Summer Reading: Federal Spending and Taxes

August is a perfect month to leave hot and humid Washington, D.C. for a heavenly getaway somewhere on the beach—to trade the steamy air along the banks of the Potomac for a refreshing breeze off the Atlantic Ocean, and briefly leave days full of political worries for carefree hours on a sunbed by the water. For lawmakers, it is a time to get out of Washington’s budget quagmires (that they caused) into which they will soon be pulled back—ahead of the September 30 funding deadline.  While in August recess, they can (but shouldn’t) briefly forget about the inescapable fiscal dilemmas that are waiting for them back in the district. But once August is done, they cannot escape reckoning with them. Thankfully, 2026’s “Summer Reading” compilation, courtesy of the Taxpayers Protection Alliance, gives lawmakers an opportunity to take Washington’s fiscal temperature before returning to the capital—it is getting hotter every day.

The 2026 fiscal outlook authored by Jessica Riedl at the Brookings Institution paints a discomforting picture. The United States has the largest budget deficit—approaching $2 trillion—among countries in the Organization for Economic Co-operation and Development (OECD) and the fourth-largest debt held by the public, which recently exceeded the size of the United States economy, reaching $32 trillion. Add roughly $7 trillion in intragovernmental debt, and the total national debt is on track to shortly top $40 trillion. Not only does such excessive borrowing already result in roughly $1 trillion in interest costs—claiming the largest share of GDP on record—but, at the current and projected pace of borrowing, the vicious cycle of rising deficits, debt, and interest costs renders the nation’s fiscal path increasingly perilous. Policy experts like Riedl have long warned that fiscal calamity will approach “gradually, then suddenly,” but with deficits projected to hit $4.4 trillion within a decade and outlays for major entitlement programs rising steeply, we might just be approaching the latter phase. “At some point these projections become so extreme as to be economically unrealistic. Indeed, a 2023 analysis by the University of Pennsylvania’s Wharton School could not even model a functioning economy under the current debt trajectory—their models simply crashed,” Riedl writes. “Something has to give before that point.”

That “something” is impossible to overlook. Riedl illustrates that the federal budget is increasingly being consumed by mandatory spending and interest costs. These budget items now account for roughly 75 percent of federal spending—about $5.7 trillion in 2026—up from just 34 percent in 1965. A vast $1.2 trillion safety net consisting of more than 90 federal welfare programs further strains the federal budget.

Some politicians adamantly refuse to acknowledge these basic facts. They instead advocate more—and ever higher—taxes on “the rich” demanding that they “pay their fair share” to sustain, even expand, an unsustainable welfare state. Yet these proposals offer no new solutions, but merely reiterate the same well-worn ones. In fact, the federal income tax code is already the most progressive among the OECD countries.

The Tax Foundation’s analysis of the latest federal income tax data reveals that, in 2023, high-income taxpayers paid the majority of federal income taxes. The top 1 percent paid by far the highest average income tax rate, at 26.3 percent—seven times the rate faced by the bottom half of taxpayers. As the Foundation notes, “Average income tax rates rise as household income increases.” What is more, “[t]he share of income taxes paid by the top 1 percent increased from 33.2 percent in 2001 to 38.4 percent in 2023…Over the same period, the share of income taxes paid by the bottom 50 percent of taxpayers fell from 4.9 percent in 2001 to 3.3 percent in 2023.”

The same increasingly narrow slice of taxpayers has financed an increasingly large share of federal spending—alongside borrowing. But the federal government has little to show for its trillion-dollar transfers in terms of outcomes that justify them. To the contrary, as Chris Edwards at the Cato Institute explains, “At a certain point, the marginal costs of overall spending top the marginal benefits, and today’s federal government has likely far surpassed that point. In addition, as the federal government expands, diverse and innovative state, local, and private approaches to tackling problems are displaced or crowded out. For example, Medicare and Medicaid expansion displaces some private health coverage, welfare programs displace private charity, and Social Security displaces private savings.”

This dysfunctional status quo, in which federal spending—having reached 23.3 percent of GDP—is used to redistribute ever more national income, is perpetuated by a deeply flawed “romantic vision of government [that] does not pass scrutiny,” as Chris Edwards and his colleague Ryan Bourne argue in their recent analysis, “Federal Government Spending Is a Leaky Bucket.” Policymakers and the public believe that social or economic problems, such as poverty, can be solved through expanded federal programs. In reality, “when the government taxes some people to provide welfare benefits to others, it is like carrying water using a bucket riddled with holes. Substantial value ‘leaks’ along the way,” they maintain.

Edwards and Bourne elucidate how funding for a government program flows. “Funds are raised from taxpayers, flow through the government, and then are handed out to program recipients. Leaks occur at each step. Higher taxes generate compliance costs and reduce incentives for working, saving, and entrepreneurship, with the result that taxes cost the private sector more than just the value of the funds raised.” As funds percolate through the government, more leakage ensues. “Policymakers allocate resources to low-value or wasteful activities because of the difficulty in central planning and the political realities of passing legislation through Congress. Resources are also consumed by administrative costs and bureaucratic failures in federal agencies.” As the funds finally reach the private sector, still more leakage occurs. “One problem is that individuals and businesses change their behaviors in unproductive ways. Individuals receiving welfare may stay on the couch rather than work, while businesses receiving subsidies may focus on lobbying rather than product innovation.” The superior, historically validated, pro-market alternative to expanding the federal government is fostering economic growth.

Reducing—not adding to—the federal debt is paramount for stimulating the U.S.’s increasingly sluggish growth. The logic is straightforward: “higher debt suppresses capital accumulation, and weaker capital accumulation suppresses growth,” Jack Salmon of the Mercatus Center explains. In addition to accumulating debt, the federal government greatly impedes growth through the tax code. Salmon argues that “the federal tax code has evolved into a highly complex and opaque system that imposes substantial economic costs well beyond statutory tax liabilities…Reasonable estimates suggest that this time burden translates into roughly $413 billion in lost economic productivity.” The tax code penalizes investment from both ends. Not only does the government raise the cost to businesses of investing through corporate taxes and depreciation rules, but it also taxes households first when they earn income and again on the returns generated when they save and invest it, thus further discouraging capital formation. And to make things worse, Salmon writes, “Over time, the tax base has been increasingly narrowed through the proliferation of tax expenditures—government spending in the form of deductions, credits, exclusions, and exemptions…[which] function as implicit subsidies that favor particular activities, industries, or demographic groups, thereby distorting relative prices, misallocating capital, and encouraging resources to flow toward less productive uses.”

Tax simplification “should be understood not merely as an administrative reform, but as a pro-growth policy with significant macroeconomic implications.” Timely in this regard, the Tax Foundation recently released 86 potential options for reforming the federal tax code. The Foundation estimated “how the changes would impact federal revenue, the long-term debt trajectory, the distribution of after-tax income, and the US economy. With the information in this book, policymakers can weigh the trade-offs of each option.” For example, enacting full federal expensing for all capital investment would increase long-run GDP by 2.7 percent.

In the heat of summer, away from the usual fiscal fuss and political brinkmanship, lawmakers should consider a more refreshing approach to the nation’s fiscal challenges. They should pursue reforms that reduce the debt, remove tax barriers to saving and investment, and allow economic growth to do more of the work that Washington increasingly—and ineffectively—tries to do itself.