WASHINGTON — The U.S. national debt has reached $40 trillion, reigniting a long-running debate over fiscal strategy. Economist Peter J. Tanous argues that only a value-added tax can generate sufficient revenue to close the deficit, contending that spending cuts alone cannot do the job.
Tanous lays out the math. Medicare costs approximately $1 trillion in fiscal 2026; eliminating it entirely would cover only about half the current deficit. Social Security, projected at $1.7 trillion and growing annually, presents an even larger challenge. Scrapping federal agencies often targeted for cuts—the Environmental Protection Agency, the Department of Education, the State Department, and foreign aid—would affect only 13 to 14 percent of the federal budget.
The Congressional Budget Office's fiscal 2026 baseline shows total federal spending of roughly $7.7 trillion. Mandatory spending, covering Social Security, Medicare, and Medicaid, accounts for 73 percent of the total, or about $5.6 trillion. These expenditures are set by law and do not require annual congressional votes. Discretionary spending, which Congress votes on each year, totals approximately $2.0 trillion. Defense spending accounts for about $900 billion, with the remaining $1.1 trillion allocated to other federal functions.
Interest costs add another layer to the fiscal problem. In fiscal 2026, the federal government will pay approximately $1.1 trillion in interest payments alone. Debt held by the public exceeds $32 trillion, with roughly one-third of that amount—upwards of $10 trillion—maturing and requiring refinancing within the next 12 months. The average interest rate on existing debt stands at about 3.3 percent, while current rates are 0.5 to 1.3 percentage points higher depending on bond maturity. Each one-point increase in interest rates costs the Treasury $300 billion to $400 billion annually. Refinancing one-third of the public debt at today's higher rates alone would increase the annual interest bill by nearly $100 billion before any new federal spending occurs.
Tanous proposes a value-added tax (VAT) as the primary solution, coupled with sensible budget cuts. A VAT taxes the value added at each stage of production and is standard in nearly every other developed country. To address concerns about regressive impact on lower-income households, a VAT could exempt necessities such as food and clothing. The tax is built into the price of goods rather than added at the point of sale.
A primary concern is that a VAT could become an easily raised revenue source for Congress. Tanous suggests embedding a safeguard into the enabling legislation, such as a supermajority requirement for any future rate increases.
