To my surprise, when I began graduate school in public policy back East, one of the first case studies was the Central Utah Project. As the professor was introducing the case, describing how federal government funding was allocated to provide water for agricultural irrigation, household use and recreation, it became clear that in his mind the project was something of a boondoggle. Why should the U.S. taxpayers pay for a few Utahns to water ski in the middle of a desert? We had spirited discussions, mainly pitting me, “the guy from out West,” against the rest of the class, most of whom came from places where it rains a lot. At one point I remember blurting out: “water is life!”
My point is not to debate water policy, but to point out that everything in the U.S. federal budget is in there because it is important to somebody.
Elon Musk is now working on plans to make the U.S. government more efficient. He is not the first to embark on such an effort, but I hope he is effective. Having worked in the federal government for many years, I know there are ways we could accomplish our goals utilizing fewer resources. If, however, the call for efficiency turns out to be nothing more than a smokescreen for keeping or enhancing programs important to us and cutting or eliminating programs that are important to others, then we will do little more than deepen and prolong the political divisions in our country.
And, importantly, we will likely again fail to resolve our frightening debt crisis. We have spent the past 23 years quibbling about this political priority or that questionable program, all while the deficit grows each year and the interest on the accumulated debt now costs more than national defense or all the rest of federal government’s discretionary spending put together. That is like paying out more for minimum credit card payments each month than we pay for the mortgage.
Is it time for a bold new approach? What if there were ways to balance the federal budget that would be effective and enduring because they would not be at the mercy of short-term political considerations?
There are ways. Let me describe two.
Adjustable flat tax
First, the adjustable flat tax. The idea of a flat tax has been around for a long time. It has been proposed as a way to be more fair, to answer the criticisms that the rich don’t pay their fair share or that the tax code is so complicated that it encourages deceit and is a drag on economic efficiency.
The idea is simple. There is a threshold above which all income is taxed at the same rate. Period. Below that threshold (some have suggested $50,000 to recognize the struggles of the working poor), income is not taxed. What if I make one dollar more than the threshold? Then you only pay tax on that dollar.
How does the flat tax work to eliminate the deficit? Each year, the flat tax rate is adjusted to bring in enough revenue to meet appropriated government expenditures. It would be clear to Congress and to the taxpayers that increasing expenditures means increasing the tax rate, the specter of which should evoke needed discipline. If one year there were a terrible spate of natural disasters, the tax rate might have to be temporarily bumped up a notch. Hurricane or earthquake cleanup, or a pandemic, is not costless. Or Congress could economize in other programs to make up the difference. But the need for any tax increase would be clear.
Equal adjustment mechanism
Second, the equal adjustment mechanism. The federal government has been spending about 30% more than it receives in tax revenues in recent years. A reasonable goal would be to reduce that deficit by a third each year for the next three years to reach a balanced budget. Of course, reaching agreement on how to make such a reduction has been a goal for the past 23 years, but has proven impossible under our present ways of unending partisan promises and political wrangling. The equal adjustment mechanism fixes that problem.
The idea is this: If Congress does not pass a budget that achieves the goal set (say, to reduce the deficit by a third) by the beginning of the fiscal year on October 1, all expenditures in the ensuing year will automatically be cut by 5% and all taxes will automatically be raised by 5%, thus achieving the goal. If this were to be done for three years, the federal government budget would be balanced. The equal adjustment mechanism would be clunky, painful and effective.
Surely only the most duplicitous politicians and the most gullible citizens believe that the budget can be balanced painlessly. From the fiscal government deficit of $1.83 trillion in 2024, each American received $5,400 in government-provided goods and services beyond what taxes paid for. We as a nation are going further into debt to pay for that irresponsible largess and the debt is accumulating at an alarming rate. We need some tough love to wean us away from the imbalance.
But there is good news. If we can bite the bullet and balance the budget in the next three years, we can put the pain of doing so behind us. If the budget is balanced in a way that is perceived as fair and not partisan, it is likely to be enduring. If we can do something hard together, it will help ameliorate the partisan divide. The business and financial environment will improve. Moreover, American creditworthiness will be solidified and international confidence in the United States will grow as we show that democracy works.
And Utahns can water ski with a clear conscience.