FY26 Treasury Budget and Tax Reform

WM:  Hearing with Treasury Secretary Scott Bessent, June 11, 2025

Finance: The President’s Fiscal Year 2026 Budget for the Department of Treasury and Tax Reform, June 12, 2025

The revenue issue dominating the headlines are the President’s tariff policies, which are dynamic rather than according to a master plan. In real life, that is how the world works in the President’s experience. We have developed a systematic approach to bring order into the chaos. It is based on how most nations deal with value added taxes - which we do not follow because we don’t use this as a revenue source. The President’s tariffs are a response to the fact that in every other nation, exporters benefit from the zero rating of these levies at the border while fully burdening imports with these taxes. 

This is the basis for our proposal, which is to link tariffs to the VAT rate of the exporting country, adjusted, where appropriate, to the trade balance they have with the United States and the per capita gross domestic product of these nations. When nations are too poor, no adjustment is made for trade balance issues (with the exception of high volume exporters from Asia). For nations where the United States has a trade surplus, the tariff is adjusted by reducing it to not overly burden American exporters. For example, we have 3.8% trade surplus (adjusted to the size of their economy) with Bahrain and 1.4% surplus with Belgium. Bahrain’s VAT is 10%, and Belgium’s is 21%. The resulting suggested tariffs are 6.2% and 19.6%, respectively. A comprehensive listing of tariff rates would push out all of the other attachments and will be provided separately to the Trade Subcommittee.

Another important issue is the national debt. America’s bond rating has been damaged - not because of the size of the debt but because of the Majority’s reticence to keep reauthorizing debt limit increases and to raise taxes on those who benefit from net interest payments - which is a major drain on the budget. Firstly, the limit needs to be abolished. It was only established because previously, each bond issue was authorized by Congress. That day has long since passed. Secondly, there is a misunderstanding of who is receiving the benefits from net and governmental account interest expenditures. 

The bottom 60% of households own the debt held by Social Security as beneficiaries. The top 0.1% of households hold about a third of managed fund and bond assets, with the rest of the top 10% holding half and the bottom 90% one sixth. Federal Reserve, bank and long term assets are divided in roughly half between the top 20% and the bottom 80%. If the debt were to be defaulted on, a great deal of the damage would be to the top 10% of households. Managed fund and bond holders in the top 1% would take the biggest hit. 

The debt itself is owed by income tax payers (not families or individuals per capita - as most could not pay and we should not scare them by saying they do). For every dollar of income tax paid, thirteen are owed. Due to the expansion of the economy (especially workers wages) since the pandemic, the factor of gross debt to income tax collections has fallen from 19 to 13. The reduction of the debt held by the public because of the retirement of the Baby Boomers also contributes to this statistic. 

The Majority needs to take note that those who pay and those who owe are the same people: capitalists. Without the national debt, leveraging private banking, debt and investment - especially  the intrinsically worthless assets in secondary markets - is impossible. For the investment economy to grow, a deficit is necessary unless the economy is driven to employee-owned financing of the retirement funding and debt management of employee-owned firms - ending securitization of both assets and consumer and housing debt. Please see the first attachment for more detail, including our latest table which includes how ownership of the debt is currently held.

The strangely named Big Beautiful Bill contains increased subsidies for families through the expansion of the Child Tax Credit (which partly offsets the continued repeal of personal exemptions). Some of the bipartisan opposition in the Senate in the prior Congress came from those who consider direct subsidies from the IRS to have the “stink of welfare.” I advise such Senators in both parties to raise the minimum wage so that no one is having to work just to receive this credit and that the best way to distribute the credit is with wages rather than individual tax filing.

Current law makes the credit (as well as the earned income credit) seem like free money. Under the tax reform proposals attached, a subtraction value added tax paid by employers moves the distribution of family based subsidies out of personal income taxes to payroll or additions to government beneficiaries.

We also propose gutting the current social service structure and replacing it with long term unemployment insurance, a feature of which will include the retirement to improve literacy, engage in further education for some and occupational therapy, drug and alcohol treatment and use of psychiatric rehabilitation services. The army of tax preparers and benefit analysts would be retrained to help people navigate through long term payments toward work. Our LTIU proposals can be found in a second attachment.

Our tax reform proposal is in two parts. The first is a menu of consumption taxes paid by consumers (credit invoice value added tax), subtraction VAT (with a surtax on higher salaried workers and dividend/interest recipients) and a carbon added tax. The second is the proposal for an asset value added tax to replace all forms of the capital gains tax. Rates for this tax will be higher (but with expanded zero rating of sales to ESOPs) to reduce the deficit in a way that slowly decreases securitization so transition to a new economy is evolutionary, not revolutionary. These are detailed in the third and fourth attachments.

Until tax reform occurs, IRS Statistics on Income tax tables  should be adjusted for inflation to get a better idea of the distribution of income. Between $50,000 and $100,000, there should be five groups. Between $100,000 and $200,000, there should at least be four so that the border between the fourth and fifth quintiles can be more adequately expressed. Every tax wonk in the nation will appreciate this. Tax Administration post reform is detailed in the last attachment.

Attachment: Debt Ownership Tax Year and SCF 2022, June 2025 Treasury Bulletin

Attachment: Social Services and Solvency: Long Term Unemployment Insurance

Attachment: Consumption Taxes

Attachment: Asset Value Added Tax

Attachment: Tax Administration Video