The only solution to our $40 trillion debt problem is a value-added tax

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The only solution to our $40 trillion debt problem is a value-added tax
News that the U.S. national debt has reached $40 trillion has produced the usual chest-thumping angst over what to do about it. Reduce spending. Cut Medicare and Social Security. Eliminate tax loopholes. Eliminate waste. Sorry, folks. Here’s why the solution has to come from the revenue side, not cost-cutting.
Start with the hardest number in Washington. Medicare costs about $1 trillion in fiscal 2026. Eliminate it entirely — as politically unthinkable as that is — and you close only about half of the current deficit. Social Security, at $1.7 trillion and rising every year, is even further off the table. Wipe out every domestic federal agency most people call “waste” — the EPA, the Department of Education, the State Department, foreign aid, all of it — and you’ve touched only 13–14 percent of the federal budget. There is no spending-cut path that closes this gap. The math forces the conversation onto revenue.
Here’s the full picture. The Congressional Budget Office’s fiscal 2026 baseline shows total federal spending of roughly $7.7 trillion. Of that, 73 percent, about $5.6 trillion, is mandatory spending set by law — no annual vote required — and covers Social Security, Medicare and Medicaid. Discretionary spending, the part Congress actually votes on each year, is roughly $2.0 trillion: about $900 billion for defense, about $1.1 trillion for everything else, “waste” categories included.
Then there’s the interest bill. In fiscal 2026 the federal government will pay roughly $1.1 trillion to service the debt, and that’s about to get worse. Debt held by the public — the portion the Treasury must actually finance in the bond market — now exceeds $32 trillion, and roughly a third of it, upwards of $10 trillion, will mature and need refinancing within the next 12 months. The average interest rate on that debt is about 3.3 percent; current rates run 0.5 to 1.3 points higher depending on maturity. Each one-point rate increase costs the Treasury $300–$400 billion a year. Roll a third of the debt over at today’s higher rates and the interest bill alone climbs by close to $100 billion — before Washington spends another dollar on anything new.
What is the solution? There is only one credible one: a tax that raises real money, paired with sensible budget cuts. Every developed country in the world except the United States imposes a value-added tax. A VAT taxes value added at each stage of production; exempting necessities like food and clothing makes it less regressive. It is built into the price of goods rather than tacked on at the register, and yes, it will raise prices. There is no version of closing a $40 trillion hole that doesn’t.
The standard objection to a VAT is that it’s a hidden, easy-to-raise revenue machine Congress will keep leaning on. That’s a fair worry — and an argument for writing a rate-increase safeguard, such as a supermajority requirement, into the enabling legislation, not an argument for inaction. The real choice isn’t between a VAT and no new tax. It’s between a VAT we design carefully now and a forced, far more painful reckoning later.
What would it raise? The Congressional Budget Office scores a 5 percent VAT at $350 billion in 2027, rising to $440 billion by 2034 on a broad base — or $220 billion to $290 billion on a narrower one. At 10 percent, the rate I’d propose, the Tax Foundation has modeled the option this way: On a conventional basis, it cuts the primary deficit by roughly $1.6 trillion a year; even after accounting for the modest drag a VAT puts on GDP, the dynamic estimate still runs about $1.3 trillion a year. That’s the only lever on the table big enough to matter. The average standard VAT rate across Europe is about 21 percent; a 10 percent U.S. rate would sit at half that.
A VAT is regressive on its face, hitting lower-income households harder as a share of spending. That’s manageable: exempt necessities from the base and pair the tax with a rebate for low-income households, the way Canada’s GST credit works.
The time has come to face reality. Numbers don’t lie. Do nothing, and we risk a financial and stock market crisis that would dwarf 2008–2009. Congress needs to act.
Peter J. Tanous is chairman emeritus at Lynx Investment Advisory in Washington, D.C. He is the author of “Investment Gurus” and co-author, with Arthur Laffer and Stephen Moore, of “The End of Prosperity.”
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