Don’t Blame the Messenger—the CBO—for Our Current Fiscal Problems

The Congressional Budget Office (CBO) provides annual snapshots of the federal government’s fiscal outlook, which in recent years has gone from bad to worse. One can quibble with CBO’s assumptions, say, about the impact of artificial intelligence (AI) or where interest rates are going, but it is the most comprehensive, rigorous, and up-to-date analysis we have of the likely path of the economy under current law and the major factors that are driving the national debt higher.

The CBO’s baseline projections of revenues, deficits, interest rates, inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin, GDP, and other economic variables also constitute an important set of inputs into TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation modeling of the impacts of potential changes in tax policies, grounding our analysis in the most accepted understanding of the default path for the economy and the federal budget under current law. In other words, the CBO baseline provides a reference point against which we can measure the economic and fiscal impacts of various tax proposals.

The variety of potential tax changes is endless, but in the current fiscal context, it is worth considering options to raise large amounts of revenue that might be sufficient to put deficits and debt on a sustainable course. I explore the potential of tax changes to address federal debt in a new study using the Tax Foundation model updated with the new CBO baseline. The results show a range of impacts across different types of tax increases and reveal the limits of raising revenue when accounting for avoidance and incentive effects. In turn, this suggests that deficit reduction efforts should focus first on reducing the growth of spending, especially the fast-growing major entitlement programs, and second on relatively efficient, broad-based tax increases.

Highlights and Lowlights of the CBO Baseline

The CBO’s most recent projection, which captures the effects of the One Big Beautiful Bill Act (OBBBA) and the Trump administration’s higher tariffs (as of November 2025, before the Supreme Court ruled many of the tariffs illegal), shows that the federal debt remains on an unsustainable course. Publicly held debt is projected to rise to a new record high of 106 percent of GDP within the next four years and continue to rise to 120 percent by 2036 and 175 percent by 2056. Deficits are projected to grow from 5.8 percent of GDP this year to 6.7 percent in 2036 and 9.1 percent in 2056, representing the largest sustained deficits in the country’s history.

A comparison of the CBO’s projections from earlier this year and early last year shows that, in broad strokes, the major trends in debt, deficits, tax revenues, and spending remain largely intact, despite significant changes in fiscal policy under the current administration.

According to the CBO, the outlook for publicly held debt as a share of GDP over the next decade has modestly improved, but it has worsened in the long run due to a combination of factors, including:

Faster economic growth, mainly resulting from OBBBA reforms as well as investment and productivity gains stemming from innovations related to AI, partially offset by higher tariffs and less immigration
Higher net deficits due to lower income taxes, partially offset by lower spending and higher tariffs
Higher interest rates, partially due to higher deficits and faster economic growth, leading to higher debt servicing costs

Federal spending and revenues are both above historical averages and growing faster than GDP, but spending is at a higher level and growing faster. Federal spending is projected to reach 23.3 percent of GDP this year, far above the average spending level over the last 50 years of 21.1 percent, and is projected to rise to 24.4 percent in 2036 and 27.9 percent in 2056.

Revenues are projected to reach 17.5 percent of GDP this year, slightly above the 50-year historical average of 17.3 percent, and are projected to rise to 17.8 percent in 2036 and 18.8 percent in 2056. Revenues grow faster than GDP mainly because of bracket creep, as incomes are expected to grow faster than the inflation measure used to index federal tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat..

The major entitlement programs, including Social Security, Medicare, and other major health care programs, are the core drivers of higher spending levels. After growing faster than the economy for decades, they now comprise almost half of the federal budget. Social Security and Medicare are projected to continue growing faster than the economy, together exceeding 10 percent of GDP within the next decade, driven by the aging of the population and rising healthcare costs.

The only major category of spending growing faster than the major entitlement programs is net interest on the debt, which is now at a record high of 3.3 percent of GDP and headed to 6.9 percent in 30 years, when it will be a quarter of the federal budget. Spending on entitlements and interest on the debt is crowding out other federal spending, including defense and nondefense discretionary spending, and putting upward pressure on deficits and debt.

What Can Tax Policy Do?

Attempting to solve the debt problem via tax increases alone is challenging. Closing the primary deficit (the difference between non-interest spending and revenues) is key to debt sustainability, but the primary deficit exceeds 2 percent of GDP and is growing over the long run.

Tax Foundation modeling shows that the tax increases most often proposed by politicians, from taxing the rich to raising tariffs, tend to target a narrow set of taxpayers and produce the least sustainable revenues. While revenue gains can be substantial in the short run, economic distortions and avoidance reduce revenue gains over time, leaving large fiscal gaps in the long run and an unsustainable debt trajectory.

More efficient, broad-based revenue raisers, most notably a value-added tax (VAT), perform better. However, even a 5 percent VAT on a broad base, which would be an enormous tax hike much larger than any since World War II, would not put the debt on a sustainable course. Instead, a 5 percent VAT would effectively delay the more dangerous debt levels projected under the CBO’s baseline by several years.

Of course, the study is not meant to address every possible tax policy scenario but rather to provide guideposts about the revenue potential of different types of tax increases and the trade-offs that would be involved, including reduced economic growth. For example, the VAT option gives a sense of what would happen if the tax system were moved in the direction of more efficient, broad-based approaches. A more systematic overhaul in that direction, including removal of the tax code’s least efficient features, would substantially boost economic growth even at higher levels of revenue, as we have demonstrated through model simulations of fundamental reforms.

As beneficial as fundamental tax reform would be, in terms of faster economic growth, simplification, and neutrality, it should not be seen as a solution to the debt problem. That solution must run through spending reforms to the major entitlement programs that are growing faster than GDP and driving the debt higher: Social Security and Medicare.

AI and Other Factors

The CBO’s most recent outlook mentions AI 15 times, noting the technology’s contribution to investment, productivity and economic growth, and higher interest rates. And the CBO is careful to recognize the uncertainty about AI’s potential effects on the economy and the budget. However, the range of possibilities does not plausibly include magically wiping away the debt or putting it on a sustainable course.

The CBO provides a “rules-of-thumb” tool to estimate how changes in key underlying economic variables affect the budget. Based on that, even if AI boosts productivity growth twice as much as the CBO assumes, pushing it 0.1 percentage points higher each year over the next decade, that would only slightly reduce debt. Publicly held debt as a share of GDP would rise to a record 107 percent (instead of 107.7 percent) in 2030 and 118 percent (instead of 120.2 percent) in 2036. The debt reduction would come from faster economic growth boosting revenues, partially offset by higher interest costs and higher spending on entitlements (Social Security benefits are tied to growth in wages and, indirectly, productivity).

A plausible pessimistic scenario would see interest rates climb above the CBO’s baseline projection, for instance, due to increased inflation or perceived risk of holding Treasury debt, which would have a large effect on the budget through debt servicing costs. If interest rates are 0.4 percentage points higher over the next decade than the CBO forecasts (about double the increase since the CBO’s forecast in early 2025), that would cause publicly held debt to rise faster so that it reaches 108.8 percent of GDP in 2030 and 123.5 percent in 2036.

The likelihood of these scenarios is, of course, highly uncertain, but this gives a sense of the range of possibilities. Even the optimistic scenario of an AI boom, like tax reform, only buys a bit of time, shifting out by a few years the inevitable fiscal reckoning. In the end, the CBO’s regular updates on the fiscal outlook should remind us of the central importance of getting spending growth under control, especially spending on the big entitlement programs.