This essay is a bit of a reversal of an earlier episode, Episode 4 – Capitalism in the 21st Century. You can listen to this one on its own or go back to that episode to get a more optimistic take on the next 80 or so years of the US economy. In this one, I’m going to go down a bit of the other path, the darker timeline as it were.
Briefly, what is a VAT or Value-Added Tax? From James M. Bickley’s “Value-Added Tax (VAT) as a Revenue Option: A Primer” report for Congressional Research Service in 2012, “A VAT is imposed at all levels of production on the differences between firms’ sales and their purchases from all other firms.”
Let’s first look at where we are today, as I write this, in April 2025, – Per CNBC, “Chances that the U.S. is heading for a recession are close to 50-50, according to a Deutsche Bank survey that raises more questions about the direction of the U.S. economy.” I should note too that this was before President Trump instated a wave of tariffs, the long-term results of which are unclear, though there has been a sharp drop off in the stock market the week they went into effect. Suffice it to say, it’s unlikely that the tariffs, alone, will make major positive changes in the economic growth rate of the United States economy.
Longer term, per an AP headline, “Weak population gains and increased government spending will result in slower overall economic growth over the next 30 years, the nonpartisan Congressional Budget Office said Thursday. The CBO’s latest long-term budget and economic outlook report — for a timeframe that spans 2025 to 2055 — projects publicly held debt to reach 156% of gross domestic product, or GDP, in 2055. That’s down from the agency’s March 2024 long-term budget projection, which said publicly held debt would be equal to a record 166% of American economic activity by 2054.”
I should say, economists differ pretty wildly on whether or not there is a universal “redline” when it comes to a debt to GDP ratio. Some believe that the United States is in a unique position because the American dollar is used as a reserve currency in many parts of the world. Others take the opposite view and say that, at some point, the debt will be such a heavy burden that bringing it down while also continuing to meet ongoing obligations will become increasingly difficult. This essay will try to look at both sides but will likely lean more towards the “it’s a problem” side of things – with evidence supporting that position as we go along.
As of today, the US national debt, per the US Debt Clock, stands at over 36.5T dollars. This is over 100K per citizen. There are some technicalities with this number as there are Intragovernmental holdings – basically debt that is held by one part of the government that is owed by another part. For the sake of brevity and because it simply doesn’t make much of a difference due to the size of the numbers we are talking about, I am going to focus on the 36T and ignore the distinction of these Intragovernmental Holdings. Some of the percentages, ratios, and raw numbers are going to be slightly off because of this distinction.
Per Wikipedia, the GDP of the United States is around 30T. As a reminder, the GDP is the monetary measure of all goods and services produced in a country in a given year. 
At 30T, this means we have a Debt to GDP ratio of 122%. Per the Peter G. Petersen Foundation article, “National Debt on Track to Reach Record High in Just Four Years”, the “CBO projects that the annual budget deficit will rise over the next 10 years, climbing from $1.7 trillion in 2026 to $2.5 trillion in 2035. Relative to the size of the economy, CBO projects that the nation’s budgetary shortfall will remain high over the coming years, with most years at or above 6 percent of GDP.” 
This problem is cofounded by a low growth rate in GDP. As I mentioned in the earlier episode, the economic growth rate is closely tied to population growth. If population growth declines, due to both a decrease in immigration and births, this number will likely decrease.
This is important because it limits the likelihood that we will be able to “grow out” of the debt. The Petersen Foundation article continues, “CBO estimates that the growth in real GDP will decrease from 2.7 in 2024 to 2.1 percent in 2025 and generally continue to slow to 1.8 percent through 2035. Those growth rates fall short of some policymakers’ hopes for annual GDP growth of 3 percent, but such a high growth rate has been rare and not been sustained over any significant period in the past 40 years.”
When does this increasing debt become a problem? Per an article from Penn Wharton’s Jagadeesh Gokhale and Kent Smetters, “We estimate that the U.S. debt held by the public cannot exceed about 200 percent of GDP even under today’s generally favorable market conditions.”
Per a recent article in Yahoo news, “assuming borrowing costs face more upward pressure amid the deteriorating fiscal situation, amounting to an additional 1 percentage point, debt would hit 204% of GDP in 2047 and exceed 250% in 2054.”
You may be asking yourself – haven’t we see high levels of debt in other countries without societal breakdown? Yes. The example that usually gets brought up is Japan.
An article from the St. Louis Fed from 2023, “ What Lessons Can Be Drawn from Japan’s High Debt-to-GDP Ratio?” by Yi Li Chien and Ashley H. Stewart lays these lessons out well: “Some economists have turned to Japan as an example to address this concern. Why? For more than two decades, Japan’s national debt has floated above 100% of its GDP. In fact, as of the second quarter of 2022, Japan’s debt-to-GDP ratio was 226%. In other words, Japan has been able to maintain a very high level of debt for decades. Researchers have also pointed out similarities in the fiscal problems faced by the U.S. today and Japan 20 years ago. Due to Japan’s rapidly aging population, economists predicted that the heavy burden of social security expenses would result in a large fiscal deficit, which could then lead to a public debt crisis. However, a crisis has yet to occur. When examining Japan’s debt-to-GDP, it may therefore seem fair to assume that concerns regarding the U.S.’s high level of debt are overstated. In this blog post, we show that, while simple, a comparison based solely on the debt-to-GDP ratio overlooks several other key factors. A more comprehensive view of the debt issue necessitates an examination of the public sector’s balance sheet as a whole, the level of net liability and the revenue from its asset returns.” 
They go on to note: In short, as a way of supporting the large deficit caused by the aging population, Japan’s strategy involves a concept called financial repression, meaning the government uses regulatory methods to borrow cheaply and widen the returns gap on their balance sheet. For this to hold, some economic agent must be willing or forced to lend to the government cheaply. In this case, the economic agent is Japanese households. When Japanese households—who hold a large amount of low-return demand deposits—deposit their savings into banks, the banks can then lend cheaply to other domestic borrowers such as the government. However, this is not the case in the U.S., where households’ largest portfolio share is equity. Therefore, opportunities for a cheap funding source are much more limited for the U.S. Given differences in the level of net liability and in the revenue from returns between the U.S. and Japan, the aggressive fiscal and monetary policies adopted by Japan may not be appropriate or even feasible for the United States. Thus, we should not rely on the Japanese experience to predict the U.S. fiscal situation.
Let’s assume for the sake of argument that the levels of debt that Japan now hold is not analogous to what would occur should the Debt to GDP ratio of the United States exceed 200%. 
You may also be asking, no but really can’t we grow our economy out of this problem? If the GDP grows more rapidly, we could continue with a “business as usual” mindset towards taxation – imagine a pizza. Taking a ¼ slice out of a 12” pie is going to result in more pie than if you took a ¼ out of an 8” pie. 
The question is – are we approaching a period of increasing productivity? Let’s look at the historical numbers first. Per a McKinsey report from 2023, “Rekindling US Productivity for a new era”, the growth rate of productivity from 1948 to 2019 averaged to 2.2% per year. From 2015 to 2019, it dropped to 1.4%. 
The McKinsey report notes that, on balance, the productivity growth rate is happening in cities, even if not every city is benefitting. There are real structural challenges to maximizing movement to these cities: “Increasing divergence among cities would matter less if talent moved freely across state and county lines. However, over the past 15 years, interstate mobility has fallen by a shocking 49 percent; county-to-county moves have fallen nearly as much (34 percent). Researchers point to many potential causes such as the growth in occupational licensing, policies that tie benefits to state residency, and high differentials in housing prices across regions. It remains uncertain whether pandemic-induced moves or increases in remote work might reverse this trend. Cities are the engine of US productivity, bringing together ecosystems of firms and talent to create self-reinforcing agglomeration effects. Yet, productivity growth in cities is not predetermined; many cities that are now lagging were once the standouts of their era.” The report also notes: “The link between productivity growth and real incomes has weakened. In the postwar boom from 1948–70, incomes grew at 3.0 percent annually, while productivity growth averaged 2.8 percent. More recently, real incomes have grown at 0.7 percent, well below the 1.4 percent gains in productivity. Worse, not everyone has shared equally in the relatively low gains in income, and labor participation rates have fallen from 67 percent in the 1990s to 63 percent in 2019, as millions have become discouraged about work.”
To add even more darkness to this portrait, remote work, a way for talented people to avoid having to move to these in-demand cities is under attack from both private and governmental actors.
Let’s pretend that you were appointed to solve the problem of maximizing productivity. You’ve seen research showing that cities, but not all cities, are driving the increase in productivity. However, you also see that high real estate costs, low workforce participation, and reluctance to move are barriers to driving productivity higher. You also see the sustained attack on remote work as having a similar negative effect. 
You probably realize that, like many problems in society, you don’t really have the authority to change anything here in a systemic way – cities are often times acting in their own self-interest (or at least in the interest of their property owning constituents) when they restrict additional housing, private employers have lots of leeway in choosing whom to hire and, short of a congressional act, are probably going to continue to force employees to live within an hour or two of their HQ (even if the reasons for doing so don’t always hold up to scrutiny), and personal decisions to move for jobs (no matter how cut and dried they appear to outsiders) are really difficult for many people and many end up regretting it, either due to lost connections with friends or family or due to the financial gains not materializing as they were hoping they might.
The productivity numbers will have to increase with fewer workers too – Per another McKinsey article, “An aging population in most advanced economies and China represents the demographic headwinds on the horizon. The ratio of global workers per person over age 65, for example, is set to shrink from 6.6 in 2022 to 3.8 in 2050. Productivity growth was not stellar before the global financial crisis, but since then, advanced economies have seen a steep decline in productivity. In Europe, that decline was even steeper than in North America, and unlike North America, Europe has not yet seen a recovery.”
If you look at these numbers and say, it’s not likely that these problems will be solved anytime soon; What other options do we have for boosting productivity?, there are some solutions though they may be more moonshot in nature than we might like.
Artificial Intelligence is the first thing that people bring up. I should say here – I took a more optimistic note in the earlier episode. This will be the opposite – like all nascent technologies, there are lots of variables that are still undecided and the full impact of the technology on productivity is yet unknown and may be for some time. 
Assuming that Artificial Intelligence progresses rapidly, it may not be the boon that some experts (and business CEOs) hope that it might be. Per a 2024 article from Business Insider, writer Filip De Mott writes, citing an MIT economist, “AI will provide just a 1% GDP boost over the next decade.”
It should be noted that the 1% bump would get us past the long-running historical average but not get us to 3% to 4% growth, which is probably what the long-term growth rate would need to be in order for us to avoid slashing entitlement spending or defense spending, given the current debt levels.
Of course, this is a ten-year horizon, so It doesn’t take into account the possibility of advances in self-driving vehicles or unmanned asteroid mining operations that could occur after this time frame or any other “cross-pollinated” technology that would be boosted by AI. 
Let’s assume that the 1% bump is correct and that this takes us to right around historical economic growth – we’re back to where we began.
Actually, it’s probably a little worse than that. In order to realize the full potential of artificial intelligence, giant data centers must be built in order to house extremely expensive servers. These data centers require vast amounts of electricity, air, and water to operate safely and efficiently. From Lauren Leffer’s interview of Alex de Vries, a data scientist in the Netherlands for an article in Scientific America from 2023 entitled, “The AI Boom Could Use a Shocking Amount of Electricity”, “In the worst-case scenario, if we decide we’re going to do everything on AI, then every data center is going to experience effectively a 10-fold increase in energy consumption. That would be a massive explosion in global electricity consumption because data centers, not including cryptocurrency mining, are already responsible for consuming about 1 percent of global electricity.”
We have a conflict – in order to realize the gains made from increases to productivity that may come from expansion in the use of artificial intelligence, we will need to greatly increase the amount of power that the electric grid generates.
This would be less of a problem if we were ahead in decarbonizing our grid. However, despite growth over the last few years, we are behind. Per The World Resources Institute, “Renewables vastly outpaced other generation sources and collectively accounted for around 90% of the United States’ new installed capacity in 2024. With the new projects online, renewables (including wind, solar, geothermal and hydropower) and battery storage now make up 30% of the country’s large-scale power generating capacity.  In 2024, all carbon free electricity sources, including nuclear, supplied nearly 44% of electricity, while renewables, including small-scale solar, supplied nearly 25%. So where does this put us in terms of achieving a carbon free grid? Studies show that reaching 90% or more carbon-free electricity by 2035 — a key element of achieving a clean energy economy — would require 60-70 GW of new renewables per year over the next decade, as well as other forms of carbon-free power. Last year, the U.S. saw additions of about 45 GW of solar and wind combined. This increase from 2023 shows robust progress, but we still need more growth in carbon free generation to meet grid decarbonization targets.” The article also notes that both EV sales and Onshore Wind turbine installations showed slowing growth.
Long story short, it’s likely that we will need more, not less, governmental intervention in order to achieve the climate change goals set forth under the Biden administration. 
Before we move on, a word from our sponsor.
Let’s assume that the breakthrough in artificial intelligence will occur in the next 10 years and let’s assume that the gains will be relatively modest, about 1%.
Let’s also assume that no other moonshot technology provides that level of gains and that the gains from artificial intelligence are unable to accelerate the gains in these other technologies. 
One more assumption - the United States will not have anything resembling a political or cultural revolution between now and 2055, and that the above assumptions about the birthrate and overall growth rates remain near constant.
How do we avoid the dreaded 200% number given the likelihood that federal spending will need to increase? To summarize here are the possible reasons the budget will increase:
o Climate Change
o Increase in medical spending 
o Possible largescale military intervention or war
o Global pandemic similar to COVID-19
This is an abbreviated list – I’m sure you can think of more horror shows if you put your mind to it. 
How do we cover that gap? A wealth tax! I hear you scream.
There is a large amount of disagreement between economists on how much a wealth tax would actually raise. Richard J Shinder, writing in the Hill, notes that, “Wealth can be difficult to measure. Unlike flow figures, stock values are often estimates.  While companies with publicly traded shares report a closing price every business day, significant wealth exists in the form of illiquid assets of uncertain value: privately held companies, real estate, fine art, collectibles, jewelry, etc. The infrastructure required to administer a wealth tax, including estimating and adjudicating the value of such assets, combined with the inherent conflict associated with IRS officials structurally incentivized to err to the higher side, present significant opportunities for abuse.”
I find the second half of Richard’s argument more persuasive than the first half – you would most likely need to substantially increase the amount of IRS agents and training in order to fully realize the potential of the wealth tax. However, from the standpoint of fair tax reporting, I think this makes sense and, provided the wealth assessment is appealable, I don’t see the issue. Maybe there are privacy issues here as well that would not be involved in a normal tax filing. This, obviously, doesn’t take into account the political hurdles this would need to overcome as well as the legal challenges that are inevitable. Putting that aside, does it make sense? 
If you had a team of 5 IRS agents, let’s assume that this cost is 1M a year. 1,000 times 1M equals a billion. So, for every 1,000 “deep audits”, it would cost 1B a year for the tax payers. If you did this for the top 10,000 highest earners in the US, it would cost 10B a year. 
If you wanted to guarantee that a household in the top 1% would be audited, this number would have to increase by 200X – 2 T a year. That’s not going to happen. A 10% chance of someone getting an audit would result in a cost of 200B a year – which also feels like a lot of money.
If you go with the top 10,000 earners, which is probably the “sweet spot”, you’d have to raise at least 10B a year to break even. The real question is – how much additional revenue would you earn from this system? Here too we have to make assumptions – one of them is that the average billionaire wouldn’t take their ball and go home. With an increasingly global and digital society, there are a myriad of ways, which we saw in the Panama Papers, for the global elite to hide their monies from taxation.
For the sake of argument, let’s assume that American patriotism (and more likely, the threat of antitrust and other governmental intervention in their businesses) goads the ultra-rich into willingly paying this tax.  
From a report called Taxing Wealth in the United States: Issues and Challenges, authors Janet Holtzblatt and Gabriella Garriga lay out some scenarios of what this could look like – this is the one I found to be the most realistic, though the tax base is broader than what I had written above, as it includes people outside the top 1% of earners:
“Countries with wealth taxes have often treated certain assets more favorably than others. Following their lead, we also estimated three options that excluded pensions, housing values below $1 million, and privately held businesses in which the owner was actively involved in the operations of the companies. About 90 percent of the tax would be borne by families in the top 1 percent under the first two options. We estimate the following:
A 1 percent tax rate on net wealth above $50 million ($25 million for unmarried filers) would raise $1.0 trillion between 2025 and 2034 and reduce after-tax income by 0.6 percent overall and by 4 percent for families in the top 1 percent of the income distribution.”
Assuming that we keep our IRS agents and we go with 10,000 “deep audits” a year – I believe this would be very important as it would quell the anger that some outside the ultra-wealthy would feel about being included in this new tax – we are netting out an additional 90B in revenue (100B in new taxes per year minus the 10B of additional enforcement costs). 
As noted above, our deficit is about 2 trillion dollars. An additional 90B is well and good but doesn’t make up for the hole that we find ourselves in.
Arguments for a European-style VAT have been around for a long time – I found an article dated from 1997 calling for one in order to provide stability to a system that changes too frequently. More recently, Alan Viard, in 2020, writing in a Bloomberg article entitled, “The United States needs a Value-Added Tax”, makes a strong case for its inevitability when he states, “The U.S. faces a large long-term imbalance between projected federal tax revenue and federal spending, an imbalance that has widened during the coronavirus pandemic. Addressing the fiscal gap will require difficult policy measures, including increases in tax revenue. To narrow the fiscal imbalance, we should follow the lead of 160 other countries by adopting a value-added tax (VAT), a consumption tax that is economically similar to a retail sales tax.” He goes on to add, “Adopting a VAT would significantly curb the debt buildup. To be sure, the VAT may seem unappealing at first glance, because it increases taxes on the middle class. However, the need for the VAT becomes clear when the limitations of the leading alternatives—tax increases on high-income households and entitlement benefit cuts—are recognized. Although tax increases on the affluent place the burden on those with the most ability to pay, they impede long-run economic growth by penalizing saving and investment and distorting business decisions. The economic costs become larger as tax rates are pushed higher. Even commentators who strongly support high-income tax increases acknowledge that such increases have limited revenue potential and that other measures will have to be adopted alongside them. Although entitlement cuts can promote economic growth, they are severely regressive, placing vastly heavier burdens (relative to income) on lower income households. They also face formidable political obstacles.”
Writing in a 2013 article from Brookings, “Creating an American Value-Added Tax”, co-authors William G. Gale and Ben Harris estimate that, “A 5 percent broad-based VAT, paired with subsidies to offset the regressive impacts, could raise about 1 percent of GDP.” 
Looking at CBO scoring, they estimate that, on the high end, a 5% VAT would pull in roughly 380B a year. If you did both, a wealth tax and the VAT, the federal government would bring in an additional 480B or so in revenue a year. Note: if no other tax rates rose, and the rate of growth in the GDP remained the same, our deficits would fall to 1.5T a year, instead of the projected 2T. 
Given the plethora of bad or worse options, a VAT has some advantages – 1. It’s a consumption tax which people view as more optionable – ie. you can cut back on purchasing goods if you want to avoid the tax. This is different than an increase in income taxes, which cannot be avoided. 2. A progressive VAT could be utilized to get more revenue from luxury goods – sports cars and yachts – leaving more essential goods less impacted. 3. Other countries have implemented similar programs. 
All these are true but the one that is truest, IMO, is this: If we want to avoid the 200% Debt to GDP ratio, which I believe we will hit by the end of the 2040s if nothing changes, something needs to change and politically speaking, the likelihood of cutting entitlement spending, especially Medicare or social security, approaches zero. They are both programs designed to end elderly poverty and are both very politically popular. 
Of course, even if we did both of these things, without economic growth beyond 3%, it’s unlikely that we will not hit the 200% Debt to GDP ratio at some point this century. Even if you implemented both a 1% wealth tax and a 5% VAT AND means tested social security, it would likely extend the time it takes to hit the 200% Debt to GDP ratio by about a decade. 
It truly may be the darkest timeline.
Hopefully, next show will have some more optimism.  
If you’re interested in more of this topic, I would highly recommend the episode entitled “DOGE’s Bogus Cost Cutting” from The Mona Charon Show podcast.
Thank you for listening to this episode of Elegant Ramblings. If you’ve enjoyed what you’ve heard, please consider liking and subscribing to the channel on iTunes or YouTube. Hope you enjoyed. Bye for now.