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In 1790, Thomas Jefferson, James Madison and Alexander Hamilton agreed to the Dinner Table Bargain, a compromise whereby the new federal government assumed all of the states’ debts incurred during the war, in return for moving the new seat of government to the banks of the Potomac.
It is time for another compromise regarding our burgeoning debt and deficits. The U.S. owes $35 trillion, representing over 120 percent of GDP, compared to 30 percent in the 1970s, 40 percent in the 1980s, and 60 percent from the 1990s up to the financial crisis.
Meanwhile, the deficits keep on growing, further pushing up the debt balance, with a shortfall of $2 trillion in 2024 compared to roughly $200 billion in the 1990s and 2000s.
Most of the increase in the deficit has been the result of a significant expansion in federal outlays. Spending ranged from 19 percent to 21 percent of GDP from the 1970s through the 2010s. After hitting a peak of 30 percent during the 2020 pandemic year, it has since settled into the range of 22 percent to 24 percent.
Of the spending, transfer payments excluding Social Security have increased from 5 percent of GDP in 1980 to more than 10 percent today. Expenditures for national defense have fallen to less than 4 percent of GDP, compared to 6 percent to 8 percent during most of the 1980s. And federal receipts have for the most part ranged from 15 percent to 19 percent since the early 1950s.
This compromise would be a constitutional amendment requiring a balanced budget set at 20 percent of GDP, in return for a one-time wealth tax that would cut the existing debt in half, returning it to roughly 60 percent of GDP.
As part of the balanced budget, defense spending would be increased back to 5 percent of GDP from its current 3 percent level. Any future yearly deficits to fund emergency spending above 20 percent of GDP would require a 75 percent vote from both houses of Congress and could not be funded by money creation by the central bank. Tax expenditures such as special tax credits would count toward the 20 percent spending limit.
Modest adjustments to Social Security start dates and future inflation adjustments, along with reduced payouts for those with significant income should be able to resolve the trust fund problem, while the other transfer payment programs will need to be reexamined. Small increases in personal and corporate tax rates would bring revenue up to 20 percent of GDP.
The second part of the amendment would be a one-time wealth tax used to reduce the federal debt by roughly $15 trillion, representing about 10 percent of the current household net worth of $150 trillion, made up largely of stocks, bonds, private businesses and real estate.
For perspective, since 1990 stocks and public debt have increased over ten times in value while median income has only increased 2.5 times. Asking wealth holders of all levels to share in the debt reduction seems reasonable given the massive increase in asset values over the past 30 years.
The 10 percent wealth tax would apply to all financial and real assets and their substitutes. Asset holders could choose to either remit public securities or their cash equivalent value to the Treasury. The tax on real estate, ownership of private businesses and other non-publicly traded assets would not be collected until the asset is sold, but any distributions on these assets, including loans taken out against asset collateral, would be subject to the same 10 percent tax up until the disposition of the asset, at which time 10 percent of the proceeds would be collected.
Public securities collected by the Treasury would be sold off over a multi-year period to avoid market disruptions, while remitted treasury securities would be extinguished.
Many will find something wrong with this proposal. Conservatives will object to the wealth tax and a 20 percent spending and tax level. Progressives will oppose the cap on spending, the increased defense expenditures and the removal of the printing press to fund deficits. However, without a compromise, we are destined for larger deficits and debt balances that ultimately will have severe consequences. Security, sound money and fiscal responsibility are minimum requirements for an effective government.
Robert Goldberg is the James F. Bender Clinical Professor of Finance at Adelphi University's Robert B. Willumstad School of Business. His research focuses on financial markets, corporate finance and investment management.
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