Addressing the U.S. National Debt: The Case for a Value-Added Tax

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September 20, 2026
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The U.S. national debt has reached a staggering $40 trillion, prompting debate on how to address this financial challenge. Common suggestions include reducing spending, cutting Medicare and Social Security, and eliminating tax loopholes and waste. However, these measures alone won’t suffice; the solution lies in increasing revenue.

“Sorry, folks. Here’s why the solution has to come from the revenue side, not cost-cutting.”

Medicare costs are expected to hit $1 trillion in fiscal 2026. Even eliminating Medicare entirely, which seems politically impossible, would only close about half of the current deficit. With Social Security costing $1.7 trillion and constantly rising, eliminating it is even less feasible. Attempts to eliminate perceived waste — such as the EPA, the Department of Education, and foreign aid — would affect only 13-14 percent of the federal budget. There’s no viable path of spending cuts that closes this gap.

Let’s examine the Congressional Budget Office’s fiscal 2026 baseline. Total federal spending is projected at roughly $7.7 trillion. Of this, 73 percent, or about $5.6 trillion, represents mandatory spending dictated by law, covering Social Security, Medicare, and Medicaid. Discretionary spending, which requires annual Congressional votes, totals roughly $2.0 trillion: $900 billion for defense and about $1.1 trillion for all other categories, including perceived “waste.” Additionally, interest payments on the debt will amount to roughly $1.1 trillion, with expectations to rise.

The national debt held by the public exceeds $32 trillion, with around $10 trillion maturing for refinancing in the upcoming 12 months. The average interest rate on this debt is currently 3.3 percent, while current rates range 0.5 to 1.3 points higher depending on maturity. Each one-point rate increase costs an additional $300-400 billion annually. Rolling over a third of the debt at higher rates will increase interest payments by nearly $100 billion before any new expenditures.

The feasible solution involves implementing a tax that produces substantial revenue, accompanied by sensible budget cuts. Most developed countries impose a value-added tax (VAT), which taxes value added at production stages. Exempting necessity items like food and clothing makes VAT less regressive. It’s integrated into the price rather than added at checkout, but it still raises prices. This approach to closing the $40 trillion gap is inevitable.

The typical objection to a VAT is its potential as a surreptitious revenue source that Congress may exploit. Safeguards, such as a supermajority requirement for rate increase approvals, should be part of the VAT legislation, responding to this concern with careful design. The choice isn’t between VAT and no new tax, but rather a deliberate VAT strategy now versus a costly reckoning later.

According to the Congressional Budget Office, a 5 percent VAT could yield $350 billion by 2027, rising to $440 billion by 2034 on a broad base, or $220 billion to $290 billion on a narrower base. A proposed 10 percent VAT, modeled by the Tax Foundation, cuts the primary deficit by roughly $1.6 trillion a year; with its modest economic impact, the estimate is about $1.3 trillion a year — hitting a needed financial lever.

Europe’s average VAT rate nears 21 percent; a U.S. rate at 10 percent is half of that. By nature, VAT is regressive, impacting lower-income households disproportionately. Exemption of necessities and rebates similar to Canada’s GST credit can address this, with rebates aiding low-income households.

Reality necessitates decisive action. Numbers are undeniable. Inaction risks a financial crisis dwarfing 2008–2009. Congressional intervention is crucial.

Peter J. Tanous, chairman emeritus at Lynx Investment Advisory, authored “Investment Gurus” and co-authored “The End of Prosperity” with Arthur Laffer and Stephen Moore.