Can taxes alone fix long-term deficits?

Myth: Long-term deficits have easy solutions, like new taxes on high earners and corporations that can close the fiscal gap without significant economic drawbacks.

Reality: While such taxes can be part of the solution, middle-class taxes and spending savings must also contribute to a plausible debt stabilization plan.

Determining the size of the fiscal gap

Fully balancing the budget is extraordinarily difficult and likely not necessary. Instead, capping the debt held by the public at the current 100 % of gross domestic product (GDP) would likely stabilize both annual interest costs and the debt’s broader economic impact.

Chart 16 reveals that meeting such a target—which requires holding long-term budget deficits to no more than roughly 3.6% of GDP—would require some combination of tax increases and spending cuts of 4.3% of GDP annually within a decade, rising to 5.1% of GDP over three decades (remaining savings would come from reduced interest costs).

This fiscal gap is larger than commonly estimated because it is based on a current-policy baseline that extends existing spending and tax policies and assumes that President Trump’s tariffs are not renewed by his successor in 2029.

Closing the fiscal gap only through taxes on the wealthy is no easy task

As chart 94 in Figure 1 shows, generating tax increases of 4-5% of GDP almost certainly requires broad-based tax hikes that reach well beyond high earners. Aggressive “tax the rich” proposals—such as taxing capital gains as ordinary income (0.16% of GDP), raising the estate tax rate as high as 77% (0.17%), restoring the steep 35 % corporate tax rate (0.53%), and applying Social Security taxes to all earnings (0.89%)—do not come close to the savings target even when combined.

And even these revenue estimates may be overstated after accounting for the likely economic drag and resulting revenue losses from layering these increases on top of one another.

Chart 94 makes clear that meaningful revenue gains require broad-based tax increases that also fall on middle- and lower-income families. Options in this category include raising payroll tax rates by 10 percentage points (3.74% of GDP), increasing all income tax rates by 10 percentage points (3.47%), and enacting a 20% value-added tax (2.80% of GDP).

A tax-heavy deficit solution would mean a substantially higher burden on working families

That, in fact, is how Europe finances its larger governments. As chart 92 in Figure 2 shows, the U.S.—across all levels of government—raised revenues equal to 25.6% of GDP in 2024, compared to 34.3% for the other 37 nations in the Organization for Economic Cooperation and Development (OECD).

Of that 8.7 percentage point gap, 7.2 points are explained by broad-based value-added taxes (VAT) imposed by every OECD country except the U.S. Strip out the VAT difference, and the revenue gap between the US and the rest of the OECD narrows to just 1.5% of GDP.

Even the high-tax Nordic countries derive the vast majority of their additional revenues from higher Social Security taxes and VATs rather than steeply progressive income and corporate taxes. And as chart 93 shows, the top US rates on individual income, corporate profits, capital gains, and estates broadly align with top OECD rates.

If taxes in the US go up, what will taxpayers get in return?

In short, the OECD achieves significantly higher revenues than the US by taxing the broad population at higher rates—not by imposing confiscatory taxes on the wealthy. If the U.S. chooses to finance its rising spending trajectory with substantially higher revenues, those taxes will have to fall heavily on middle- and lower-income families as well.

Broad-based tax increases are a legitimate policy choice—and one much of Europe has made. But many European families pay higher taxes in exchange for substantial family benefits. In the U.S., these same taxes would be needed simply to fund existing benefits for seniors and to service the interest on the federal debt. Americans may eventually find themselves paying European-level taxes—but without the European-level benefits.

For more insights into federal spending, taxes, deficits, and debt, check out Jessica Riedl’s 2026 federal budget chartbook.