Wherever you look in American politics right now, legislators claim the government still doesn’t tax enough—especially when it comes to the wealthy. California progressives are pursuing a wealth tax on billionaires, advertised as a method to raise $100 billion in a single stroke. New York City Mayor Zohran Mamdani is pushing for sweeping new taxes on the wealthy to fund a vast expansion of city services. Washington state politicians similarly treat a preventable budget problem as a failure to sufficiently tax corporations and the rich.
On the national stage, progressive figures including Senator Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts have spent years insisting that the deficit is fundamentally a revenue problem. Republicans also embrace tariff collections in the name of raising revenue and have drifted toward justifying tax cuts as “paying for themselves,” implicitly conceding that revenue must be the focus.
However, Cato Institute tax scholar Adam Michel observes this perspective is flawed. The real issue isn’t insufficient government revenue—it’s excessive spending. Since 1950, total government spending has risen from roughly one-fifth to more than one-third of the U.S. economy. Real spending per person has quadrupled over that period.
Jack Salmon of the Mercatus Center traced this phenomenon back and found that 98% of the long-term structural deficit stems from spending decisions. Two-thirds of this deficit reflects the compounding cost of interest on debt accumulated over time, while the remainder comes from mandatory program growth—most notably Medicare, which is projected to nearly triple as a share of GDP by mid-century compared with historical averages.
No plausible tax increase can close such a gap. Federal tax revenues have averaged around 17% of GDP since World War II despite top federal rates ranging from 28% to 91%. The revenue share has remained relatively stable, reaching 19.8% in 2000 before declining.
When tax rates rise, taxpayers work less, shelter their money, and invest differently—compressing the tax base until the yield reverts to its historical equilibrium. Politicians also respond by hollowing out the tax base through carveouts that reduce federal revenues by about 8% of GDP.
Some propose adopting Europe’s model with value-added taxes and high payroll levies. Michel estimates this would increase the average American household’s annual tax bill by roughly $12,000—a heavy burden for middle-class families.
Yet even Europe’s approach fails. France has a 20% VAT, top income tax rates exceeding 45%, a lingering remnant of its old wealth tax, and a state that consumes roughly 57% of GDP with spending—among the highest in developed nations. Despite this, with public debt standing at approximately 116% of GDP, France did not tax its way to solvency.
Washington state is currently running an experiment: Its biennial operating budget exploded from $102 billion to $166 billion over six years, far outpacing inflation and population growth. As this unfolded, state politicians enacted a 7% capital gains tax on high earners, triggering thousands of billionaires to leave the state. Democrats now propose a 9.9% income tax on high earners—likely to draw former Starbucks CEO Howard Schultz to Florida.
California’s experience with a billionaire wealth tax underscores the same pattern: researchers at the Hoover Institution found six publicly confirmed departures of billionaires before the tax even passed, removing nearly 30% of the projected tax base. More damaging is the future income tax revenue California would forgo by driving those taxpayers out—a likely negative net fiscal return.
Governments do not face fiscal crises because they passively tax too little. It’s because they choose to spend too much. Dramatic new taxes can temporarily mask an imbalance but rarely solve it. This merely delays the reckoning and makes the eventual adjustment more painful.
