The theory and philosophy around taxation sometimes starts with the US Supreme Court’s distinction between “avoidance” and “evasion.” No American is obligated to pay more than what is required. Measures taken to avoid tax within the rules are fine; measures taken to defeat the rules—evasion—are criminal. The rules should take into account “plucking the goose’s feathers to have the least amount of squawking.” However, we seem to be at a crossroad with a new administration. In a letter to the editor discussing California’s preparations for a natural disaster, the author answers the question of “who created the conditions on the ground that invited this catastrophe” this way: “All of us. It’s what the Greeks called hubris: unfounded confidence that we can bend the land to our will and buy our way out of the consequences.”[1] Our current tax system/structure has a patina of logic to it. However, if the system doesn’t encourage or support economic growth, which is America’s strategic advantage, then existing tax policy is a hindrance and should be changed.
A further important distinction is the difference between legal/political decision-making and economic decision-making.[2] Quoting Thomas Sowell, a letter writer notes that “political, and especially legal, decision-making tends toward categorical rather than incremental decisions.” The letter continues: “the alternative is economic decision-making in which myriad companies and individuals make choices based on their own unique knowledge, preferences and situations. These are incremental and not categorical in nature and allow for valuable feedback.” Tax policy changes should be slight and gradual, never retrospective, to allow long-term business and personal planning. However, rolling back sudden or dramatic changes and returning to pro-growth policies would count in our minds as “gradual.”
As discussed by Treasury Secretary Scott Bessent, the new administration may be focused on 3-3-3: a sustained 3% growth rate for gross domestic product (GDP), a federal fiscal deficit no more than 3% of GDP, and an increase in domestic oil production of three million barrels per day.[3] We may be able to get there incrementally. The US is a great country.
For tax policy, Bessent says, “we do not have a revenue problem in the USA, we have a spending problem.”[4] For the last 50 years the average deficit has been approximately $0.55 trillion per year.[5] Multiplied by 50 years, that gives us US debt held by the public at October 1, 2024 of 100% of GDP, or approximately $28 trillion, with most of this accumulating in the last 15 years.
Don’t Eat the Word Salad
“Word salad” has been a popular political term in the most recent election cycle. It’s an expression that comes in handy as we work into understanding the tax policy discussions that are about to begin. First we should review terms such as “mandatory,” “discretionary,” “outlays,” “primary deficit,” and our favorite, “tax expenditures.” Basically, in this lexicon, you, the taxpayer, are the enemy. “Mandatory” spending (“outlays” equal spending) covers items the legislature doesn’t want you to believe are under their control. This spending is governed by laws passed by the federal legislature, not by annual appropriations, which is a distinction without a practical difference. The legislature does both. “Discretionary” spending includes those things all of us agree are items our government must do: national defense, federal justice, international affairs and other items subject to annual appropriation.
The big item left out of these two is interest on the national debt (called “debt held by the public”). We’re not sure we want to know what other kind of debt there is; perhaps, see “unfunded liabilities”? Without including interest, the annual deficit is called the “primary deficit.” Because you are the enemy, “tax expenditures” arise from the legislature letting you keep more of your money. If they were brave enough, they would end tax expenditures by raising your taxes.
If we give the people who believe we have a spending problem enough time, we can probably solve our problems. It has happened before. After 12 years (1981–1992) of heavy defense spending but with policies that encouraged Americans to grow our way out of a continuous deficit, the federal government ran a surplus from approximately 1997 to 2001 by increasing revenues through growth to the historic percent of GDP normally associated with spending, 21%, and lowering spending to the historic average of GDP normally associated with revenue, 17–18 percent. Don’t let anyone talk “word salad” or explain to you why that can’t be done, again. Just vote until it is done.
William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager
[1] Stephen M. Albert, “California Makes Violent Contact with Reality,” WSJ Letters, 1/15/25, p. A16.
[2] Mark Shiller, “We Need Better Statemen, Not Technocrats,” WSJ Letters, 1/16/25, p. A16.
[3] Gerard Baker, “Bessent’s 3-3-3 Economic Growth Plan…,” WSJ, 1/14/25, p. A15.
[4] Brian Schwartz et al., “Bessent Lays out Agenda for Treasury,” WSJ, 1/17/25, p. A4.
[5] Congressional Budget Office, “Outlook for 2024,” cbo.gov, January 2025, pgs. 1,2,4,16,20,37.