Facing the Reality of U.S. National Debt

The National Debt Clock recently displayed a startling number: $40 trillion. This has reignited debates over the actions needed to address it. Common suggestions like reducing spending or cutting programs such as Medicare and Social Security frequently surface. However, these measures are insufficient when looking at the numbers.

Medicare costs about $1 trillion in fiscal 2026. Even if it were entirely eliminated, an unlikely scenario, this would reduce only half of the current deficit. Social Security, costing $1.7 trillion annually, offers even less room for cuts. The idea of eliminating all so-called ‘wasteful’ domestic federal agencies, including the EPA, Department of Education, or foreign aid, would barely touch 13–14 percent of the federal budget.

The Congressional Budget Office projects a fiscal 2026 baseline of federal spending at roughly $7.7 trillion, with 73 percent dedicated to mandatory spending programs like Social Security, Medicare, and Medicaid. Discretionary spending is about $2 trillion, divided between $900 billion for defense and around $1.1 trillion for other areas. Moreover, interest payments on the debt will cost approximately $1.1 trillion in fiscal 2026.

Debt held by the public exceeds $32 trillion and presents refinancing challenges. About a third of this debt needs refinancing within the next year at higher interest rates, potentially increasing the interest bill by close to $100 billion.

The solution requires a shift toward revenue generation rather than cutting costs. One effective approach is implementing a value-added tax (VAT), commonly used by developed countries worldwide, except the United States. A VAT imposes taxes on value added during production stages, built into the price of goods. Despite raising prices, it’s essential to closing the fiscal gap.

Concerns about the VAT being a hidden revenue source are valid. To counter this, one could establish safeguards such as supermajority requirements for rate increases within the legislation. Not choosing a VAT now risks future financial crises.

The Congressional Budget Office estimates a 5 percent VAT could generate $350 billion in 2027, rising to $440 billion by 2034. A 10 percent VAT, as proposed by the Tax Foundation, could significantly reduce the deficit by $1.6 trillion annually, accounting for effects on GDP.

A typical VAT rate in Europe is 21 percent, while a 10 percent U.S. rate would be notably lower. Though regressive, careful design—exempting necessities and offering rebates for low-income households—can alleviate concerns.

The urgency to act is clear, with the risk of another financial crisis looming. Peter J. Tanous, Chairman Emeritus at Lynx Investment Advisory and author, advocates for immediate congressional action.