The U.S. Congress is currently debating the Budget for the year to September 30, 2026, where past mostly Biden-era profligacy has left a $2 trillion deficit. I want therefore to discuss what the final Budget should contain, focusing mainly on the tax provisions rather than the expenditure cuts, which should clearly be as Draconian as possible. There is much facile moaning about the end of U.S. economic hegemony; it can be restored, but only with a collection of provisions that close much of that $2 trillion hole. I will also discuss how much closure is needed.

To begin with expenditure cuts, DOGE is currently claiming savings of $150 billion for the fiscal year. While all help is welcome, that is nowhere near enough. In addition, the military/industrial complex is demanding extra expenditure, since it always finds Republican administrations and Congresses an easy mark. In this context, it was depressing to see President Trump approve development of the F-47 fighter by Boeing, a program type and supplier that almost always result in massive cost bloat. The existing fighter platform, the F-35 appears to be almost useless when faced with drones of around 0.1% of the cost of each aircraft; why should we imagine that another gold-plated boondoggle of overpriced fancy technology and endless consulting contracts will do better?

As for non-defense expenditure, it is vital to close departments completely to ensure that expenses are permanently eliminated, and Congress needs to cooperate in this. DOGE has revealed that USAID was a morass of waste and corrupt leftist handouts; the organization cannot therefore be left in place. If it were, even before the U.S. were subjected to the misery of another Democrat administration, the leftist bureaucrats would build it back, soon eliminating any savings. Similarly, the Department of Education and the Corporation for Public Broadcasting need to go altogether; whatever functions in them are felt to be truly necessary can be redistributed to other departments.

The Department of Energy and the Environmental Protection Agency serve no function that is helpful to good governance and are merely generators of absurd costly regulations; their useful functions if any can be absorbed into the Commerce Department. On the other side of the political aisle, it makes no sense to have a Department of Veterans Affairs separate from the Defense Department; veterans’ welfare can be made the responsibility of the military or the provision thereof can be devolved to the private sector. Finally, many of the medical and scientific grants and institutions gigantically funded by the government would do better in the fully private sector – government is not capable of picking research winners, and the intellectual productivity of these funds has sharply diminished since grants were first made in the 1960s. President Trump’s freezing of $2 billion in funds to Harvard University is a good start in this sector; all such funding should be cancelled.

On the tax side, the first question is which of the 2017 tax provisions to extend — by an absurd provision that only Congress could love, most expire in December this year. Should these provisions expire, half the current standard deduction would disappear and almost every individual filer’s taxes would be increased. Two provisions that would not expire would be the cap on State and Local Taxes (SALT) deduction of $10,000 and the 21% corporate tax rate, which would not revert to the previous 35% (you can tell the corporate lobbyists had a major hand in drafting the legislation)!

On corporate taxes first, in my view too much was given away to the lobbyists in 2017; the corporate tax rate for large corporations should be not 21% but 25%. Ideally, the capital allowances provisions would also be allowed to expire, so that corporate investment is depreciated over its useful life rather than immediately (but software should be treated as an expense). This would eliminate several tax management games that have inordinately reduced the tax take from the corporate sector; it would in particular reduce the instances where big company tax is less than its small-company competitors. (In an ideal world, stock buybacks would also be forbidden, as before 1978, which would eliminate the recession risk to companies like Boeing, McDonalds and Verizon that have repurchased all their capital).

Turning now to individual tax, it has been suggested that Congress should impose a “billionaires’ tax” at a higher rate on very high incomes. The problem with this is that marginal rates on top incomes are already high, well over 50% if state taxes in even a moderate tax state are included – you have to add the Medicare tax of 2.35%, which is effectively an extra income tax. The Eisenhower administration kept the top rate of income tax at 91% throughout its eight-year rule, albeit applying only at very high incomes – the result was eight years of an extraordinarily sluggish economy, despite huge “stimulus” spending on bombers and missiles. In that sense Robert Welch, founder of the John Birch Society, was right: Dwight Eisenhower WAS a Communist – or at least only 9% capitalist. The reality is that Ike had no idea how the economy worked beyond the big corporate behemoths and never bothered to learn – definitely a bottom-quartile President, far inferior to the economically savvy Franklin Pierce and James Buchanan!

On other taxes, the primary need is to reduce the $2 trillion deficit to a sustainable level. Tariffs can do part of this work, but not a huge part; a tariff program that produced more than about $450 billion, or 1.5% of a $30 trillion 2025 GDP, would be seriously distorting to world trade and impose excessive costs on U.S. consumers. With real GDP growth at most 2% (which Trump’s deregulation could speed somewhat in future years) the maximum deficit that keeps the debt to GDP ratio stable is $600 billion, 2% of GDP. Hence, with DOGE savings projected at $150 billion and $450 billion from tariffs, there is another $800 billion that must be found from further budget cuts or tax rises. That gives an idea of the extent of the problem.

With that huge hole to be filled, President Trump’s campaign slogans of zero tax on tips, overtime and Social Security must be abandoned, at least until we have shown that the deficit can be cut to a sustainable level. Each of those possibilities would blow a substantial hole in the budget, and zero tax on tips or overtime would undoubtedly cause massive further tax evasion losses from employers shifting remuneration into those categories. Sorry, Mr. President, those trial balloons won’t fly!

Nevertheless, many multi-millionaires pay nothing like the nominal rate of tax on their incomes. The biggest loophole at these levels is the charitable tax exemption, which allows the ultra-rich to deduct spurious “charitable” donations that subsidize their vulgar lifestyle or allow them to support destructive leftist causes. Subsidizing $5,000-a-plate charitable dinners is a rip-off of the rest of us, who pay effectively 40% of the cost of their rubber-chicken meal. Subsidizing their left-wing causes is far worse; it produces such social disasters as the appalling flood of illegal immigrants over the last four years and the plague of hard-left District Attorneys in blue states and cities. Thus, the middle class are forced to subsidize leftist lawyers and political campaigns as well as bearing the direct costs of intrusions and crime that their nefarious activities bring. Revenue could also be increased by removing the charitable status of politically-affiliated entities, such as large over-endowed colleges, or making endowments above a certain size pay tax on their investment profits.

The solution to both the SALT and charitable donations dilemma is a unified cap on deductions, applicable to home mortgage interest, state/local taxes and charitable donations, of say $100,000. That way, each group of the upper middle class would get some relief: the overstretched young homeowner, the middling earner in a high-tax state or city like New York and the retired, home-paid-off elderly charitable donor. At the same time, the tax privileges of the really rich would be strictly limited; the investor in luxury housing, the voter for leftist local governments and the abuser of charitable status would all be limited to only a moderate write-off.

This overall provision would limit the SALT double-tax on the middle-class striver forced to live in a big city, but it would also end innumerable scams and largely defund the odious non-profit sector that has worked so hard to make ordinary people’s lives a misery. If combined with tax on endowments and perhaps the removal of tax exemption for colleges, it could produce a serious ratchet effect towards good government and civilization. Most important, it would go a long way (perhaps $250 billion) towards plugging the deficit without adversely affecting the incentives of those building business empires or significantly damaging the wealth of anybody who might conceivably vote Republican.

All this will be Gone With the Wind if the Biden Democrats win again in 2028 or 2032; only when the Democrat party has learned its lesson and abandoned its most destructive policies, perhaps by 2036, will it be fit to govern. But give the Trump/Vance Republican party those twelve years, and tax and spending reforms such as outlined herein (together with a well-designed tariff program) and it will truly have Made America Great Again.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)