, where the federal government will be penalized for using a continuing resolution in FY 2025 by reducing both defense and nondefense funding levels by 1 percent if appropriations bills are not enacted by April 30, 2025.
However, this does not solve the problem. Policymakers need to seriously consider fiscal review commissions. These review commissions may start small, but they must eventually work up to what Economist Romina Boccia calls “a BRAC-Like Fiscal Commission to Stabilize the Debt.” The key benefit of a BRAC commission (whether for spending on military bases or managing the national debt) is that it mitigates the incentive problems facing politicians and bureaucrats by requiring “silent approval.” Instead of a politician going on record in support of spending cuts (which will hurt reelection prospects), the spending cuts are enacted so long as the member of congress does nothing. Instead, they must voice their disapproval to prevent spending cuts.
Amending the constitution to include spending limits is another admirable goal but would require significant effort to get there. Further reforms show constitutional spending limits can help constrain the growth of spending, and, ultimately, the national debt. As Vance Ginn and I wrote, a proper constitutional spending limit (such as tying taxes and expenditures to the sum of population and inflation growth) can nudge even the worst in DC to make fiscally responsible choices.
The largest drivers of spending and debt are entitlement programs. A recent WSJ article reports that 53 percent of all US counties draw at least a quarter of their income from government aid. However, recent Congressional Budget Office estimates show that 53 cents of every dollar the federal government spends goes toward entitlement programs.
There are several actionable steps in the process of entitlement reform. For instance, state governments that administer many welfare programs can do eligibility checks and frequently update rolls so that those who are ineligible for income security programs are not receiving it. The same goes at the federal level for Social Security’s Old Age and Disability Insurance programs. Research also finds that overpayments are a key source of Medicare spending growth. To reduce costs, policymakers can reduce government subsidies for wealthier beneficiaries. This can be achieved by adjusting income thresholds at which means-testing applies, expand definitions of wealth for means-testing, and use alternative mechanisms of means-testing (such as using Medicare Part A premiums based on income).
After adjusting, these programs, a larger goal would be to reform entitlements altogether. Replace all entitlements with a “universal savings account (USA)”. Economist Adam Michel describes a USA as an account, “that would function similarly to retirement accounts—income saved in the account would only be taxed once—but without restrictions on who can contribute, on what the funds can be used for, or when they can be spent.” Michel and others note that current tax and fiscal policy punishes savings through income and payroll taxes and then again through corporate income taxes, taxes on investment income, or taxes transfers (i.e. taxes on gifts and inheritance).
Economist Judy Shelton notes, “Just as government should function as a servant to the people, not vice versa, money should provide a dependable unit of account for free people engaged in free enterprise.” Ending political meddling in monetary policy is a difficult, but necessary resolution to keep.
Policymakers can start by changing the Fed’s dual mandate (maintain stable prices and full employment) to a single mandate of stable prices. “If the Fed is doing its job,” Economist Alex Salter comments, “keeping inflation under control will foster robust labor markets.” By keeping the Fed bound to this rule, it can help keep the Fed out of other areas (such as racial equity, climate change, and other social issues beyond that narrow mandate).
From there, enacting a monetary rule would help further separate fiscal and monetary policy. The stronger the rule, such as a constitutional monetary rule, the better able to keep fiscal influence out of monetary policy.
Ultimately though, the best check on fiscal and monetary policy is returning to the gold standard. A gold standard provides a check on fiscal policy by limiting the amount of paper money that can be issued by a bank to the supply of its gold reserves. In principle, this means government budget deficits must be covered by tax increases, spending cuts, and/or issuing debt instead of money printing.
Returning to the gold standard, however, is probably the most difficult resolution to keep. Economist Bryan Custinger comments, bringing back the gold standard would “deprive government of this revenue source,” and would require a cost-benefit analysis of decreased spending and/or higher taxes.
Just like our own New Year’s resolutions, there’s no shortage of guides and programs to help the federal government improve its fiscal health. Without the willingness to take political risk, the advice is not worth the paper it’s printed on. Sadly, given the eagerness to talk about anything but the national debt in DC, it seems that these fiscal year resolutions may end up abandoned faster than a gym in mid-January.
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