This memorandum represents the fourth installment in a series examining the potential provisions of a comprehensive third-party tax reconciliation bill. The first three memos in this series addressed areas where the two major political parties hold drastically different ideological perspectives, frequently resulting in a volatile, “one-step-forward, two-steps-back” approach to policy progress. These initial analyses include:

• A Third Party Tax Reconciliation Approach to Health Care Reform

• A Third Party Tax Reconciliation Approach to Student Debt

• Tax Reconciliation and Capital Gains Taxes

In contrast to those deeply polarized issues, this fourth memo on tax reconciliation and retirement policy addresses an area that enjoys a meaningful degree of bipartisan consensus. However, despite this political agreement, recently enacted legislative changes have proven fundamentally inadequate for the very households that face the greatest difficulties saving for the future. The structural reforms presented in this memorandum are designed to move past these limitations—expanding retirement savings, lowering systemic costs, and substantially improving long-term financial outcomes for the entire population.

Key Proposals

• Universal Auto-IRAs: Establish a workplace-independent, automatic enrollment framework for all workers to capture multiple part-time income streams and receive automatic rollovers during job transitions.

• IRA and 401(k) Parity: Allow employers to provide employer matches into IRAs and expand IRA contribution limits to reduce the need for small employers to create their own 401(k) plans.

• Automated Spousal Funding: Launch a joint marital payroll default that automatically routes split contributions to a caregiver’s IRA, while eliminating legacy income phase-outs and separate-filer tax penalties.

• Core Account Preservation: Limit the amount of funds which can be disbursed prior to retirement. Replace existing tax penalties with a fee which allocates a percent of the early disbursements to the person’s own Social Security account.

• FSA Balance Rollovers: Eliminate the “use-it-or-lose-it” FSA rule with a rule mandating automatic rollover of FSA funds to a non-deductible IRA.

• De-Risked Target Funds: Update default regulations to restrict high-fee private credit and mandate smooth transitions into inflation-protected assets.

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Introduction:

Retirement savings policy has reemerged as a critical component of federal tax and budget debates, serving as one of the few arenas where Congress has consistently secured bipartisan consensus. However, recent structural reforms are unlikely to yield higher net retirement savings for the households struggling most to balance long-term asset accumulation with basic household emergencies.

This memorandum evaluates the operational mechanisms of recent legislative and executive interventions, identifies core structural vulnerabilities in the contemporary framework, and proposes targeted, structural reforms designed to safeguard wealth for low- and moderate-income families.

Recently enacted retirement reform proposals:

The SECURE Act of 2019, now commonly referred to as SECURE 1.0 focused primarily on expanding access to retirement plans and modernizing portions of the retirement system.

· allowed several small firms to participate in a single shared retirement plan, reducing administrative costs and complexity for small employers;

· raised the required minimum distribution age from 70½ to 72;

· allowed older workers to continue contributing to traditional IRAs after age 70½ if they still had earned income;

· encouraged employers to offer annuity and lifetime-income products inside retirement plans;

· expanded retirement-plan access for part-time workers;

· and required many inherited IRAs to be withdrawn within 10 years rather than over the beneficiary’s lifetime.

Congress followed with SECURE 2.0 in 2022, also enacted on a bipartisan basis rather than through reconciliation. Among other changes, the law:

• expanded automatic enrollment requirements for many new retirement plans;

• increased catch-up contribution limits for older workers;

• improved retirement-plan access for part-time employees;

• allowed certain student-loan payments to qualify for employer retirement matching contributions;

• created emergency savings “sidecar” accounts linked to retirement plans;

• increased the required minimum distribution age further over time;

• expanded tax incentives for small businesses establishing retirement plans;

• and replaced the old Saver’s Credit with the new Saver’s Match beginning in 2027.

The 2025 tax reconciliation legislation did not create a comprehensive new retirement framework comparable to SECURE 1.0 or SECURE 2.0. Its principal retirement-related initiative instead centered on the creation of so-called “Trump Accounts,” new tax-favored investment accounts established for children and designed to encourage long-term savings beginning at birth. Key provisions included:

• creation of “Trump Accounts,” tax-advantaged savings and investment accounts established for eligible children, with assets intended to accumulate over time through family, employer, private, and federal contributions;

• a temporary federally funded $1,000 seed contribution for children born between 2025 and 2028, with the limited eligibility window reducing the bill’s long-term budget score under reconciliation rules;

• expanded opportunities for parents, employers, and private donors to contribute to those accounts subject to annual limits;

• and favorable tax treatment for investment earnings and certain qualifying withdrawals within the accounts.

The Trump administration subsequently supplemented this framework through executive action, particularly through efforts to promote IRA participation and implementation of the Saver’s Match previously enacted under SECURE 2.0.

In April 2026, President Donald Trump signed an executive order directing Treasury, IRS, and the Department of Labor to establish “TrumpIRA.gov,” a federal portal designed to help workers without employer retirement plans open and compare low-cost IRAs.

The executive order primarily directed Treasury, IRS, and the Department of Labor to create a federal IRA information and enrollment portal intended to make retirement saving easier for workers lacking employer-sponsored plans. It also encouraged administrative coordination and public outreach related to the Saver’s Match previously enacted under SECURE 2.0.

The executive order did not create new retirement subsidies, mandate employer participation, establish automatic enrollment, or substantially modify the Saver’s Match itself. Its primary practical effect was creation of administrative and informational infrastructure intended to increase participation in existing retirement programs.

Beginning in tax year 2027, eligible lower- and moderate-income workers will receive direct federal matching contributions deposited into their retirement accounts.

Key features of the Saver’s Match include:

• a federal match equal to 50 percent of up to $2,000 in annual retirement contributions;

• a maximum annual federal contribution of $1,000 per eligible worker;

• direct deposit of the federal contribution into retirement accounts rather than reduction of tax liability;

• eligibility for many workers with little or no federal income-tax liability;

• automatic federal expenditure increases if participation and contributions rise;

• and no major near-term sunset provision currently built into the program.

Issues with Recent Retirement Reform Efforts

While recent statutory updates have successfully expanded plan access, their underlying design remains heavily influenced by the retirement-services industry, focusing primarily on increasing total plan participation and encouraging voluntary savings through tax incentives and automatic enrollment.

Consequently, these reforms have functioned better as upscale substitution mechanisms for households already positioned to save, rather than addressing the deeper structural bottlenecks facing lower- and middle-income workers who lack financial flexibility.

Crucially, contemporary policy prioritizes front-end account creation while largely ignoring back-end wealth preservation. Significant retirement assets continue to be lost through abandoned accounts, excessive administrative fees, fragmented structures driven by frequent job changes, and punitive early-withdrawal policies during periods of household financial distress.

The following sections examine these core system vulnerabilities and propose targeted structural interventions to achieve true long-term wealth preservation.

Issue One: Expanding IRA Access and Making IRAs a True Parallel System to 401(k) Plans

Employer plans remain the strongest retirement-saving channel for many households, but millions of workers are outside that system. In March 2025, 72 percent of private-sector workers had access to employer-sponsored retirement benefits, which means more than one-quarter still did not.

Crucially, this point-in-time snapshot severely understates the structural damage to lifetime wealth accumulation. Because modern career paths are fluid, millions of workers who have plan access today will transition into a “coverage desert” tomorrow—whether by moving to a small business, launching a freelance initiative, or downshifting to part-time status. Over a full 40-year working career, the percentage of Americans who spend multi-year stretches completely locked out of the 401(k) system is vastly higher than 25%. When a worker encounters these inevitable coverage gaps, they face an “automation cliff.” Because individuals are up to 15 times more likely to save when deductions are automated, the absence of a parallel, workplace-independent IRA structure means that personal savings velocity completely flatlines during these transitional years, permanently fracturing the momentum of early-career compounding.

The gap is especially important for workers at small firms, gig workers, part-time workers, workers with multiple jobs, young adults, and non-working spouses. These groups often need a portable account that does not depend on one employer relationship. IRAs are the natural vehicle for that role, but current policy does not do enough to ensure that every household actually opens, funds, and preserves one.

The need for a stronger IRA system is also evident in household balance-sheet data. Federal Reserve data show that retirement accounts, including IRAs, Keogh accounts, 401(k)s, 403(b)s, and thrift savings accounts, were held by only 54.3 percent of families in 2022. CRS analysis of the same data found especially large income gaps in IRA ownership: about 63 percent of households with income of $150,000 or more owned IRAs, compared with only 8.8 percent of households with income below $30,000.

This is the basic policy problem: the workers most likely to need IRAs are often the least likely to have them.

There has been some progress toward automatic IRA coverage. State auto-IRA programs have expanded rapidly, and Georgetown’s Center for Retirement Initiatives reports that, as of May 2026, 17 state programs were open to all eligible employers and workers. These programs are an important step because they use payroll deduction and default enrollment rather than relying entirely on voluntary account opening.

But automatic IRA access alone is not enough. The account has to be created, remain open, receive contributions, avoid excessive fees, and survive job changes and financial emergencies. Otherwise, the system may create more small accounts without solving the deeper problem of long-term retirement accumulation.

This account fragmentation is driven by a fundamental policy misstep: the statutory insistence on treating the employer as the primary gatekeeper of high-limit retirement plans. SECURE 1.0 and 2.0 focused heavily on nudging small firms to adopt complex 401(k) plans. But forcing small businesses to act as financial fiduciaries saddles them with administrative overhead and subjects their workers to high retail-layer fees. There is no structural or economic reason why individual IRAs must possess lower contribution limits than 401(k)s, nor why current tax law bans employers from contributing matches directly into a worker’s personal, portable IRA. True parallel parity requires decoupling retirement security from specific employer relationships entirely, allowing small firms to bypass 401(k) setups altogether by matching directly into a universal, portable IRA.

A more complete reform would put IRAs on a more equal footing with 401(k) plans. That means expanding automatic IRA enrollment for workers without employer plans, strengthening incentives for regular contributions, allowing automatic rollover of small 401(k) balances into low-fee IRAs, and limiting rules that permit complete depletion before retirement.

IRAs are also essential for non-working spouses. A spouse with little or no earned income can still build retirement savings through spousal IRA rules when the household has sufficient earned income. But that opportunity is underused if households do not understand the rule or lack an easy default mechanism for opening and funding the account.

Young adults also need earlier attachment to the retirement system. Trump Accounts may create some early-life savings infrastructure, but those accounts will matter only if they remain active and eventually connect to the broader retirement system. A dormant account created at birth is not a substitute for an IRA system that encourages regular contributions beginning early in working life.

The central goal should be to make IRAs a universal fallback retirement account. Every worker without a 401(k), every worker with multiple jobs, every young adult entering the labor market, and every eligible non-working spouse should have a simple, low-fee IRA available by default. The policy challenge is not merely to create more accounts. It is to create accounts that remain open, receive contributions, and are protected from unnecessary erosion or full pre-retirement depletion.

Related data and background:

• BLS, Employee Benefits in the United States, March 2025

• Federal Reserve, 2022 Survey of Consumer Finances summary

• CRS summary on retirement account ownership by income

• Georgetown Center for Retirement Initiatives state auto-IRA tracker

• Center for Retirement Research analysis

• Behavioral evidence from H&R Block experiment

• A look at 401(k) Plan Fees (Department of Labor)

Issue Two: Abandoned 401(k) Accounts and Excessive Fees

One important weakness in recent retirement reforms is that policymakers have focused heavily on expanding the number of retirement accounts while paying far less attention to preserving account balances after workers change jobs. SECURE 2.0 expanded automatic enrollment and increased retirement-plan participation, but these changes will also increase the number of small inactive 401(k) accounts left behind when workers move between employers.

These abandoned or “stranded” accounts create several problems. Small inactive accounts are often subject to disproportionately high administrative and investment fees, which can significantly erode retirement savings over time. In some cases, accounts may eventually be transferred to state unclaimed-property systems through escheatment processes if account owners lose contact with plan administrators.

Congress has recently considered legislation designed to reduce retirement-account escheatment. However, preventing escheatment addresses only part of the larger problem. Even when accounts remain active, many workers continue to lose substantial retirement wealth because small dormant accounts are frequently invested in relatively high-fee products.

A more effective solution would require automatic rollover of small inactive 401(k) balances into low-fee default IRA accounts when workers leave employers. Such a system would help preserve retirement balances, reduce fee erosion, simplify account management for workers with multiple jobs over time, and build naturally on the automatic-enrollment framework already expanded under SECURE 2.0.

High fees remain one of the least discussed but most economically significant threats to long-term household retirement savings, particularly for lower- and middle-income workers with relatively modest account balances.

This automatic rollover mechanism forms the vital structural pipeline connecting front-end account creation with long-term wealth preservation. By automatically sweeping dormant, low-balance 401(k) assets out of fragmented employer plans and into a consolidated, low-fee default IRA system, policy would simultaneously resolve the “stranded account” crisis while giving the parallel IRA framework the critical mass and asset scale it currently lacks. Instead of forcing workers to manage a trail of administrative wreckage across every job transition, the automated transfer mechanism transforms the IRA into a robust, lifetime financial anchor.

Discussion:

• “Stranded Savings”

• “How to Minimize the Impact of 401(k) Fees”

Issue Three: Pre-Retirement Depletion of Retirement Assets

A second major weakness in recent retirement reforms is that they continue to allow substantial pre-retirement depletion of retirement accounts. The problem is not merely that workers fail to save enough. It is also that workers increasingly use retirement accounts as emergency funds, debt-management tools, or last-resort liquidity sources before retirement.

Research on pre-retirement use of 401(k) funds finds that workers who access retirement savings before retirement often have other debts and weak credit positions, suggesting that withdrawals are frequently driven by broader financial stress rather than casual consumption. Other research similarly finds that retirement assets in IRAs and 401(k)s can be tapped relatively easily to finance pre-retirement needs, despite tax penalties and plan restrictions.

Current law discourages early withdrawals mainly through tax penalties rather than through strong preservation rules. Traditional IRAs and many employer retirement plans generally impose ordinary income tax and an additional 10 percent penalty on taxable distributions taken before age 59½, unless an exception applies. Roth IRAs are somewhat more flexible because contributions can generally be withdrawn before retirement, but early withdrawals of earnings may still be subject to tax and penalty rules. Trump Accounts generally cannot be withdrawn before the year the child turns 18; after that point, they are generally treated like traditional IRAs and subject to the same distribution rules.

These rules create a serious policy problem. They penalize workers for withdrawing funds early, but they do not prevent full account depletion. A worker facing financial distress may still empty an entire retirement account, pay income taxes and penalties, and reach retirement with little or nothing left. The penalty can be harsh precisely when the household is already under financial pressure, while still failing to preserve retirement assets.

There is a real tradeoff. If retirement accounts were completely locked up until retirement, contributions would likely fall because many households would be unwilling to save in accounts that provide no access during emergencies. But the current system moves too far in the other direction. It allows 100 percent depletion of retirement balances before retirement, relying mainly on punitive tax penalties after the fact.

A better system would preserve some access to emergency funds while protecting a core retirement balance. One approach would prohibit pre-retirement distributions from exceeding a fixed share of account assets. For example, 40 or 50 percent of accumulated retirement balances could be permanently protected from pre-retirement withdrawal except in the most extreme circumstances.

Another approach would create an emergency-liquidity compartment inside retirement accounts. For example, a fixed portion of contributions, such as 30 percent, could automatically flow into an emergency account available for pre-retirement use, while the remaining balance would be protected for retirement. This approach would acknowledge that households need liquidity while preventing complete depletion of long-term retirement assets.

While both mechanisms attempt to restrict asset leakage, the structural creation of an emergency liquidity compartment is policy-preferred over a rigid percentage cap. A hard cap on total balances introduces unnecessary volatility, as a worker’s available emergency liquidity would fluctuate with market cycles. Conversely, an explicit partition (e.g., an 80/20 or 75/25 split where 20% to 25% of contributions automatically fund a liquid emergency tier up to a fixed dollar ceiling) leverages the psychological power of mental accounting. By separating liquid safety nets from the core asset-building engine, this design explicitly signals to households which funds are operational, and which are untouchable, optimizing both short-term resilience and long-term wealth preservation.

The current 10 percent penalty should also be reconsidered. A more coherent system would restrict full depletion directly rather than imposing a harsh penalty on households already facing financial stress. Some early distributions could remain subject to ordinary income tax, and policymakers could consider a smaller dedicated charge, such as a 5 percent payroll-style contribution to Social Security or another retirement trust fund, instead of the current blanket penalty.

The core reform principle should be simple: retirement policy must prevent the possibility of 100 percent depletion of retirement accounts before retirement.

Readings:

· David Bernstein, Pre-retirement use of 401(k) funds

· Urban Institute analysis of early retirement withdrawals

· IRS guidance on exceptions to early-distribution penalties

· IRS guidance on Trump Accounts

Issue Four: Retirement Security for Non-Working Spouses and Caregivers

Another weakness in the current retirement system is that retirement savings incentives remain tied too heavily to continuous formal employment. Workers with stable long-term labor-force participation generally accumulate retirement assets through employer plans and payroll deduction. But many spouses, particularly caregivers and stay-at-home parents, spend substantial periods outside the paid labor force and therefore accumulate far smaller retirement balances.

Current law partially addresses this problem through “spousal IRAs,” which allow a non-working spouse to contribute to an IRA based on the earned income of the working spouse. However, the existing system remains limited and underused. Many households are unaware that spousal IRAs exist, contribution patterns are highly uneven, and restrictive rules apply when married couples file taxes separately.

The current framework also assumes a relatively cooperative household financial structure. In practice, retirement savings decisions are often controlled primarily by the working spouse. This creates particular problems in marriages involving unequal financial power, restrictive prenuptial agreements, or eventual divorce. A spouse who spends years outside the labor market performing caregiving work may reach middle age or retirement with minimal retirement assets despite contributing substantially to household well-being.

Current retirement policy therefore fails to treat caregiving and household labor as activities that justify systematic retirement accumulation.

Several reforms could improve this system.

One reform would eliminate or substantially relax restrictions on spousal IRA contributions for married couples filing separately. Current rules effectively discourage retirement accumulation in some households with fragmented finances or marital instability.

Another reform would normalize automatic spousal retirement contributions whenever one spouse participates in an employer-sponsored retirement plan. For example:

• employer payroll systems could automatically offer a parallel spousal IRA contribution option;

• tax software could default households into spousal IRA contributions unless they opt out;

• or a portion of retirement-plan contributions could automatically flow into a spouse’s IRA account unless the household declines.

The larger goal would be to make spousal retirement saving routine and automatic rather than optional and poorly understood.

Automatic spousal contributions would also better reflect the economic reality that household retirement security is often produced jointly, even when only one spouse formally earns wages. A retirement system centered entirely on individual wage income systematically disadvantages caregivers and many non-working spouses.

Policymakers should also reconsider income-based restrictions on spousal IRA eligibility. High-income households are often assumed to have adequate retirement savings already, but unequal control of household assets can still leave non-working spouses financially vulnerable, particularly in divorce situations involving restrictive premarital agreements or uneven asset ownership structures.

The broader principle is straightforward: retirement policy should not assume that only formal wage earners deserve systematic retirement accumulation. A modern retirement system should provide automatic and durable retirement-saving pathways for caregivers and non-working spouses as well as traditional full-time workers.

Readings:

• IRS guidance on IRA deduction limits and spousal IRAs

• IRS overview of IRA contribution rules

Issue Five: Student Debt and Retirement Savings

One of the largest impediments preventing younger households from building retirement savings is the high level of student debt carried by many borrowers during the first decade of their working lives. Monthly student-loan payments often directly compete with retirement contributions, emergency savings, home purchases, and family formation.

SECURE 2.0 attempted to address part of this problem by allowing certain employer retirement plans to treat student-loan payments as if they were retirement-plan contributions for purposes of employer matching contributions. Under this approach, workers making student-loan payments may still receive employer retirement-plan matches even if they are unable to contribute directly to the 401(k) plan themselves.

Although this reform may increase retirement balances for some borrowers, it has important limitations. Many younger workers do not have access to employer-sponsored retirement plans at all, and many smaller employers are unlikely to adopt the optional feature. As a result, the provision primarily benefits borrowers already working in relatively stable jobs with access to established 401(k) systems.

The policy also effectively expands tax-preferred retirement contributions for eligible borrowers while channeling additional assets into the 401(k) industry. Critics may reasonably question whether the approach is overly dependent on expanding retirement-plan contributions and fee-generating retirement accounts rather than solving the underlying student-debt problem itself.

The broader problem is that retirement policy increasingly attempts to accommodate large student-debt burdens rather than reducing those burdens early in working life.

A more effective approach would focus on accelerated student-debt reduction during the first years after graduation. Earlier retirement of student debt would free younger households to begin retirement saving sooner, accumulate assets earlier in life, and reduce long-term dependence on complex retirement subsidies.

One proposed alternative framework would:

• provide temporary zero-interest federal student loans during the early repayment period;

• delay entry into income-driven repayment systems during the first years after graduation;

• encourage refinancing into private credit markets once borrowers achieve greater financial stability;

• reduce marriage penalties embedded in current repayment systems;

• protect borrowers from inflation erosion during repayment;

• and concentrate federal assistance earlier in borrowers’ careers rather than extending debt burdens over long repayment horizons.

The broader goal would be to help borrowers eliminate student debt earlier in adulthood so that retirement saving becomes possible without permanent dependence on increasingly complicated tax-preferred retirement arrangements.

Readings:

• “A Third-Party Tax Reconciliation Student Debt Proposal”

Issue Six: Health-Care Costs, Health Savings Accounts, and Retirement Saving

Saving for retirement has become increasingly difficult because many households face high out-of-pocket health-care costs even when they possess relatively comprehensive health insurance coverage. Deductibles, co-payments, prescription costs, dental expenses, vision care, and long-term-care concerns often compete directly with retirement saving for limited household resources.

As a result, many households prioritize contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) over contributions to 401(k) plans or IRAs. This behavior is economically rational because households often fear near-term medical expenses more than distant retirement risks.

Current policy partially recognizes this tradeoff by providing favorable tax treatment for HSAs and FSAs. However, the interaction between health-care savings and retirement savings remains fragmented and sometimes punitive.

One particularly problematic feature involves Flexible Spending Accounts, which often operate under “use-it-or-lose-it” rules. Workers who fail to spend remaining balances within specified periods may forfeit part of their savings. This structure effectively imposes penalties on households attempting to budget conservatively for uncertain medical expenses.

The broader problem resembles the weaknesses discussed earlier involving retirement accounts. Policymakers frequently rely on forfeitures, penalties, or restrictive withdrawal rules rather than designing systems that preserve household savings over time.

A more coherent approach would integrate health-care savings and retirement savings more directly. One proposal would automatically roll unused Flexible Spending Account balances into non-deductible IRA accounts rather than allowing forfeiture of unused funds. Such a reform would:

• reduce wasteful end-of-year spending incentives;

• preserve household savings rather than penalizing caution;

• encourage longer-term asset accumulation;

• and create a smoother connection between health-care saving and retirement saving.

This type of reform would be particularly valuable for middle-income households struggling simultaneously with health-care expenses, student debt, emergency savings needs, and retirement preparation.

The larger principle is that households attempting to save responsibly should not face repeated penalties and forfeiture rules merely because financial needs evolve over time. Current policy too often punishes households already struggling to balance competing savings demands.

Readings:

• Economic Memos health-care reconciliation proposal

Issue Seven: Creating Better Default Portfolios for Automatically Enrolled Workers

The automatic-enrollment provisions contained in SECURE 2.0 represent more than a technical retirement-policy reform. In practice, they amount to a federal endorsement of the 401(k) system itself. When Congress and Treasury encourage or require automatic enrollment, the government is implicitly advising workers that participation in these plans is an appropriate and prudent financial strategy.

Once the government assumes that quasi-advisory role, it also assumes a responsibility to ensure that the default investment options into which workers are automatically enrolled are financially sound and reasonably protective during periods of economic stress.

Current default investment structures are often heavily dependent on conventional stock-and-bond allocations and target-date funds that may expose workers to substantial inflation risk, interest-rate risk, or correlated market declines during stressful economic periods. Many workers automatically enrolled into retirement plans have little understanding of the underlying portfolio risks and frequently remain invested in default options for long periods without making active portfolio decisions.

This issue becomes even more important as policymakers continue expanding automatic-enrollment systems. Automatic enrollment works partly because it assumes that default options are likely to be suitable for ordinary workers. But if the default portfolios themselves are poorly constructed or excessively exposed to certain forms of market risk, then the government may effectively be steering households into fragile investment structures.

Concerns about portfolio quality have become more significant as portions of the financial industry and some policymakers push for expanded inclusion of higher-risk assets such as private credit, private equity, and other illiquid investment products inside retirement accounts. Advocates argue that these products may increase long-term returns or broaden investment opportunities. Critics argue that many of these investments involve higher fees, lower transparency, valuation uncertainty, and potentially significant downside risk during economic downturns.

If policymakers are going to encourage broad participation in 401(k) plans through automatic enrollment, then retirement policy should include stronger safeguards regarding default investment design. At a minimum, policymakers should establish clearer guardrails limiting excessive risk exposure and requiring greater transparency regarding fees, liquidity risks, and downside scenarios.

More importantly, policymakers should actively encourage inclusion of financial products designed to provide greater protection during periods of inflation, rising interest rates, or broader financial instability. Retirement policy should focus not only on maximizing returns during favorable markets but also on preserving retirement security during stressful economic periods when many households are most vulnerable.

The broader principle is straightforward: if government policy increasingly nudges workers into retirement plans automatically, then government also bears some responsibility for the quality and resilience of the investment structures receiving those funds.

Related discussion of inflation risk and retirement portfolios:

Readings:

• “How to Protect Workers from Inflation”

• “How Best to Expand Investment Opportunities”

Issue Eight: The Unintended Savings Penalty of Untaxed Tips and Overtime

While exempting tips and overtime hours from the federal income tax base is intended to boost the near-term take-home pay of lower-income hourly and service workers, it introduces a severe structural distortion: the erosion and practical destruction of lower-income retirement and healthcare savings incentives.

Traditional asset-building vehicles—including traditional IRAs, 401(k)s, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs)—rely entirely on the value of an income deduction to alter household savings behavior. When a worker’s marginal tax rate on a significant portion of their earned income is reduced to zero through selective exemptions, the financial utility of these deductions simultaneously drops to zero. For an hourly or tipped worker whose remaining taxable AGI is already fully neutralized by the standard deduction, locking up liquid capital in a retirement or health account yields zero immediate tax relief.

The current tax-deferred framework effectively demands that low-AGI workers accept significant illiquidity without providing any offsetting federal subsidy. Consequently, policies that narrow the tax base via income exemptions inadvertently disincentivize long-term asset accumulation among the households most vulnerable to financial shocks.

To mitigate this structural friction, policy design must pivot away from income deductions and toward direct tax preferences that decouple the savings incentive from a worker’s marginal tax bracket. For example, rather than offering a functionally useless tax deduction, a modernized framework could utilize a structured federal match. Implementing a 100 percent government match on the first $1,000 of taxable tips or overtime contributed to an IRA would reverse the behavioral math. By shifting from a regressive deduction system to a direct matching credit, retirement policy can preserve asset-building opportunities for low-tax-burden households without relying on the leverage of an income tax liability.

Conclusion:

Recent and proposed retirement changes have proven inadequate for households struggling financially. Because the federal government actively prioritizes 401(k) plans over other household savings options, it has an institutional obligation to improve plan outcomes. Here are some potential reforms:

· Establish a Universal Auto-IRA Framework: Implement a national, workplace-independent default IRA framework with automated enrollment for all workers lacking employer plans.

· Create an Automated Spousal IRA Default: Establish an automated, marital-joint enrollment mechanism that automatically opens and funds a spousal IRA for a non-working caregiver when the primary earning spouse triggers a workplace 401(k) deduction, removing separate-filer administrative barriers.

· Decouple Small-Business Matching: Amend tax law to grant individual IRAs contribution limit parity with 401(k) plans, allowing small employers to bypass complex company plan administration by matching directly into their employees’ portable, personal IRAs.

· Enact Automated Rollover Pipelines: Mandate the automatic clearing of dormant, small-balance 401(k) assets out of fragmented employer plans and into a consolidated, low-fee national default IRA system upon a worker’s termination, preserving early-career compound interest.

· Restructure Pre-Retirement Account Leakage: Enact a Core Preservation Rule that legally isolates 50% to 60% of an account’s peak value from pre-retirement distribution. Replace the punitive 10% tax penalty with a 5% diversion fee routed directly back into the worker’s future Social Security trust fund.

· Mandate Health Spending Rollovers: Eliminate the inefficient “use-it-or-lose-it” statutory design of Flexible Spending Accounts (FSAs) by requiring the automated rollover of unspent end-of-year balances directly into a worker’s traditional IRA.

· De-Risk Default Portfolios and Modernize Distribution: Direct the Department of Labor to update QDIA regulations to restrict high-fee, illiquid private credit concentrations in target-date funds, requiring default portfolios to transition smoothly into dynamic, inflation-hedged distribution models (utilizing assets like inflation-indexed securities) rather than relying on static, outmoded withdrawal rules.

The persistent failure of recent bipartisan retirement legislation to move the needle for lower-income savers stems from a fundamental conflict of interest: federal policy has effectively allowed the Wall Street firms running these 401(k) networks to hold the pen, prioritizing institutional fee retention over friction-free asset accumulation for the working class.

The proposals presented here prioritize the needs of households facing the hardest time saving rather than the commercial interests of Wall Street. Automatic enrollment is meaningless if savings are immediately eaten away by friction. True structural reform ensures that hard-earned savings actually persist and grow—demanding lower asset fees, plugging early-career leakage, banning high-risk toxic assets from default funds, and anchoring portfolios against the twin threats of inflation and interest rate exposure.

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This proposal optimizes federal revenue generation and accelerates economic growth by combining lower marginal tax rates on capital gains with a broader capital gains tax base. By reducing transaction penalties while systematically closing structural loopholes, this framework unlocks stagnant capital and ensures long-term fiscal solvency.

· Targeted Capital Gains Compression: Lowers the top statutory rates to 12.5 percent and 17.5 percent to unlock “locked-in” assets, lower the cost of capital, and immediately boost market liquidity.

· Surtax Realignment: Increases the Net Investment Income Tax (NIIT) to a flat 6.0 percent to preserve progressivity among high-income earners and offset initial rate reductions.

· Housing Market Integration: Uniformly applies the new rates to real property to eliminate tax arbitrage and dismantle the “lock-in effect,” freeing stagnant residential inventory for older homeowners and expanding supply.

· Repeal of Section 1031 Exchanges: Phases out like-kind real estate deferrals over five years to remove artificial distortions in asset allocation and permanently broaden the tax base.

· Modified Basis Adjustment at Death: Replaces complete step-up with a fractional 50 percent basis adjustment, deferring the tax liability until a voluntary sale occurs to eliminate estate-planning lock-in without forcing disruptive liquidity events.

· Programmatic Pre-Tax Asset Conversion: Implements an automated 5-year post-inheritance window for conventional retirement assets, shifting final balances from ordinary income schedules to capital gains rates to protect heirs from tax-bracket spikes while accelerating Treasury receipts.

· Taxation of Inherited Roth Vehicles: Automates the transition of inherited Roth funds into standard taxable brokerage portfolios after five years to integrate compounding growth back into the active tax base without assessing distribution penalties.

· Post-Mortem Excise Tax on “Mega-Roths”: Enacts a flat 5.0 percent levy on inherited Roth balances exceeding $10 million to cleanly capture extreme wealth insulated in tax shelters (the Peter Thiel exception) while actively encouraging unlimited lifetime capital accumulation below that threshold.

· Abolition of the Federal Estate Tax: Repeals the federal estate and gift tax regime entirely to eliminate double-taxation and protect family-owned businesses and farms from predatory, forced liquidations.

· Entitlement Solvency Integration: Introduces a 2.5 percent levy on capped capital gains contributions to fund Social Security, aligning the interests of entitlement advocates with supply-side proponents of lower tax rates.

Previous memos considered how the tax reconciliation bill could be used to facilitate health insurance reform and student debt reform. The primary focus of this article outlining a third-party tax reconciliation program involves improvements to capital gains tax rules.

Democrats strongly feel that the existence of a preferential tax rate on capital gains (a lower tax rate on capital gains than income) is unfair. Several problems with this argument exist:

· The decision to realize a capital gain is optional, and higher rates discourage capital gains realizations.

· Current law allows for complete step-up in basis at death, leading to the complete avoidance of capital gains taxes.

· The combination of higher capital gains tax rates and step-up in basis discourages sales by older homeowners with large gains, reducing the inventory of homes for sale.

· Some real estate investors avoid all capital gains taxes for business and investment purposes by putting properties into Section 1031 exchanges.

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Introduction:

An alternative approach to capital gains taxation—one that lowers rates while broadening the tax base—can both increase federal revenue and stimulate economic growth. The approach towards lower rates and a broader tax base is guided by Arthur Laffer’s insight that a revenue-optimizing tax rate exists somewhere in the middle, never at the 0 percent or 100 percent endpoints. Just as higher ordinary income rates past the optimal point discourage work, higher capital gains rates past the optimal point drastically lower optional asset realizations. These alternative capital gains tax rules could also involve earmarking more funds from capital gains tax and net investment income tax receipts towards entitlement programs, offsetting or preventing projected insolvencies.

1. Restructuring of Long-Term Capital Gains Tax Rates

The proposal flattens the long-term capital gains and qualified dividends schedule by reducing the top two statutory rates by 2.5 percentage points, while maintaining the existing income brackets to preserve progressivity. The bottom tier is left untouched to protect lower-income savers.

The restructured schedule maps directly onto current statutory income thresholds:

· 0 Percent Bracket: Retained for low-income investors.

· 12.5 Percent Bracket: Replaces the current 15% rate, applying to the exact same income ranges.

· 17.5 Percent Bracket: Replaces the current 20% rate, applying to the exact same top-tier income cutoffs.

By directly lowering the transaction penalty on realizations, this targeted reduction lowers the cost of capital, unlocks “locked-in” assets, and immediately injects liquidity back into the broader market.

2. Expansion of the Net Investment Income Tax (NIIT)

To partially offset the revenue impacts of the capital gains tax reduction and ensure continued progressivity among high-income earners, the proposal increases the Net Investment Income Tax (NIIT) established under Internal Revenue Code Section 1411.

• Rate Adjustment: The NIIT rate will be increased from its current statutory level of 3.8% to a new flat rate of 6.0%.

• Threshold Retention: The tax will continue to apply to the lesser of net investment income or the excess of Modified Adjusted Gross Income (MAGI) over the existing statutory thresholds (currently set at $200,000 for single filers and $250,000 for married couples filing jointly).

3. Application of Unified Rates to Real Property and Market Liquidity

The newly proposed 12.5% and 17.5% long-term capital gains brackets apply uniformly to real estate, including principal residences, while leaving existing Section 121 statutory exclusions fully intact.

Maintaining a unified rate schedule prevents structural distortions and tax arbitrage. By lowering the top statutory rate to 17.5%, this policy directly facilitates transactions by long-tenured homeowners whose lifetime asset appreciation exceeds the standard $250,000/$500,000 single/married exclusion limits. (Note, proposal 10 includes a 2.5 percent trust fund levy, which if adopted, could apply to gains below the exemption thresholds.)

Reducing this transaction penalty expands active housing inventory, enables growing families to move up into larger homes, and removes a major tax barrier for older homeowners. Rather than remaining locked in a primary residence until death solely to secure a basis adjustment for heirs, seniors are economically empowered to downsize or relocate closer to family.

Crucially, while this proposal preserves the current zero percent tax tier for gains falling within the standard Section 121 statutory limits, this design choice represents a significant area for future policy optimization. Critics could reasonably argue that introducing a modest, low-baseline capital gains rate on all residential real estate transactions would generate substantial, predictable federal revenue while still entirely preserving geographic and social mobility.

4. Repeal of Section 1031 Like-Kind Exchanges and Rate Uniformity

To eliminate artificial distortions in capital allocation, this proposal advocates for the full repeal of Internal Revenue Code Section 1031, which currently permits real estate investors to defer capital gains tax indefinitely by rolling transaction proceeds into replacement properties.

There is no sound economic justification for maintaining a distinct or preferential tax rate for gains realized on investment real estate versus other capital assets.

To prevent an abrupt liquidity freeze in commercial real estate markets and to proactively generate significant short-term federal revenue, the repeal of Section 1031 will be phased in. There will be an immediate ban on the acquisition of new 1031 properties, the open-ended rolling over of basis is immediately terminated, only 50 percent of gains realized in the first five years after the enactment of the proposal will be subject to a capital gains tax, and 100 percent of realizations will be subject to tax from year 6 onwards.

5. Structural Reform of Basis Adjustment at Death and Mitigation of Capital Loss Penalties

The proposed change establishes a new cost basis automatically adjusted to a midpoint exactly halfway between the decedent’s historical cost basis and the fair market value.

Under current framework guidelines governed by Internal Revenue Code Section 1014, the tax basis of a capital asset held at death is adjusted to its fair market value on the date of the decedent’s passing. The complete elimination of basis at death creates an incentive for some households to maintain ownership of assets until death to reduce the tax liability of heirs. This provision can be especially onerous to older homeowners sitting on a large gain in their primary residence. They may prefer to downsize and move but this action could substantially reduce their legacy to their heirs.

For assets that have declined in value, the basis will similarly be adjusted to the midpoint between historical cost and fair market value. By preventing an absolute step-down, this provision preserves 50 percent of the embedded capital loss, allowing heirs to utilize the remaining loss to offset future gains when the asset is sold.

To eliminate liquidity friction at death, no tax liability is triggered by the transfer itself. The tax is deferred entirely until the beneficiary chooses to liquidate the asset, at which point the gain or loss is recognized under the unified 12.5 percent and 17.5 percent statutory rate schedule.

Gains on the sale of a primary home will be reduced by an exemption equal to $250,000 so the new tax should not substantially reduce liquidity for people who sell an inherited home.

6. Structural Reframing and Capital Gains Reclassification of Inherited Traditional Retirement Assets

To accelerate capital velocity into liquid, productive market investments and eliminate multi-generational tax insulation, this paper proposes a standardized 5-year duration for tax-deferred inheritance structures (such as traditional IRAs and 401(k)s). Rather than utilizing punitive regulatory penalties or forcing mandatory liquidations that trigger destructive ordinary income tax spikes, this policy implements a seamless, non-coercive reclassification at the conclusion of the 5-year post-inheritance window.

· Five-Year Tax-Sheltered Horizon: Non-spouse beneficiaries retain the right to maintain inherited assets the traditional tax-deferred shell for up to five calendar years following the decedent’s passing.

· Programmatic Reclassification at Year 5: On December 31 of the fifth calendar year, the tax-deferred status of the account automatically expires. The account structures dissolve seamlessly, and the underlying securities are programmatically transitioned into standard taxable brokerage portfolios. No early withdrawal penalties or compliance fees are assessed.

· Application of Unified Capital Gains Rates: Upon this automatic conversion, the embedded growth is detached from ordinary income schedules. The cost basis of the securities is automatically adjusted to a midpoint exactly halfway between the decedent’s historical cost basis and the fair market value at the time of conversion. Moving forward, all subsequent liquidations face the paper’s unified 12.5 percent and 17.5 percent capital gains rate schedule.

By replacing extended tax-insulation windows with an automated 5-year transition, this framework achieves clean, predictable revenue realization for the Treasury while providing a smooth, friction-free path for heirs to integrate inherited wealth into the standard market.

Macroeconomic and Revenue Impact Analysis: While compressing the inheritance window from 10 years to 5 years accelerates the transition of assets, this programmatic framework functions as an optimized, pro-taxpayer mechanism that simultaneously raises structural federal revenue. Under current law, non-spouse heirs inheriting conventional, pre-tax retirement accounts face a severe structural penalty: because these accounts possess a zero-tax basis, all forced distributions are taxed as ordinary income. When heirs inherit these assets during their peak earning years, a massive year-10 liquidation stacks directly on top of their existing salary, creating a destructive tax bracket spike that can consume up to 37 percent of the wealth. By fundamentally shifting these assets away from ordinary income schedules and onto the paper’s unified 12.5 percent and 17.5 percent capital gains brackets—while providing a 50 percent basis step-up at conversion—this policy fundamentally defuses that ordinary income tax liability.

From a public finance perspective, this provision serves as a highly efficient revenue accelerator. Pulling the automatic conversion window forward by five full years captures substantial revenue for the Treasury significantly faster, maximizing the time-value of collection. Furthermore, because the underlying securities are programmatically transitioned into standard taxable brokerage portfolios rather than being liquidated under duress, they are permanently integrated into the active tax base. Moving forward, all subsequent dividend payments, realized gains, and compounding growth generate annual tax revenue, subject to the unified capital gains rates and the updated 6.0 percent Net Investment Income Tax (NIIT). This accelerates capital velocity, broadens the permanent tax base, and yields predictable, elevated revenue realizations that far outpace the current, uncoordinated 10-year deferral system.

7. Implementation of a 5-Year Structural Transition for Inherited Roth Assets

Current statutory rules allow non-spouse beneficiaries to hoard assets inside an inherited Roth IRA for up to ten years completely tax-free, with no annual distribution mandates. To optimize public finance outcomes and accelerate capital integration, this paper replaces the uncoordinated 10-year liquidation rule with a uniform 5-year operational boundary, converting inherited Roth vehicles into standard taxable assets without forcing disruptive liquidations or assessment penalties.

The 5-Year Automatic Conversion: The inherited Roth vehicle retains complete tax-free growth status for exactly five calendar years following the owner’s death. On December 31 of the fifth calendar year, the tax-exempt status of the account expires automatically. No forced asset liquidations, withdrawal mandates, or compliance penalties are triggered.

Existing rules governing Roth IRAs rely on penalties for undistributed funds after 10 years. I have a strong aversion to penalizing taxpayers in this manner. This policy simply automatically converts undistributed Roth funds to taxable assets five years after they are inherited.

To establish an equitable baseline, the assets receive a clean step-up to their fair market value on the date of conversion. Moving forward, all subsequent capital appreciation or dividend growth generated by these assets is fully integrated into the tax base, subject to the unified 12.5 percent and 17.5 percent capital gains rates, alongside the updated 6.0 percent Net Investment Income Tax where applicable.

Inherited IRA Rules Explainer

This video details how the IRS manages current inheritance windows and the complexities that beneficiaries face under the existing 10-year rule, highlighting the exact baseline compliance hurdles that your 5-year automatic conversion model eliminates.

8. Implementation of a High-Balance Post-Mortem Excise Tax on “Mega-Roth” Structures

This paper proposes a flat 5.0 percent Post-Mortem Excise Tax on the aggregate fair market value of all inherited Roth IRA and Roth 401(k) accounts exceeding an absolute baseline threshold of $10 million on the date of the decedent’s passing.

· Complete Insulation for Standard Savers: Every dollar of accumulated Roth wealth below the $10 million ceiling remains entirely exempt from this levy, fully shielding standard savers who utilized the accounts under standard statutory contribution limits.

· Preservation of Lifetime Accumulation Incentives: A 5.0 percent tax rate is mathematically negligible relative to the compounding benefits of a tax-exempt vehicle over several decades. Because the rate is so low, it exerts zero downward pressure on an entrepreneur’s or investor’s desire to maximize growth. The explicit objective of this policy is to actively encourage savers to accumulate as much capital as possible their Roth vehicles. The levy functions as a modest back-end equalization mechanism at the end of a lifecycle, rather than a punitive barrier during it.

· Administrative Liquidity: The 5.0 percent excise tax is assessed at the account level and paid directly out of the mega-Roth assets before the remainder of the balance undergoes the programmatic 5-year transition into standard taxable brokerage portfolios outlined in Section 7.

Policy Motivation and Distinctions

Under current regulatory frameworks, unique asset positioning—such as placing founders’ private equity shares, start-up options, or highly discounted assets inside a Roth shell—has permitted select individuals to accumulate “mega-Roth” balances stretching into the billions of dollars. A prominent public example of this structural breakdown is tech investor Peter Thiel, who famously amassed a multi-billion-dollar Roth IRA using early-stage startup shares. Because these structures completely insulate explosive lifetime wealth creation from both ordinary income and capital gains schedules indefinitely, they operate as unintended, permanent federal tax havens.

It is critical to note that this framework does not exclusively target Peter Thiel or any single individual, nor does it adopt the friction-heavy mechanisms previously proposed by Congress. Past drafts of the 2021 Build Back Better Act attempted to target these accounts aggressively by capping total IRA contributions at $10 million and forcing massive, immediate lifetime distributions of 50% to 100% on excess balances for high earners. Those previous designs created severe distortions: they required invasive, ongoing annual valuations of private assets, disrupted active capital compounding during the owner’s lifetime, and penalized high-wealth accumulation itself.

By shifting the mechanism entirely to a low-rate, post-mortem excise tax, this framework successfully captures a fair slice of lifetime capital accumulation that completely escaped the standard tax loop, generates immediate federal revenue from previously unreachable tax shelters, and maintains the integrity of broader capital markets—all while keeping the psychological incentive to build substantial private wealth fully intact.

9. Complete Elimination of the Federal Estate and Gift Tax Regime

This paper proposes the total repeal of the Federal Estate Tax, Generation-Skipping Transfer Tax, and Gift Tax (Chapter 11, 12, and 13 of the Internal Revenue Code).

· Harmonization with the New Tax Base: Under the unified framework established in this bill, the transfer of wealth at death is already fundamentally reordered through partial step-up in basis (Section 6) and the 5.0 percent mega-Roth post-mortem excise tax (Section 8). Maintaining a separate estate tax layer constitutes uncoordinated double-taxation.

· Elimination of Forced Liquidity Events: By abolishing the estate tax, the federal government completely removes the threat of forced, predatory liquidations of family-owned businesses, agricultural land, and illiquid private enterprises.

· Eradication of the Wealth-Destructive Avoidance Industry: Repealing the estate tax dismantles a massive, economically dead-weight compliance industry dedicated to constructing complex trusts, valuation discounts, and artificial holding companies designed solely to bypass asset-transfer penalties.

Policy Motivation and Economic Rationale

The traditional federal estate tax is an obsolete, friction-heavy revenue instrument. While conceptually designed to limit dynastic wealth concentration, in practice, it operates primarily as a tax on the illiquid and the poorly advised. Ultra-high-net-worth families routinely utilize sophisticated legal structures to shelter billions in liquid wealth, while mid-tier entrepreneurs and multi-generational family business owners are frequently hit with massive, unexpected tax bills that force the dissolution of productive firms. Furthermore, the estate tax raises a negligible fraction of federal revenues while imposing massive systemic compliance costs.

By pairing the total repeal of the estate tax with the dynamic baseline reforms introduced earlier in this paper, we achieve a far more equitable and efficient economic equilibrium. Rather than assessing a massive, punitive tax on an arbitrary date (death) based on subjective, easily manipulated asset valuations, the tax code under this framework shifts entirely to a realization-based and liquidity-aware model.

Standard inherited assets retain their underlying tax exposure through modified basis carryover, meaning the tax is only paid when the heir voluntarily chooses to sell the asset in an orderly, market-driven transaction. Meanwhile, the uniquely insulated tax-haven properties of ultra-high-balance Roth accounts are cleanly accounted for via the non-disruptive 5.0 percent post-mortem levy. Sweeping away the estate tax removes a major psychological barrier to lifetime domestic capital investment, simplifies the tax code, and ensures that federal revenue generation tracks actual economic transactions rather than arbitrary lifecycle events.

10. Creation of a 2.5% Tax Subject to a Ceiling for Contributions to Social Security

The preceding seven proposals were designed to increase capital gains realizations to increase revenue and expand economic growth. This proposal allocates a new 2.5% tax subject with fees provided to the Social Security Trust fund.

To maintain the historical and legal design of Social Security as a contributory social insurance program rather than a general welfare surcharge, this levy must be tied to future benefit calculations.

To achieve this integration, policymakers could choose between two primary structural approaches:

· The Parallel Factor Approach: The policy introduces an Average Indexed Capital Earnings (AICE) factor into the standard Social Security administration framework, acting as a parallel calculation to the traditional wage-based Average Indexed Monthly Earnings (AIME) formula.

· The Direct Integration Approach: Alternatively, capital gains subject to the levy could be blended directly into the existing AIME formula alongside traditional wage earnings.

Regardless of the path chosen, implementing this policy introduces a distinct structural challenge that must be resolved by Social Security Administration actuaries. Because asset realizations are inherently volatile and “lumpy” compared to steady lifetime wages, a single large liquidation could artificially distort a taxpayer’s 35-year earnings history or crowd out years of legitimate wage contributions. Actuaries will need to design an appropriate smoothing mechanism—such as a multi-year rolling average or a modified indexation formula—to ensure these capital contributions scale the Primary Insurance Amount (PIA) in an actuarially sound, equitable manner.

The 2.5 percent levy would apply uniformly to all long-term capital gains and qualified dividends recognized within the newly established 12.5 percent and 17.5 percent statutory brackets and to gains on principal residences below the $250,000/$500,000 exemption.

The total volume of capital gains subject to this levy is capped at $50,000 per year, yielding a maximum annual Trust Fund contribution of $1,250 per taxpayer.

By embedding this 2.5 percent payroll tax directly inside the OASI funding stream, any future legislative effort to increase the baseline capital gains rate introduces an immediate, quantifiable threat to Social Security solvency because higher rates lower realizations and reduce contributions to the Trust fund. In fact, advocates concerned strictly about Trust Fund Solvency and retirement income could favor further reductions in capital gains taxes which would increase realizations and new Social Security contributions.

This architecture improves the solvency of the Trust fund, expands retirement benefits for people who realize gains, and aligns the interest of entitlement advocates with the interests of people favoring lower capital gains tax rates.

Conclusion

The ten policy proposals outlined in this memo represent a cohesive framework, but they are by no means the only configurations possible. Future iterations of this program could explore different permutations of these ideas—such as adjusting the phase-in timeline for the Section 1031 repeal, altering the specific percentage split for basis adjustments at death, or modifying the annual cap on capital gains subject to the Social Security levy. Because tweaking these variables can significantly alter macroeconomic outcomes, it is vital to establish a process that moves away from rigid ideological battlelines. Instead, modifications to these proposals must be guided by a rigorous, objective cost-benefit analysis. This process should actively seek out and integrate input from individuals with diverse perspectives, ensuring that the final legislative package is stress-tested against real-world economic conditions rather than political dogmas.

Central to evaluating any modification is a two-sided principle rooted in the insights of Arthur Laffer. While historically applied to ordinary income tax, the Laffer Curve logic applies acutely to capital gains taxation because realizations are entirely optional; when tax rates are too high, investors simply lock in their assets, freezing market liquidity and starving the Treasury. There is an undeniable optimum rate for revenue generation—it is demonstrably not 100 percent, but crucially, it is also not 0 percent. Recognizing that this optimum lies between these two extremes is what guides the balanced reforms suggested for Section 1031 exchanges and the eventual taxation of inherited Roth IRAs. By capturing revenue at an optimized threshold without completely erasing the incentive to invest, the government can maximize public finance health while sustaining economic velocity.

Ultimately, reforming capital gains is not just a theoretical math exercise; it has a profound, real-world impact on broader economic growth and major societal pain points. This is especially true in the residential housing market, where the current tax code forces an artificial freeze on inventory. When an elderly homeowner faces a massive tax penalty for downsizing or moving closer to family, they choose to stay put to preserve a full step-up in basis at death. This lock-in effect starves the market of entry-level housing supply, which is a vital driver of macroeconomic expansion. Furthermore, it adds unnecessary financial friction to incredibly difficult, emotional end-of-life housing decisions—including transitions into assisted living or managing long-term care spend-down rules. A truly complete tax reconciliation framework must recognize these intersecting pressures, ensuring that capital gains rules unlock market velocity rather than penalizing families during critical life transitions.

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Key Findings:

The incoming Federal Reserve chair is walking directly into a classic dual-mandate nightmare. Across every core asset class, the data flatly refuses to cooperate -- flashing warning signs of a slowing economy right alongside stubborn, cost-push inflation.

Here are the key contradictions tearing through the macro landscape right now:

· The Yield Curve vs. TIPS: Nominal bonds are bracing for sticky long-term inflation (10-year implied at 3.10%), while the TIPS market bets long-run price pressures will eventually normalize (5-year, 5-year forward at 2.28%).

· Main Street vs. Wall Street Forecasters: Consumers expect inflation to remain highly elevated at 3.20% over the next five years, while professional economists model a much cooler, anchored 2.40% baseline.

· Global Central Banks and Bond Markets Versus the White House Universal inflationary pressures are forcing global central banks—from Tokyo to Sydney—to navigate intense policy constraints, effectively raising the global floor for interest rates. This systemic shift threatens to spike long-term U.S. borrowing costs and block the rate cuts intensely desired by the President and some financial market participants.

· Low Unemployment vs. Hiring Freezes: The headline jobless rate is historically low at 4.3%, yet broad payroll growth has cratered to 115,000, and U-6 underemployment has jumped to 8.2% as recent graduates hit a white-collar brick wall.

· Surging Oil vs. Crashing Metals: Geopolitical shocks have spiked retail gasoline to an inflationary $4.50+ per gallon, but a 16.7% plunge in copper prices screams that the global industrial engine is rapidly cooling.

· AI Bubble vs. Small-Cap Distress: Mega-cap tech is on a tear -- driving a 122% one-year return for semiconductors (SMH). While interest-sensitive homebuilders plunge 16.6% and the domestic Russell 2000 sinks into an 11% correction.

· Distress in private credit markets but stable junk bond yields: A financial crisis if it occurs will be self-inflicted.

· Broader issues than oil and Strait of Hormuz: Market is highly fixated on oil but electricity prices are also increasing and alternative routes for oil don’t resolve Hormuz related issues on food and fertilizer.

· Inflation versus recession: Can’t rule out a stagflation.

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Introduction:

Even in normal periods, macroeconomic forecasting is an inherently imprecise process, much more art than science. The current economic environment is not normal. I have not seen so many divergent economic signals, with some statistics suggesting a strong perhaps overheated economy and other signals flashing warning signs of impending inflation.

This post considers data in nine areas – (1) the conventional Treasury yield curve. (2) TIPS securities (3) surveys of inflation, (4) international interest rates, (5) junk bond and private credit markets, (6) labor markets, (7) commodity markets, (8) electricity prices (9) stock markets.

The Conventional Yield Curve:

Extracting concrete inflation forecasts from the conventional nominal yield curve requires anchoring the analysis in the classical Fisher framework separating nominal interest rates into two components – the real rate and expected inflation and by assuming the real rate remains constant at 1.5%.

Applying this framework to a 10-year nominal Treasury yield of 4.60% extracts an implied inflation expectation of 3.10% over the next decade. Applying this framework to a 30-year bond yield currently above 5.00% isolates an even higher implied ultra-long-term forecast of 3.50%.

Both estimates exceed the Federal Reserve Board’s 2.0 percent target.

The steepness of the conventional yield curve may partially reflect depressed short rates because of expectations of a Fed rate cut a desired outcome of the President and the new Fed chair.

The 10-year and 30-year rates did show some upward movement this week. There is substantial nervousness that further increases in expected inflation could raise long rates and spill over to the equity market.

Signals from the TIPS Market:

Treasury Inflation-Protected Securities (TIPS) provide alternative, direct market estimates of expected inflation by stripping real interest rates out of nominal yields, revealing a distinct divergence when compared to the conventional curve over intermediate intervals:

The 5-year breakeven inflation rate recently rose to 2.69%, signaling that investors expect cyclical price pressures to keep inflation modestly above target over the immediate five-year horizon.

The 5-year, 5-year forward inflation expectation rate stands near 2.28%. This structural metric isolates expectations for the half-decade beginning five years from now, indicating that institutional investors believe long-run trend inflation will eventually subside and normalize.

The inflation expectations from the conventional yield curve exceed the inflation expectation from the TIPS market, possibly because the TIPS market is less liquid than the conventional one.

For more on the TIPS market and inflation expectation consider this article:

Consumer and Professional Inflation Surveys

Surveys complement market-based measures by capturing expectations among distinct economic actors, providing vital context for how inflation expectations translate into real-world behavior. The latest data reveals a stark divergence between heightened short-term anxieties and relatively stable long-term anchors.

University of Michigan Surveys of Consumers Near-term household expectations remain highly elevated, with consumers projecting a 4.5% inflation rate over a 1-year horizon. This reflects immediate sensitivity to trade tariffs and stubborn core service costs, though metrics have eased marginally from their spring peaks. Looking further out, the 5-year horizon sits at a more moderated 3.4%, indicating that while immediate pressures are acute, consumers expect some cooling over the long term.

Federal Reserve Bank of New York Survey of Consumer Expectations Short-term household outlooks have steadily ticked higher, with the 1-year expectation currently sitting at 3.6%. This trend is driven largely by lower-to-middle-income cohorts facing localized, non-discretionary price pressures. Over the medium to long term, consumer anxiety flattens out but remains sticky, with expectations landing at 3.1% for the 3-year horizon and hovering right at the 3.0%threshold for the 5-year mark.

Federal Reserve Bank of Philadelphia Survey of Professional Forecasters Professional economists have aggressively adjusted their near-term models upward to absorb recent geopolitical shocks and spiking commodity costs, projecting a sharp 6.0% annualized rate for the immediate quarter and a 3.5% full-year baseline. However, their long-term structural assumptions remain firmly anchored, with the 10-year horizon projected at 2.4% -- a figure that remains closely aligned with the Federal Reserve’s target.

The consumer survey pushes up the average at both the short and long horizons.

· The Short-Term Horizon (Next 12 Months): Household expectations average 4.05% (across the Michigan and NY Fed surveys), outpacing the professional forecasters’ full-year baseline of 3.50%. Combined, the short-term consensus sits at 3.87%, though professionals expect immediate quarterly spikes to peak as high as 6.0%.

• The Long-Term Horizon (5 to 10 Years): Long-term anchors remain intact but show a clear structural gap. Consumer surveys yield a long-term average of 3.20%, while professional forecasters project a much cooler 10-year baseline of 2.40%.

The survey data closely tracks the broader pattern seen in the TIPS market, reflecting significantly higher inflation expectations in the short term than in the long term.

Many economic surveys of consumers have indicated a high level of pessimism, not only about inflation but about the future of the economy. For more about the growing level of economic pessimism captured in consumer surveys consider this article:

International Interest Rates:

Inflation is increasingly a global phenomenon rather than a purely domestic one applying pressure to all central banks.

Recent Central Bank Actions and Policy Benchmarks

Bank of Japan (BOJ) — Policy Rate: 0.75%

Meeting Date: April 28, 2026

Official Document Link: https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2026/k260428a.pdf

Action: In a 6–3 split decision, the BOJ maintained its key overnight rate at 0.75% (a level unseen since 1995). The split vote led to a market rebellion causing the domestic yield curve to steepen sharply as the 10-year Japanese Government Bond (JGB) surged to a 30-year high of 2.80%.

Reserve Bank of Australia (RBA) — Policy Rate: 4.35%

Meeting Date: May 5, 2026

Official Document Link: https://www.rba.gov.au/media-releases/2026/mr-26-12.html

Action: In a hawkish, split 8–1 board decision, the RBA raised its cash rate target by 25 basis points to 4.35%. With headline inflation surging to 4.6% following global energy infrastructure disruptions, the board explicitly warned that domestic firms are rapidly passing through escalating fuel and transport costs into consumer goods and services.

Bank of England (BoE) — Policy Rate: 3.75%

Meeting Date: April 29, 2026

Official Document Link: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/april-2026

Action: The Monetary Policy Committee (MPC) voted 8–1 to maintain its key Bank Rate at 3.75%. While a softer real economy prompted a rate hold, the April Monetary Policy Report revealed that near-term consumer price inflation projections have been revised upward to 3.3% for the third quarter due to the Middle East supply shock, meaning policy is likely to remain restrictive.

Bank of Canada (BoC) — Policy Rate: 2.25%

Meeting Date: April 29, 2026

Official Document Link: https://www.bankofcanada.ca/2026/04/fad-press-release-2026-04-29/

Action: The Governing Council held its target for the overnight rate at 2.25%, continuing its extended pause. While global peers are hiking or tightening aggressively to fight energy-driven inflation, Canada’s massive domestic oil reserves naturally cushion it from the worst of the Middle East supply shock. Instead, the primary concern for the BoC is a significant softening of aggregate demand. The domestic economy is under severe stress due to escalating U.S. tariff pressures and deep trade uncertainty ahead of the upcoming CUSMA review, both of which are actively depressing Canadian business investment and exports. The central bank is locked in a defensive hold—unable to ease because of global baseline inflation pressures, but unable to tighten further without worsening the domestic demand slump.

European Central Bank (ECB) — Policy Rate Benchmark

Reporting Period: May 2026 (Tracking late April operations)

Official Document Link: https://www.ecb.europa.eu/press/stats/mfi/html/ecb.mir2605~8bd04df5cc.en.html

Action: The ECB maintained an ultra-vigilant operational posture as core services inflation remains deeply stubborn against the rising tide of global crude prices. Eurozone corporate borrowing costs remain locked at a 3.57%, while household housing credit indicators hover at 3.35%.

Concluding Thought:

Monetary policy appears to be tightening in most parts of the world.

Events in Japan are especially vital because Japanese institutional investors are the world’s largest sovereign holders of foreign fixed income -- collectively owning well over $1 trillion in U.S. Treasuries alone. The sudden upward spike in long-end JGB yields may have large financial implications.

Labor Markets and the Federal Reserve’s Dilemma:

The labor market is central to inflation analysis because the Federal Reserve operates under a dual mandate: maximum employment and price stability.

Current U.S. labor data present a mixed picture:

• The headline unemployment rate stands at approximately 4.3 percent, modestly above the cycle low but still low by historical standards.

• Nonfarm payroll growth slowed to roughly 115,000 jobs in April, well below the average monthly gains recorded during 2024.

• The U-6 underemployment rate, which includes discouraged workers and those working part-time for economic reasons, rose to 8.2 percent in April 2026, up from 8.0 percent in March and 7.9 percent in February—a meaningful 0.3 percentage point increase over two months.

• Unemployment among workers ages 20 to 24 has climbed to roughly 8 to 9 percent, and recent college graduates are encountering a noticeably weaker hiring environment, particularly in technology and other white-collar sectors.

• Prime-age labor-force participation (ages 25 to 54) remains near 83.5 percent, close to the highest level in more than two decades.

• Labor-force participation among workers age 55 and older remains below pre-pandemic norms, reflecting a sustained increase in retirements and reduced workforce attachment among some older Americans.

Source:

https://www.bls.gov/news.release/pdf/empsit.pdf?utm_source=chatgpt.com

Junk Bonds vs. Private Credit:

The corporate credit landscape highlights another set of issues.

Public high-yield “junk” bonds have remained surprisingly resilient. Because many public speculative-grade companies locked in fixed, ultra-low interest rates during the pandemic, their trailing default rate has stayed low, near 3.3%. Deeper public market trading has allowed these bonds to absorb macro volatility smoothly.

In stark contrast to the public fixed-income markets, the massive, un-regulated private credit market is showing acute signs of structural distress:

· Floating-Rate Risk & Cash Squeeze: Private direct lending is almost exclusively structured on floating interest rates pegged to benchmark SOFR. Because these rates adjust automatically with central bank policy, sustained high interest rates directly erode borrower interest coverage ratios, rapidly accelerating both headline defaults and “shadow” credit distress.

· Concentrated Exposure to Software (SaaS): Direct lenders have heavily concentrated portfolios in the Software-as-a-Service (SaaS) sector, which commands nearly 20% of total direct lending assets. These loans were heavily underwritten on multiples of recurring revenue rather than actual EBITDA. With generative AI tools now rapidly disrupting legacy software business models and driving a collapse in public software valuations, private credit funds face localized asset impairments across their largest sector exposure.

· Payment-in-Kind (PIK) Debt: Borrowers who cannot afford their escalating cash interest payments are being allowed to defer payments by issuing more debt via PIK toggles. Non-cash PIK payments now make up roughly 8% of total investment income for major public Business Development Companies (BDCs), masking a significant shadow default rate.

· Maturity Extensions & Arbitrary Marking: Instead of declaring formal defaults or enforcing covenants, funds are quietly executing amend-and-extend modifications to prolong loan durations, while keeping stressed assets marked near face value to obscure real valuation drops.

· Redemption Gates: As worried institutional and wealthy retail allocators attempt to trim their exposure, perpetually non-traded BDCs and evergreen private credit funds are facing surging redemption requests, forcing several major funds to enforce strict quarterly liquidity caps and slam shut “redemption gates” to freeze cash withdrawals.

This private credit distress creates a potential dilemma for the incoming Fed chair that goes far beyond the standard inflation-growth dynamic. Historically, central banks have been forced to abandon their macroeconomic goals and inject massive liquidity into the system just to halt a financial sector panic. The classic precedent is the 2008 subprime crisis.

While no central banker wants to preside over a systemic financial crisis, a severe and unchecked private credit contraction could, if triggered, inadvertently break the Fed’s primary policy deadlock. Should a large crisis manifest, the subsequent freezing of credit creation, forced asset liquidations, and aggressive retrenchment in corporate spending would induce a sharp, deflationary contraction in aggregate demand.

For further readings

See the 2026 credit trap: Why Wall Street gates the exits

and

How best to expand investment opportunities inside retirement accounts?

Commodity Markets:

Current commodity prices provide highly mixed signals about the global inflation path. Surging oil prices stemming from recent geopolitical shocks indicate a real risk of resurgent inflation. Some industrial and commodity and metal prices indicate the world economy may be cooling. The energy squeeze and the closure of the straits is impacting costs and food prices and alternative pipelines for oil won’t facilitate movement of food and fertilizer.

This crisis may not fully resolve quickly and future stagflation can’t be ruled out.

The price of oil has surged significantly as a direct result of ongoing conflict, driving intense market volatility fueled by shifting rumors regarding the ultimate duration of the hostilities. This structural energy premium has passed directly down the line to retail consumers, with U.S. gasoline prices averaging an elevated $4.50 to $4.63 per gallon and retail diesel remaining stubbornly sticky near $5.64 per gallon. High diesel prices impact the supply chain and the cost of food and other goods.

The energy shock has not yet fully worked through the broader economic system to impact underlying core prices. Modern Vector Autoregression (VAR) studies indicate that these second-round energy effects now transmit to Core CPI with a prolonged three-to-nine month lag, acting as a slow structural fuse rather than an immediate catalyst.

However, historical context provides a critical buffer: the notorious oil shocks of the 1970s represented a far greater percentage increase relative to the baseline economy. Because the modern global economy is significantly less energy-intensive per dollar of real GDP, the mechanical, long-term pass-through to non-energy goods may ultimately be smaller than the historical precedents of the late twentieth century.

This energy-driven cost pressure clashes directly with the price action across the metals complex, where a widespread cooling trend points to softening global demand. Gold, the global flight-to-liquidity standard, established an all-time intraday high of $5,598 per ounce (with a record close of $5,411 per ounce) on January 28. The market has since experienced a distinct 19% drawdown, with gold floating near $4,550 per ounce.

A similar exhaustion of momentum is visible in silver, the market’s dual-nature monetary and industrial indicator. Silver previously touched a spectacular, record-breaking high of $121.64 per ounce on January 29, 2026, but has fallen to around $78 per ounce due to a short squeeze.

Copper is a complex macro outlier. The London Metal Exchange (LME) copper price has fluctuated between $13,400 and $14,153 per metric ton, its relatively high price floor reflecting factors impacting both demand and supply.

· Short-Term Cyclical Demand Destruction: The macro engine is slowing. China’s industrial production growth has decelerated, dragging down order flows for copper cathodes and rods. With crude oil hovering above $110 per barrel and keeping central banks hawkish, the broader global economic slowdown has actively triggered price-induced demand destruction, flipping Chinese spot copper premiums into discounts.

· The Peru Energy Crisis: On the supply side, major operational shocks are capping output. Peru issued an emergency decree (Decreto de Urgencia 003-2026) prioritizing electricity for residential households amid a national power deficit. This has forced rolling power rationing across major mining operations, immediately driving up marginal costs and curbing refined production.

· The Sulfuric Acid Bottleneck: Roughly 20% of global copper relies on acid-intensive leaching processing. Ongoing shipping blockades in the Strait of Hormuz have choked off Middle East sulfur exports, while China has restricted its own sulfuric acid exports. This sudden bottleneck has spiked the cost of this vital chemical input, threatening deep production cuts across major mining hubs in Chile and Africa.

· Rigid Structural Tech Demand: Providing a hard floor against a total demand collapse are multi-decade, inelastic capital programs. Hyperscale artificial intelligence data center expansions—housing power-dense infrastructure like Nvidia’s HGX systems—are projected to draw massive additional tonnage this year, alongside state-directed electrical grid overhauls that require up to five times more copper per megawatt than legacy power systems.

Copper is not cleanly decoupled from the business cycle; rather, it is highly sensitive to it. However, because near-term mine supply growth has slowed to a crawl against a deep projected refined global deficit for the year, the metal’s price cannot easily collapse. The current high baseline is a highly complex, temporary equilibrium between visible macroeconomic slowing and intense, rolling supply destruction.

Expanding this examination to agricultural and soft commodity futures reveals that the food complex does not signal economic cooling; rather, it actively amplifies resurgent inflation as energy shocks diffuse directly into agricultural curves.

The closure of the Strait of Hormuz directly disrupts agricultural markets via three channels: skyrocketing nitrogen-fertilizer input costs, penalized transport logistics, and intensified biofuel arbitrage. Front-month futures for heavy-input and energy-linked staples like wheat, corn, soybean oil, and palm oil are experiencing sharp price increases as farmers scale back plantings or divert crops to fuel. Conversely, luxury soft commodities like cocoa and coffee are bucking this inflationary trend with downward price corrections driven by bumper harvests and normalizing weather in West Africa and Brazil. Sitting firmly on the inflationary ledger, the cost of beef has surged because elevated corn and diesel prices have drastically raised the cost of animal feed and long-haul transportation, forcing cattle ranchers to pass these compounding expenses directly down the line.

While expanded overland bypass networks like Saudi Arabia’s East-West pipeline and the UAE’s fast-tracked Fujairah routes can mitigate global energy shocks by rerouting millions of barrels of crude, they offer no relief for regional food security. Because the Gulf states rely almost entirely on the Strait of Hormuz to import the bulk of their agricultural staples, a prolonged maritime closure leaves their domestic food supply chains critically exposed, irrespective of how much oil they manage to pipe to the open ocean. In fact, long-term macroeconomic estimates suggest that a multi-season closure could ultimately drive global food price inflation above headline energy inflation. While energy markets can eventually find equilibrium through alternative drilling and reserves, the disruption to the Gulf’s seaborne fertilizer exports—which represent nearly half of the global urea trade—threatens a structural compression of agricultural yields that could trigger a prolonged, systemic global food crisis.

Electricity Prices:

Increases in electricity prices, which outpace inflation preceded and are compounding problems caused by the oil shock. Rates in many parts of the country are increasing at a 5% to 7% annual rate.

The primary structural driver altering this domestic demand curve is the hyper-accelerated buildout of high-compute artificial intelligence data centers. The commercial sector’s thirst for power is expanding so rapidly that the EIA projects commercial electricity consumption will equal residential use this year and fully surpass it next year for the first time in American history.

Rather than maximizing supply for this computational boom, the Trump administration’s regulatory freeze on wind leases, solar tariffs, and clean energy tax credits creates self-inflicted headwinds. Sidelining these low-cost, rapidly deployable technologies restricts domestic energy volume during a period of historic load growth, shooting the economy in the foot by inflating consumer utility bills and undermining American competitiveness.

Electricity prices, like oil prices, impact core inflation with a lag creating a headwind for future inflation.

Corporate Equities:

The stock market, the most analyzed and discussed part of the economy, does not provide clear evidence of where the economy is going. Some sectors and funds appear to be in a bubble that will increase if policy makers decide to adopt expansionary policies. Other sectors and funds could benefit from expansive policies.

The difference is somewhat highlighted by comparing returns on the market weighted S&P 500, VOO which was 25.8% substantially higher than the return from the equal weighted S&P 500 14.5%. The former is dominated by some large tech companies.

The dispersion in returns, the existence of bubble and bust sectors, can be more clearly demonstrated by comparing sector ETF returns.

· The one-year return for a major semiconductor ETF (SMH) is 122.3%,

· The one-year return for a consumer discretionary fund (VCR) is 7.0%.

· The one-year return on a homeowners (ETF) is -7.2%.

Dispersion in returns across sectors and funds is even larger since the onset of the war between March 3, 2026, and May 19, 2026. Between these dates energy VDE has increased by 9.3% and semiconductors SMH has increased by 39.1%. By contrast, consumer discretionary has increased by 1.0% while homebuilders has fallen by a negative -16.6 %.

Even more vividly, the small cap index the Russell 2000, which relies primarily on domestic economic activity and is highly sensitive to interest rates, is now in correction territory. The total drawdown from its previous high is close to 11 percent.

So how should the incoming staff interpret the performance of the stock market when shaping policy given that some sectors are in a bubble and other sectors are distressed? My concern is that a monetary expansion would stimulate the bubble and do little to assist the distressed sectors and could actually worsen the distressed sectors if the monetary expansion led to higher expected inflation and higher interest rates.

Conclusion: The Ultimate Dual-Mandate Dilemma:

The incoming Federal Reserve leadership faces the classic policymaker’s nightmare: clear evidence of slowing aggregate demand and stubborn inflationary pressures existing at the exact same time. Under its dual mandate of price stability and maximum employment, the central bank is being pulled in two opposite directions by an economic matrix that refuses to resolve into a singular trend.

Many market participants including the President of the United States want rate cuts, but various expectations of inflation are elevated. Moreover, central banks do not directly control the long end of the yield curve and changes in long maturity bond yields are not consistent with the desires of investors.

The headline unemployment rate remains historically low at 4.3%, yet new entrants and recent graduates are hitting a brick wall trying to find work. In the equity markets, a massive, soaring bubble in mega-cap technology and semiconductors coexists with substantial distress in small caps and interest-sensitive homebuilders.

This structural fragmentation extends across every major asset class, creating a landscape of profound macro uncertainty. While a geopolitically driven supply shock has pushed retail gasoline and crude oil prices sharply upward, vital industrial barometers like copper have retrenched significantly, signaling a cooling global manufacturing engine.

The new Fed chair will have to coordinate with other global central banks that appear to be tightening, a global backdrop that could easily prevent the immediate interest rate cuts intensely desired by both financial markets and the President. Navigating this cross-current requires recognizing that the signals are genuinely mixed, and any heavy-handed, politically driven domestic policy shift risks breaking one side of the mandate to fix the other.

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Competition in the Education Industry was republished on Economic Memos in December 2025, although the original version was written nearly a decade earlier. The essay applies industrial organization theory to education reform and argues that the central problem in public education is not a lack of competition per se, but the fact that competition has been introduced at the wrong level.

The essay critiques charter schools and broad voucher programs because they attempt to create competition between entire schools. That approach duplicates buildings, transportation systems, administrators, and support staff—functions characterized by substantial economies of scale. In many communities, especially rural areas, the local school is effectively a natural monopoly. Creating multiple competing institutions in such environments can weaken all providers rather than improve outcomes.

The essay proposes an alternative model in which schools function as regulated platforms rather than vertically integrated monopolies. The central policy recommendation can be summarized in a simple phrase: course choice rather than school choice. The school district would continue to provide facilities, transportation, counseling, meals, and extracurricular activities, but students could choose among competing providers for individual courses such as mathematics, physics, foreign languages, or computer science.

The proposed structure is analogous to the one created by the reform of the electric utility industry. Utilities continue to operate the grid, while customers may purchase electricity from competing generators.

In education, the school remains the platform, while instruction becomes a contestable service. Although no state or country has fully reorganized K–12 education into a complete marketplace for individual courses, several jurisdictions have implemented important elements of this model.

In Colorado, Florida, Utah, and Louisiana, students may enroll in approved outside courses while remaining enrolled in their local public schools. In these programs, public funding follows the course, so families generally pay nothing when they choose from the state’s approved list of providers. If a parent prefers that a student take physics from a former NASA engineer rather than the school’s regular physics teacher, the course can be publicly funded if that instructor or organization has been approved by the state or district.

Minnesota’s Postsecondary Enrollment Options program applies the same principle to college coursework. High school students may take courses at colleges and universities at public expense, with no tuition cost to the family.

New Zealand’s Te Kura and Australia’s distance education systems also provide publicly funded access to specialized courses for students who remain enrolled in local schools, particularly in rural and remote communities.

These examples are broadly consistent with the model proposed in this essay, which also contemplates state or district vetting of outside providers. The goal is not an unregulated market in which any instructor automatically qualifies for public funding. Rather, approved providers would need to satisfy standards relating to subject-matter expertise, curriculum quality, student outcomes, and financial integrity. Once approved, these providers would be eligible to compete for student enrollments.

These systems demonstrate that the school-as-platform model is operationally feasible and that course-level competition can be introduced without requiring families to pay twice for education.

The most important barriers in states that have not adopted this model are political. Teachers’ unions and other stakeholders often oppose reforms that could shift students and funding away from traditional classroom assignments. Many policymakers are also reluctant to alter a familiar system when the benefits, while potentially large, are not immediate.

In states that have adopted elements of this approach, the main obstacles are administrative rather than ideological. Funding formulas must allow money to follow individual courses, accountability rules must define who is responsible for outcomes, and districts need systems for scheduling, transcripts, and quality control. These practical challenges slow implementation, but they are fundamentally management issues rather than conceptual flaws in the model.

The federal government could accelerate adoption while preserving local control.

One useful tool would be competitive grants administered by the U.S. Department of Education. States could receive funding to build course marketplaces, modern transcript systems, and interoperable student records that allow students to combine instruction from multiple providers.

Congress could also provide greater flexibility in Title I and other federal education programs. A portion of these funds could be used to purchase approved outside courses for disadvantaged students, giving low-income families access to specialized instruction that is often available only to wealthier households.

Rural education initiatives could help small districts aggregate demand and jointly contract for advanced mathematics, science, language, and career courses. This would be particularly valuable in areas where staffing shortages make it difficult to offer a full curriculum.

The federal government could support the development of common accreditation and data standards so that credits earned from outside providers transfer seamlessly across districts and states. National standards would reduce administrative barriers and increase confidence in course quality.

Research and demonstration projects could identify which course-level competition models most effectively improve student achievement and expand access. Rigorous evaluation would help states distinguish successful approaches from those that do not deliver meaningful benefits.

Continued investment in broadband and educational technology would make it easier for students in underserved communities to access specialized instruction from remote providers.

The federal scholarship tax credit enacted in 2025 may provide an additional mechanism for expanding course-level competition. Beginning in 2027, participating states may authorize Scholarship Granting Organizations to award scholarships to eligible K–12 students for a broad range of educational expenses. Because public school students are eligible, these funds could potentially be used to purchase accredited supplemental courses while students remain enrolled in their local schools. Congress or the Treasury Department could strengthen this connection by clarifying that approved single-course instruction is an eligible expense.

This modification or clarification of the federal scholarship credit is consistent with the argument developed in the original essay: subsidizing individual courses is likely to be more economically efficient than subsidizing the cost of transferring an entire student to a different school.

Private philanthropy could reinforce this model by subsidizing approved courses in areas where the social return is especially high, including mathematics, science, computer programming, engineering, and foreign languages. Foundations, corporations, and individual donors could provide scholarships or endowments that allow students to enroll in accredited supplemental courses at little or no cost.

A philanthropist interested in expanding the number of future engineers, scientists, or multilingual professionals might achieve greater impact by financing thousands of targeted course enrollments than by funding the construction of new institutions. Because the school remains the platform and only the instructional component is subsidized, these investments could leverage the existing public education infrastructure and deliver a high return per dollar spent.

Conclusion

The central insight of Competition in the Education Industry is that education should be reorganized in much the same way as other infrastructure industries. Schools should continue to provide the essential platform—buildings, transportation, counseling, and community -- while instruction becomes a competitive service delivered by diverse providers.

Rather than dismantling neighborhood schools, reform would open them to a broader educational marketplace. This approach preserves local institutions while introducing competition where it matters most: the delivery of learning itself. The future of educational competition lies not in school choice, but in course choice.

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Introduction

The political debate over student debt is trapped in the same kind of ideological and legal stalemate that has long frustrated health care reform, a similarity which results in this essay being analogous to a previous one on the use of the reconciliation process to move health care reform forward.

Progressive student debt proposals rely on broad loan forgiveness that is poorly targeted and fiscally expensive. Many student borrowers do not require large-scale debt cancellation, and the budgetary resources devoted to blanket forgiveness are needed for other national priorities. The Biden Administration’s most ambitious discharge efforts were based on contested legal authority and were quickly struck down by the courts.

Republicans moved sharply in the opposite direction. The student loan repayment system enacted in the 2025 tax bill replaced the SAVE plan with a more restrictive Repayment Assistance Plan (RAP). As a result, Republicans now own both the design of the current system and its consequences.

Recent analyses on this Substack have documented several shortcomings in the new framework:

• RAP repayment periods and total borrower costs are substantially higher, even for borrowers with relatively modest balances.

• Failure to index RAP parameters to inflation will steadily erode the value of available relief.

• Current RAP rules create a significant marriage penalty.

• New borrowing limits on conventional loans impose severe costs on physicians and other professionals during extended training periods.

• Longer repayment periods and the near elimination of forbearance options are likely to increase the number of workers entering retirement with outstanding student debt.

Both political parties have become overly reliant on income-driven repayment (IDR) as the principal mechanism for managing student debt. IDR programs are also administratively complex and discharges do not always occur in a timely manner

The current RAP program requires 360 qualifying monthly payments before discharge, with little or no allowance for forbearance. This structure is likely to result in a growing number of workers entering retirement still carrying student debt a problem which already exists based on a WSJ finding that the average person defaulting on student loans is already nearly 40 years old.

This paper outlines a third-party tax reconciliation approach to student debt that reduces reliance on IDR and encourages faster repayment through conventional amortizing loans. The central objective is to help borrowers eliminate student debt early in their careers so they can begin saving for retirement, purchasing homes, and building long-term financial security. This objective is particularly important for younger workers who may face reductions in future Social Security benefits and therefore will need to accumulate more private savings.

A core principle of this proposal is that student debt reform must balance the interests of borrowers and taxpayers. Borrowers need a repayment system that is fair, predictable, and structured to eliminate debt early in life rather than extending repayment into middle age and retirement. Taxpayers, however, also deserve assurance that federal student lending will remain fiscally responsible and that relief will be targeted toward borrowers who genuinely need assistance.

The current political debate often treats these goals as mutually exclusive. Broad forgiveness proposals can expose taxpayers to very large costs with little targeting, while highly restrictive repayment systems can impose unnecessary burdens on borrowers and increase defaults. The reforms proposed here are designed to strike a middle path: provide substantial liquidity and repayment assistance during the years when borrowers are most financially constrained, while encouraging principal reduction and limiting long-term taxpayer exposure.

The key design principle is straightforward: government support should be concentrated at the beginning of repayment, when it is most effective, and should diminish over time as borrowers gain earning capacity.

The Third-Party Approach

Provision One: Zero-Interest Period for Conventional Loans

All new federal student loans should carry a zero percent interest rate during the first three years of repayment. Borrowers currently in an IDR program who elect to convert to a conventional repayment schedule should also receive a three-year zero-interest period beginning at the time of conversion.

The first several years after graduation are the period when borrowers are most financially constrained. Earnings are lower, housing costs are high, and many borrowers are establishing households and families. Eliminating interest during this period allows all payments to reduce principal directly, substantially accelerating debt reduction.

This reform allows borrowers to initially choose conventional repayment and only move to the IDR option if the conventional option is unaffordable.

The temporary zero-interest period is designed to be fiscally disciplined. Rather than providing indefinite subsidies, the government offers concentrated support during the first three years of repayment, when borrowers are least able to absorb interest costs. By accelerating principal reduction, this temporary subsidy may reduce defaults and future discharge costs.

Provision Two: Repeal the Student Loan Interest Deduction

The federal tax deduction for student loan interest should be repealed.

This deduction primarily benefits upper-middle-income households and provides limited assistance to borrowers facing the greatest financial strain. Because Provision One eliminates interest during the first three years of repayment, most borrowers would receive greater benefits from the zero-interest period than from the existing tax deduction.

Borrowers with existing loans could be grandfathered under current law to avoid concerns about retroactive changes. Alternatively, the deduction could be phased out gradually over several years.

Repealing this deduction offsets part of the cost of the broader reform package and helps ensure that taxpayer resources are concentrated on provisions that directly accelerate repayment.

Provision Three: Delay Eligibility for RAP

Borrowers should not be eligible to enter RAP until they have made three years of payments under a conventional repayment schedule.

Because loans would carry a zero percent interest rate during this period, borrowers would have a meaningful opportunity to reduce principal before entering a long-term IDR program.

This approach ensures that IDR serves as a true safety net rather than the default repayment option for nearly all borrowers.

Requiring three years of conventional repayment protects taxpayers by reserving long-term repayment assistance for borrowers who continue to face genuine financial constraints after making a substantial initial effort to repay.

Provision Four: Five Percent Principal Reduction for Borrowers Who Refinance into the Private Market

Borrowers with either RAP loans or conventional Direct Loans should be eligible for a one-time principal reduction equal to 5 percent of their outstanding federal student loan balance if they refinance their loans into a private student loan after making at least 60 months of on-time payments.

This provision is designed to align borrower incentives with taxpayer interests while encouraging a gradual transfer of seasoned loans from the federal balance sheet to private lenders.

From the borrower’s perspective, the 5 percent reduction provides a meaningful incentive to refinance after establishing a solid repayment history. By that point, many borrowers will have improved credit profiles and more stable earnings, allowing them to qualify for lower-cost private financing.

From the taxpayer’s perspective, this proposal reduces long-term federal exposure by encouraging borrowers to move performing loans into the private market. A limited one-time subsidy may substantially reduce the number of borrowers who remain in RAP for 20 to 30 years and ultimately qualify for partial or full discharge.

The 60-month requirement is not arbitrary. Five years of on-time payments demonstrates a sustained commitment to repayment and provides borrowers sufficient time to stabilize their financial circumstances. It also ensures that the federal government does not subsidize immediate refinancing by borrowers who would likely have exited the federal system without additional incentives.

The principal reduction should be applied directly to the borrower’s federal loan balance immediately before refinancing.

This approach treats federal assistance as a targeted off-ramp from long-term federal repayment programs rather than an open-ended promise of eventual forgiveness. Borrowers receive a clear incentive to eliminate federal debt more rapidly, while taxpayers benefit from reduced credit risk and lower long-term subsidy costs.

Provision Five: Separate RAP Payment Schedules for Married and Single Borrowers

RAP should include distinct payment schedules for married and single borrowers to eliminate the current marriage penalty.

Under current rules, many couples face sharply higher payments after marriage because household income is combined and the RAP percentage is applied to total household income. This discourages marriage and creates inequities between similarly situated borrowers.

A more rational system would widen the lower payment brackets for married couples and apply repayment percentages marginally rather than to all income once a threshold is crossed.

Eliminating the marriage penalty does not increase taxpayer subsidies indiscriminately. Instead, it corrects a structural distortion that penalizes family formation and often pushes borrowers into private refinancing or strategic tax filing decisions. A marriage-neutral system better aligns payments with actual ability to pay while preserving repayment obligations.

A detailed analysis of this issue appears in the Substack article, https://www.economicmemos.com/p/how-to-fix-the-rap-student-loan-marriage.

Provision Six: Index All RAP Parameters to Inflation

All RAP payment thresholds, protected income amounts, and related parameters should be automatically indexed to inflation.

Without indexing, inflation steadily reduces the real value of income protections, causing borrowers to pay a larger share of their earnings over time.

Automatic indexing would preserve the intended structure of the program and prevent hidden benefit reductions.

Indexing does not create new subsidies. It simply maintains the original balance between borrower and taxpayer obligations that Congress intended when the program was enacted.

A discussion of the failure to link RAP payments to inflation appears in this Substack article, https://www.economicmemos.com/p/inflation-and-the-rap-trap-how-rising

Provision Seven: Fixed 4.5 Percent Interest Rate on Federal Student Loans

Federal student loans should carry a fixed 4.5 percent interest rate rather than rates linked to the May 10-year Treasury yield.

The federal government is better equipped than individual borrowers to absorb interest-rate risk. Market-based rate adjustments create unnecessary volatility and can significantly increase borrowing costs during periods of higher interest rates.

A stable 4.5 percent rate would provide predictability and reduce borrowing costs without introducing significant fiscal risk.

The objective is not to eliminate taxpayer compensation but to establish a stable and transparent rate that preserves a reasonable federal return while protecting borrowers from excessive interest-rate fluctuations.

Provision Eight: Treasury or IRS Installment Plans After 20 Years

Borrowers who still carry balances after 20 years of repayment should be allowed to transfer those balances to a Treasury or Internal Revenue Service installment plan with a very low interest rate.

This reform would:

• Provide a simplified collection system.

• Lower interest costs for older borrowers.

• Reduce administrative burdens on the Department of Education.

• Prevent defaults among borrowers approaching retirement.

This approach also recognizes that, under current law, forgiven student debt may generate tax liabilities, meaning many borrowers ultimately owe money to the Treasury regardless.

Taxpayers benefit because Treasury and IRS installment systems are well established and may improve collection rates while reducing administrative costs.

Provision Nine: Reform Chapter 13 Bankruptcy Treatment

Chapter 13 bankruptcy plans should be required to allocate a meaningful share of disposable income to student loan repayment.

Under current practice, unsecured creditors such as credit card issuers may receive substantial payments while student loan balances continue to grow. Requiring some payment toward student debt would improve repayment outcomes and better reflect the public nature of federal student lending.

Because this reform affects federal loan recovery rates, it may be suitable for inclusion in budget reconciliation legislation, subject to parliamentary review.

Budget Reconciliation Considerations

Budget reconciliation rules limit legislation to provisions with direct effects on federal spending or revenues. Most proposals outlined in this paper should satisfy this requirement because they alter:

• Federal loan subsidy costs.

• Tax expenditures.

• Interest receipts.

• Loan recovery rates.

• Treasury collection revenues.

Some provisions, particularly bankruptcy reforms, may face procedural scrutiny under the Byrd Rule. However, the majority of the package appears well suited for reconciliation.

Conclusion

The student debt debate has become polarized between expansive forgiveness proposals and increasingly burdensome repayment systems. Both approaches rely too heavily on income-driven repayment and postpone debt resolution far into borrowers’ working lives.

A third-party tax reconciliation approach offers a more practical alternative. By providing a temporary zero-interest period, encouraging early principal repayment, indexing repayment protections, eliminating marriage penalties, and creating a low-cost Treasury payment option for older borrowers, policymakers can help borrowers retire their debt much earlier.

This proposal rejects both indiscriminate loan forgiveness and excessively punitive repayment systems. The goal is to create a student loan framework that offers targeted assistance when borrowers are most vulnerable while preserving strong incentives for repayment and protecting taxpayers from unnecessary long-term subsidy costs. Student debt reform should be judged not only by how much relief it provides, but by whether it balances fairness to borrowers with responsible stewardship of public resources.

Although this paper does not address every problem in the federal student loan system, some issues -- such as the financing challenges faced by physicians and other professionals during lengthy training periods -- deserve further attention. These borrowers often carry exceptionally large balances while earning relatively modest incomes during critical early career years. The reforms proposed here substantially improve their circumstances, but additional targeted measures may be warranted. No single reconciliation package can solve every problem simultaneously. The objective of this paper is to identify a practical set of reforms that materially improves the current system while remaining fiscally responsible and legislatively achievable.

The central goal is straightforward: student debt should be a temporary obligation that facilitates educational opportunity, not a financial burden that persists into middle age and retirement.

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Introduction:

A recent post at this blog, Student Loans and the Marriage Incentive Problem, showed that the newly enacted Repayment Assistance Plan (RAP) creates a substantial marriage penalty for people with student debt. While the program was intended to streamline the federal system, its mechanical design creates a massive “marriage tax” for couples walking down the aisle in 2026. This post documents the financial impact of marriage on borrowers and proposes specific policy fixes to restore marriage neutrality to our student loan system.

The RAP Program:

Two differences between the new RAP student loan program and previous Income Driven Replacement (IDR) loan programs create a financial penalty for married people, which discourages people to get married when one or more person, have student debt.

Previous Income-Driven Repayment (IDR) plans were based on “discretionary income”—a concept that shielded a portion of your earnings (usually 150% to 225% of the poverty line) from any payment calculation. RAP eliminates this shield. Instead, it applies a graduated payment percentage to your entire household Adjusted Gross Income (AGI), thereby increasing student debt payments when household income rises due to marriage.

RAP uses a graduated payment schedule tied to income and applies the repayment percentage directly to total income.

The Current Graduated Tiers:

• Up to $10,000: $10 monthly minimum

• $10,001 – $30,000: 1% of total AGI

• $30,001 – $50,000: 4% of total AGI

• $50,001 – $75,000: 7% of total AGI

• $75,001 – $100,000: 9% of total AGI

• Over $100,000: 10% of total AGI

RAP is an “all-or-nothing” system: once your income hits a new tier, the higher percentage applies to every dollar you earn, not just the incremental amount. Because these rates apply to the entire household income and lack an incremental structure, marriage acts as a “bracket-shifter” that can instantly double or triple a borrower’s monthly bill.

Additional features of RAP (beyond the income calculation and tier structure):

• Minimum payment requirement of $10 per month, including for very low-income borrowers

• Interest waiver: waives interest when a borrower’s required payment does not fully cover accruing interest

• Principal reduction support: up to $50 per month may be applied toward principal even when payments are low

• Negative amortization protection: loan balances are prevented from growing due to unpaid interest

• Forgiveness after 360 months (30 years) of qualifying payments

• Elimination of most deferment options for newer loans, including unemployment and economic hardship deferments

• Forbearance limits: capped at 9 months within any 24-month period

• Dependent credit: $50 monthly payment reduction per qualifying dependent

• Spousal income integration: household income used when filing jointly

• Spousal allocation rule: when both spouses have RAP loans, total payments are divided based on relative loan balances

The Marriage Penalty

The RAP program replaces multiple previous IDR programs to create a simpler repayment framework, but it introduces a severe financial penalty when one or more individuals enter a marriage with RAP student debt.

A Representative Case Study

Consider a graduate with $35,000 in RAP debt earning $40,000 a year. As a single filer, they pay $133/month (4% tier). They marry a partner with no debt who also earns $40,000. Together, their $80,000 AGI pushes the borrower into the 9% tier.

• Current RAP Penalty: Their payment jumps to $600/month.

The severity of this payment spike isn’t uniform; it depends entirely on how a couple’s debt is distributed, whether one or both spouse has debt and how much debt.

While this higher payment technically reduces the loan balance quicker and speeds up repayment, it comes at a significant cost. This involves one spouse effectively subsidizing the other, which is fundamentally unfair. More importantly, for a young couple starting a life together, this jump is often unaffordable and creates a massive liquidity crisis.

Beyond the Baseline: The Need for Empirical Research

While the example above illustrates the mechanical “jump” caused by the RAP tiers, the real-world impact varies wildly across different household configurations. We must acknowledge the vast array of student debt pairings that face unique financial hurdles:

• The Debt-Asymmetry Gap: A physician with high debt but high earning potential marrying an educator with modest debt.

• The Dual-Professional Trap: An MBA and a JD both entering marriage with six-figure balances, where combined incomes trigger the maximum 10% “success tax” on every dollar earned.

• The Low-Income Liquidity Squeeze: Two public service workers whose combined income barely crosses a tier threshold, yet triggers a payment increase that wipes out their ability to save for basic emergencies.

The sheer variety of these combinations—where debt levels, interest rates, and income disparities collide—highlights a critical gap in our current policy understanding. Detailed empirical research on marriage penalty examples is urgently needed to quantify how many households are being forced into “strategic non-marriage” or private refinancing simply to survive the RAP algorithm.

Potential Policy Fixes:

To keep the RAP program from becoming a deterrent to family formation, we need to restructure the engine under the hood using three distinct pillars.

We can reduce the marriage penalty with two adjustments.

First, the payment percentage on the RAP loan should be applied to incremental income above each new tier rather than total income.

Second, the bottom bracket or brackets could be widened. For example, the lowest bracket would be $10,000 if single and $20,000 if married with the higher married brackets shifted up by $10,000.

By implementing a $20,000 floor and shifting to marginal brackets, the payment in our case study would drop from $600 to approximately $210/month.

The married couple still pays more than the single filer ($210 vs. $133), but the increase is indexed to their actual ability to pay. This preserves essential household liquidity while still ensuring a faster repayment track than the single filer—creating a “marriage neutral” system that benefits both the family and the taxpayer.

The analysis here centers on one representative couple but there are countless other cases defined by various asymmetries in debt and income, which wil produce different outcomes.

The RAP modifications considered here are not the only way to fix the marriage penalty and do not correct for the full range of problems.

Conclusion: On the need to fix a poorly designed program

The marriage penalty is not an isolated glitch; it is a structural symptom of a program that is fundamentally poorly designed. I have written extensively on the various “RAP Traps” that now define the federal student loan landscape, and the picture they paint is increasingly draconian:

The RAP brackets are not indexed to inflation, meaning that as nominal wages rise, borrowers are pushed into higher repayment tiers even as their real purchasing power stays flat. See this paper on how inflation will fairly quickly undermine the RAP program.

The program’s reliance on AGI effectively discourages the use of Roth assets, forcing a choice between long-term financial health and immediate monthly survival.

The RAP program can result in four times the cost and twice the time to repay compared to the now defunct SAVE plan for many borrower with relatively modest income and debt levels.

Most student borrowers starting their careers face two primary hurdles: relatively low initial salaries and a desperate need for liquidity to start a family. While politicians across the spectrum, including our Vice President, consistently emphasize the importance of young adults forming families, the reality is the current RAP program does not work on a wide range of levels including incentivizing marriage.

Author’s Note: Going on vacation for a couple of weeks but when I return one of the first items on the agenda will be the creation of a paper listing the provisions of a tax reconciliation bill that will modify the RAP program, to rectify these problems. This is entirely feasible and consistent with Senate rules, because as you know RAP itself was enacted through the reconciliation process. In the meantime, you have access to a blog with a lot of timely information on policy personal finance and politics.

· The Pardon Power: From Hamilton’s Mercy to Political Currency

· The 2026 Midterm Outlook: Structural Shifts to Policy Stalemate

· Crucial Financial Decisions

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Current legislative efforts to close the “caregiver gap”—specifically the Improving Retirement Security for Family Caregivers Act and the Catching Up Family Caregivers Act—rely on a fundamental misunderstanding of household economics. By focusing on increasing contributions to managed retirement accounts, Congress provides a windfall for investment firms while ignoring the practical needs of families.

• The Savings Paradox: It is fundamentally illogical to “motivate” additional retirement savings at the exact moment a caregiver’s income has dropped or disappeared. Policy should instead focus on increasing general IRA contribution limits during high-earning years and creating parity between IRA contributions and 401(k) contributions.

• The “SECURE” Playbook: Like the SECURE Acts 1.0 and 2.0, these new bills prioritize keeping assets locked in high-fee, firm-sponsored plans rather than facilitating debt reduction or flexible liquidity.

• The Liquidity Penalty: Caregivers are often forced to raid retirement accounts for survival, yet the tax code continues to punish them with penalties. A superior approach would replace tax penalties with a cap on allowable pre-retirement distributions to protect core balances while allowing emergency access.

• The Mortgage Priority: For many households, mortgage elimination provides far greater retirement security and tax-free cash flow than a marginally larger, volatile, and fully taxable retirement account.

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Current Legislative Proposals

Two primary bipartisan bills, reintroduced in April 2026 by Senators Mark Warner (D-VA) and Susan Collins (R-ME) along with Representatives Brittany Pettersen (D-CO) and Maria Elvira Salazar (R-FL), represent the latest attempt to fix the retirement gap through asset accumulation:

1. Improving Retirement Security for Family Caregivers Act (H.R. 8274): This bill targets the “earned income requirement.” Currently, IRA contributions are capped at the lesser of the annual limit ($7,500 in 2026) or the individual’s earned income. This bill allows a “qualified family caregiver”—defined as someone providing at least 500 hours of unpaid care with fewer than 500 hours of paid employment—to contribute up to the full $7,500 Roth IRA limit even with zero earned income.

2. Catching Up Family Caregivers Act (H.R. 8273): This bill addresses the “catch-up” tiers. While SECURE 2.0 created a “peak” catch-up limit (currently $11,250 for those aged 60–63), this bill would grant caregivers returning to the workforce up to five additional years of eligibility for these maximum catch-up levels, regardless of whether they meet the standard age requirements.

Comment One: Existing Landscape. The current tax framework for caregivers is defined more by its limitations than by its actual support, creating a significant policy gap for middle-class families. To understand the proposed legislation, one must consider it against these existing features:

• The Work Mandate: Benefits like the Child and Dependent Care Credit are strictly tethered to employment; they only offset expenses incurred to enable the taxpayer to work. For a caregiver who leaves their job to provide care personally, the available relief is zero.

• The $500 Ceiling: The Credit for Other Dependents—the primary vehicle for those caring for elderly parents—is a mere $500 and is strictly limited by the care recipient’s income, which must be below $4,700 for the 2026 tax year.

The Credit for Caring Act, which proposes up to a $5,000 non-refundable tax credit for eligible caregivers, has effectively languished in committee since its reintroduction. To qualify, a caregiver must have an earned income of at least $7,500 for the year, a requirement that offers no relief to those whose caregiving duties have forced them entirely out of the workforce.

Comment Two: Investment Priorities and the IRA Disparity. The newest legislative proposals for caregivers, much like the SECURE Acts 1.0 and 2.0, appear designed to prioritize the growth of assets under professional management rather than the immediate financial health of the workers. This approach favors the investment industry while leaving several critical structural issues unaddressed:

• The IRA-401(k) Disparity: The proposals do not adequately address the gap in allowable contributions between people reliant on IRAs and people with access to 401(k) plans.

• Fee Extraction in Managed Plans: SECURE Act provisions that mandate automatic enrollment and delay Required Minimum Distributions (RMDs) do not also mandate automatic rollovers to low-fee accounts often leading to substantial loss of retirement income.

• Riskier Investment Options: Recent Congressional proposals and executive orders from the Trump Administration will allow 401(k) investors greater access to risky probably unsuitable investment options.

Congress tends to favor these investment-linked frameworks because they are easier to label as “bipartisan retirement wins” without requiring direct government outlays. However, the result is a system that treats retirement security as a byproduct of asset management fees, prioritizing the stability of investment firms over the practical, liquid needs of families facing a caregiving crisis.

Readers interested in learning more about how Congress tends to prioritize the needs of Wall Street firm over the needs of household should read the essay Evaluating the Secure Act 2.0.

Comment Three: Provisions for additional contributions will have limited effect.

The proposal to allow caregivers to contribute to a Roth IRA without earned income appears to overlook existing spousal IRA provisions and the actual financial constraints of long-term caregivers.

• Existing Spousal Benefits: Under current law, a non-working spouse can already contribute to either a Traditional or Roth IRA based on the working spouse’s earnings. The spousal IRA effectively removes the individual earned income requirement for married couples filing jointly, making the new proposal redundant for most married caregivers.

• The “Single Caregiver” Gap: While the proposal would technically expand Roth eligibility to single caregivers without income, these individuals—often surviving on limited savings or public assistance—are the least likely to have the discretionary funds required to contribute.

A more effective way to help caregivers prepare for retirement is to address the systemic disparity in contribution limits. Currently, 401(k) limits are significantly higher than IRA limits ($24,500 vs. $7,500 in 2026). Increasing general IRA limits would allow caregivers to save more aggressively when they are actually in the workforce, creating a larger “war chest” before they have to step away for family needs.

Ultimately, motivating additional savings at the exact moment a caregiver’s income has dropped or disappeared is a fundamental policy mismatch. Instead of niche provisions that look good on paper but offer little practical benefit, the government should focus on a general lifting of IRA contribution limits and the removal of the liquidity traps—taxes and penalties—that prevent families from using their own life savings to manage a caregiving crisis.

What is a spousal IRA? This video provides a concise overview of how spousal IRAs work under current law, illustrating why adding separate caregiver provisions may be redundant for many married couples.

Can You Fund a Roth IRA After You Retire?

Rob Berger · 9.9K views

Comment Four: Improve retirement outcomes by replacing tax penalties on disbursements with limits on overall disbursements

We currently live in a system that “motivates” contributions with generous tax incentives, imposes substantial penalties on withdrawals prior to age 59 ½, and has absolutely no limit on the amount that can be withdrawn prior to retirement.

Caregivers facing financial emergencies are often forced to raid their retirement accounts, only to be hit with taxes and premature distribution penalties.

We should eliminate the existing tax penalties on premature distributions. In their place, a simple “maintenance rule” could suffice—for example, requiring that at least 30% of total contributions remain in the account until age 59½, while allowing penalty-free access to the rest.

This approach is a fairer and more effective way to balance the need for people to save for retirement with the need for funds during emergencies including periods of high expenses when a person must leave the workforce to care for a family member.

Comment Five: The Mortgage-Catch-Up Tradeoff. The bipartisan focus on expanding “catch-up” contributions for caregivers ignores a critical alternative for retirement security: the elimination of mortgage debt. For many households, the most significant driver of financial stability in retirement is not the size of their managed portfolio, but the elimination of fixed cash obligations.

• The Tax-Liquidity Paradox: Carrying a mortgage into retirement creates a fixed, non-negotiable cash requirement. When this payment must be sourced from traditional, fully-taxed retirement accounts, it triggers a cascade of negative tax effects—increasing the share of Social Security benefits that are taxed and potentially pushing the retiree into a higher bracket. In contrast, paying off a mortgage prior to retirement reduces the required withdrawal rate, effectively lowering the household’s tax burden and exposure to market volatility.

• The Disparity in After-Tax Resources: A retiree reliant on traditional assets may find that nearly half of their after-tax income is consumed by a mortgage payment. While Roth assets can mitigate this early-retirement cash flow squeeze, most households enter retirement with limited Roth balances. For these families, funds used for “catch-up” contributions in their final working years might be more effectively used to retire the mortgage, creating immediate “tax-free” cash flow upon retirement.

• Insulation from Tax Creep: Because Social Security taxation thresholds are not indexed to inflation, taxes on retirement income rise faster than inflation. A household with a mortgage and a traditional retirement account sees its purchasing power erode by 15–18% over the first decade, compared to only 6–8% for a Roth-heavy or debt-free household.

The current legislative push assumes that more “savings” is always the solution. However, workers are often better served by achieving debt-free homeownership before they exit the workforce. If Congress wants to support caregivers and retirees, it should recognize that mortgage elimination provides a more tangible margin of safety than a marginally larger, high-fee retirement account and should create more appropriate tax incentives. More on this issue can be found here.

Concluding Remark: The current legislative push for caregivers is a classic example of “Doing Something” while solving nothing. By doubling down on the SECURE Act framework, Congress is merely inviting families to lock more of their dwindling liquidity into high-fee managed accounts. True reform would prioritize household flexibility—lifting IRA contribution limits during high-earning years, removing the IRS “penalty trap” for emergency access, and recognizing that for most families, a paid-off mortgage is the most reliable retirement plan money can buy.

This is not just a platform of ideals; it is a pragmatic legislative strategy. By securing a “kingmaker” block of 20 to 30 House seats, we can force Congress to select a consensus Speaker and bypass partisan gridlock to pass meaningful reform with a simple majority.

Our work begins with healthcare. We have developed a rigorous draft of a new program that replaces inefficient subsidies with federal catastrophic protection, universal portability through the merger of employer and marketplace insurance, and a national pediatric foundation through universal CHIP. The plan further expands Medicaid to 200% FPL while introducing fiscally optimized Premium Tax Credits designed to eliminate the “subsidy cliff” and protect taxpayers from over-spending. Finally, it ensures equal tax treatment via above-the-line deductions for the individual market and the modernization of flexible savings accounts.

This proposal will be less expensive than many realize because these new subsidies and reforms are fundamentally more efficient than the legacy systems they replace. Comprehensive reform is a structural necessity; it addresses not only the immediate hardships of the uninsured and underinsured but also the systemic impact of medical debt. By depleting household liquidity, medical debt prevents families from building the private savings required for retirement. Solving this crisis is a prerequisite for stabilizing and reforming Social Security, which currently faces an insolvency crisis.

This is the first of several modules in a total tax code overhaul aimed at addressing student debt, retirement adequacy, energy supply, and environmental sustainability while stabilizing the national debt.

A Third-Party Tax Reconciliation Approach to Health Care

Introduction

Democrats and Republicans have long been divided by fundamentally different economic philosophies, leaving the American family caught in the crossfire. Republican policymaking has traditionally centered on tax cuts and a smaller federal government, often prioritizing market-based solutions even when they impose significant financial risk on households. Conversely, Democratic policymakers have focused on expanded federal spending, with a progressive wing often unwilling to consider trade-offs and a centrist wing struggling to craft permanent reforms that survive changes in administration.

The result is a “one step forward, two steps back” cycle. The Trump Administration and Republican Congress dismantled Biden-era expansions, while progressives continue to champion an economically unrealistic “Medicare-for-All” model.

The current political situation does not address major market imperfections impacting health care and insurance.

• Insurance is tied to a specific employer resulting in either loss of all insurance or loss of access to current medical provider with every job transition.

• The employer-based tax subsidy is more generous for more affluent individuals.

• People with state exchange coverage lose all subsidies if income exceeds 400 percent FPL.

• Private markets are distorted by the “catastrophic risk” of the most expensive 1% of cases.

• Family plan premiums are extremely high and could be reduced through increased use of the Children’s Health Insurance Program (CHIP)

• Restrictions on the use of Medicaid increase the number of the uninsured and costs to both low-income households and taxpayers subsidizing private insurance.

• Health care subsidies are too low for self-employed and gig workers.

• Many people with comprehensive health insurance coverage still have high out-of-pocket health care costs.

The following seven provisions establish a fiscally responsible, market-oriented framework to modernize American health care. By utilizing the tax reconciliation process, we can integrate these reforms into a single, cohesive “Health Care Clearinghouse” model.

This shift represents a fundamental pivot in federal policy: we are systematically reducing our reliance on opaque, tax-code-based employer subsidies—which disproportionately benefit the affluent—and replacing them with a suite of more efficient, direct programs. By stripping away the market imperfections that drive up costs, these provisions incentivize superior market outcomes, rewarding consumer agency and fiscal transparency while ensuring a robust safety net for all Americans.

Seven Features of the third-party health care proposal:

1. A Federal Catastrophic Healthcare Subsidy

The Concept: A permanent federal program designed to absorb the “tail risk” of high-cost medical cases. While the ultimate goal is a broad-based subsidy (e.g., paying 50% of costs over $50,000), this framework is designed for a gradual phase-in. Initial versions could be more targeted—starting with a smaller reinsurance pool or a reinsurance scheme focusing specifically on high-cost chronic diseases —to ensure fiscal stability while the market adjusts.

Crucially, this benefit is applied exclusively to state exchange health insurance plans. By providing this federal “backstop” only within the exchange market, we create a powerful market incentive for employers to shift toward the new employer subsidy of state exchange insurance and away from the firm-specific employer subsidy as described in Pillar 2.

Why This is a Fairer, Smarter Way to Fund Healthcare

Employers are currently trapped in expensive, rigid, firm-specific policies. By offering a federal catastrophic subsidy only for exchange-based plans, we provide a massive financial incentive for firms to subsidize their employees’ portable state exchange coverage (created in pillar two of this proposal) instead of continuing to offer health insurance tied to the firm.

Currently, the tax break for employer-based insurance is worth more to high-income earners in high tax brackets and less to lower-income workers. This proposal provides the same level of protection to a janitor as it does to a CEO, effectively giving lower-wage workers a much-needed boost in the value of their coverage.

The state exchange premium tax credit is not applied to people with income over 400 percent FPL (around $60,000 for a single person). The catastrophic reinsurance benefit provides some support, in the form of lower premiums, to all households and reduces the need for enhanced credits.

The reinsurance subsidy by reducing premiums reduces the premium tax credit. The reduced premium tax credit offsets part of the cost of the new subsidy.

The reinsurance subsidy, because government is sharing in the cost of the riskiest cases, reduces incentives for firms to cherry pick health customers, to narrow networks, and to create high prior authorization hurdles.

The risk sharing creates incentives for more insurance firms to enter state exchange markets and to lower premiums.

A gradual increase in the reinsurance share of health insurance premiums could lead to a transition towards a single-payer system.

2. Universal Portability: Merging Employer and Marketplace Insurance

The Concept: This reform merges the “Work Insurance” and “State Exchange” worlds into a single unified market, allowing employer contributions for premiums, maintaining an employer mandate but tying health insurance to the individual or family not the job.

The Framework

• The tax code is modified to allow for tax free contributions to state exchange health insurance rather than firm-specific policies.

• Large employers (50+ workers) are required to pay at least 60 or 70 percent of premiums but they don’t have to manage the plan. (This is a revised employer mandate.)

• People without an employer subsidy or people who could not afford state exchange insurance would have access to a modified premium tax credit.

Why This is Fairer and Better

People maintain access to the same insurance policy regardless of their employment status as long as they maintain premium payments. (Subsidies in the form of an increased premium tax credit kick in for people who lose employer-based subsidies)

The maintenance of continuous coverage allows people to keep their insurance providers if they change jobs, ends job lock (a situation where people don’t switch jobs to maintain insurance coverage) and prevents immediate loss of insurance from layoffs.

The use of employer subsides for state exchange health coverage increases options for many employees who often have only one option from their employer plan.

The reliance on state exchanges reduces costs and paperwork and may incentivize smaller firms to offer health subsidies. The approach also creates a predictable benchmark premium for small employers.

3. Universal CHIP: A National Pediatric Foundation

The Concept: We expand the Children’s Health Insurance Program (CHIP) to act as the primary insurer for all children, in households with state exchange health insurance regardless of their parents’ employment. For affluent families, CHIP becomes a high-quality, “buy-in” option. They pay an income-adjusted premium that is often lower than private insurance but higher than what lower-income families pay, ensuring the program is self-sustaining and fair across all tax brackets.

Why This is Fairer and Better

It is significantly cheaper for the government to cover a child through CHIP than to subsidize that same child on a private Marketplace plan. By moving dependents into CHIP, we drastically reduce the total cost of Premium Tax Credits (PTC), making the entire healthcare system more fiscally sustainable.

CHIP is designed specifically for kids, covering essential developmental screenings, dental, and vision that private plans often skimp on. This ensures a “CEO’s child” and a “janitor’s child” both have access to the same gold-standard pediatric network.

Appropriate regulations would guarantee that the CHIP network is very broad. (Regulations could in fact mandate that all doctors accept CHIP coverage.)

4. Expanding Medicaid for more lower income households throughout the country.

The Concept: Expand Medicaid coverage to 200 percent FPL and provide a permanent more generous federal match in all states. Have the reinsurance program pay costs for a percent of all Medicaid costs above the threshold.

Why This is Fairer and Better

In economics, a Pareto improvement makes at least one person better off without making anyone worse off. This proposed reform is potentially Pareto improving.

The government could save money because the cost of Medicaid is lower than the cost of the premium tax credit for state exchange health insurance.

The expansion of the Medicaid program would allow for a new higher floor on the state exchange health insurance premium tax credit equal to the current reimbursement rate for people at 200 percent FPL.

Medicaid is more suitable than private insurance for most lower-income households, who cannot afford high deductibles and who frequently lose eligibility for Medicaid due to changes in income.

Opposing this expansion is fiscally irrational. Using private tax credits to cover this income group is like using a luxury sedan to haul gravel—it’s the wrong tool for the job. Medicaid is built for this specific demographic, offering the comprehensive benefits and low cost-sharing they need to stay in the workforce.

5. Right-Sizing the Premium Tax Credit (PTC)

The Concept: The Premium Tax Credit is redesigned to account for the new subsidies -- the new reinsurance program, the expanded CHIP program, and expanded Medicaid. The new subsidy is a sliding scale of income for households between 200 % FPL and 600 % FPL.

Why This is Fairer and Better

Households under 200% FPL transition to Medicaid. The expensive “cost-sharing reductions” and high PTCs currently spent on this group are redirected toward the more efficient Medicaid expansion.

Because the Federal Catastrophic Subsidy (Pillar 1) lowers the underlying cost of insurance for the entire market, the “gap” the PTC needs to fill is much smaller for every household.

The current 400% FPL subsidy cliff is moved to 600% FPL. This provides a safety net for the “squeezed” middle class while maintaining a clear endpoint for federal assistance. A cliff still exists but it hits at a higher income level and leads to a less drastic fall than the current cliff.

6. Equal Tax Treatment: Above-the-Line Deduction for the Individual Market

The Concept: We introduce a universal Above-the-Line” deduction for all health insurance premiums paid in the individual market to disparities in health insurance subsidies between people with and without employer based subsidies.

Why This is Fairer and Better

Currently, if an employer pays $1,000 for your insurance, it’s tax-free. If a freelancer earns $1,000 and buys the exact same plan, they must pay income and self-employment taxes on that money first. This is a structural bias that punishes entrepreneurship. This reform reduces that inequity.

With over one-third of the American workforce now engaged in independent work, our tax code is stuck in 1950. This deduction is tied to the individual, not a specific business entity, allowing workers with multiple income streams (e.g., a part-time job plus consulting) to easily claim the benefit.

Many independent contractors earn too much for PTC subsidies but are still crushed by high premiums. This deduction provides them with meaningful relief, recognizing that a $15,000 premium is a legitimate “cost of doing business” for a self-employed person.

By making the deduction “Above-the-Line,” we remove the need for complex “S-Corp” workarounds or expensive tax professionals. It makes the “cheapest” way to buy insurance also the “easiest.”

By lowering the “effective cost” of insurance for the self-employed, we encourage more healthy, young entrepreneurs to enter the individual market. This creates a more stable and diverse risk pool, which helps lower premiums for everyone.

Critics of previous proposals (like those seen in early versions of the Tax Cuts and Jobs Act) warned that a deduction could be less valuable than a credit for low-income earners. Our plan solves this by using the deduction as a complement to the PTC, not a replacement.

Deductions naturally offer more value to those in higher tax brackets. However, in our unified framework, lower-income workers are already protected by Medicaid (Pillar 4) and enhanced PTCs (Pillar 5). The deduction serves as the specific “fairness tool” for the middle and upper-middle class who currently receive the least help.

7. Modernizing and Expanding Flexible Savings (FSAs) and Health Savings Accounts (HSAs)

The Concept We transform FSAs and HSAs from passive storage accounts into active, consumer-driven Health Wallets. This includes eliminating use-or-lose rules, allowing accounts to directly pay for insurance premiums and Direct Primary Care (DPC), and introducing a Feldstein-Gruber Major Risk tier. In this tier, higher-income individuals opt for higher deductibles in exchange for significantly expanded tax-free contribution limits, shifting the focus from routine small-claim processing to protection against major financial shocks.

The provision restricting FSAs to employer-based plans is removed from the tax code allowing their use in state-exchange health insurance plans, which will become the new baseline venue for the provision of health insurance to working-age people and their households.

The Framework

• Legislative language will establish new regulatory authority allowing HSA and FSA trustees to act as fiduciary agents. These accounts would be empowered to directly shop and pay for health plans that offer the lowest cost for a user’s specific prescriptions or chronic care needs, and to automate monthly Direct Primary Care (DPC) membership fees.

• Following the Feldstein-Gruber model, high-income earners can opt into Major Risk plans with higher deductibles and a corresponding 7.5%–10% of AGI contribution cap for their HSA/FSA. This encourages healthy, high-earners to self-insure for routine care while maintaining a robust tax-advantaged backstop for catastrophic events.

• A new rule allows people to either keep unused FSA balances forever or rollover funds into a non-deductible conventional IRA, ending the year-end panic spending on unneeded supplies.

• Modify IRS rules to allow for the use of FSA/HSA funds for all health insurance premiums, including state exchange plans. Current law largely restricts this to COBRA or unemployment periods.

• Lower-to-middle income households receive an annual government seed contribution of $500 to $1,000 to their account to ensure they have liquidity for immediate out-of-pocket needs.

Why This is Fairer and Better

The use-or-lose FSA stipulation currently incentivizes people to buy unneeded procedures at year-end. These changes allow the worker to keep funds for future health or retirement needs, reducing the tradeoff between current health and future security.

The ability to roll over funds into a retirement account makes these plans highly attractive to younger individuals, keeping them in the risk pool and stabilizing premiums for everyone.

As highlighted by recent trends in DIY healthcare, more Americans are finding success by negotiating cash prices and using DPC. This reform legitimizes and scales that model by making those payments tax-free automated, and managed by professional agents employed by FSAs or HSAs.

Current law links FSAs to employer-based plans, making work insurance artificially superior to the individual market. This reform levels that playing field, making state exchange plans more attractive.

The Feldstein-Gruber framework incentivizes higher-income individuals to be more judicious with routine healthcare spending, which exerts downward pressure on prices across the entire system.

Feldstein, Martin, and Jonathan Gruber. “A Major Risk Approach to Health Insurance Reform.” NBER Working Paper No. 4852, September 1994.

Link: nber.org/papers/w4852

Direct PDF: Download Full Text

Conclusion

The current American healthcare landscape is a byproduct of decades of ideological gridlock, leaving families to navigate a fragmented system where coverage is tied to employment, subsidies are inequitably distributed, and catastrophic costs remain a constant threat.

This proposal addresses these systemic failures by solving the “job lock” dilemma through universal portability, eliminating the “subsidy cliff” for the middle class, and providing a robust federal safety net for high-cost medical cases. By integrating employer contributions with state exchanges, expanding the role of CHIP and Medicaid, and modernizing FSAs, we create a market-oriented framework that prioritizes the patient’s needs.

This proposal moves beyond the “one step forward, two steps back” cycle of partisan healthcare debates. By replacing the regressive structure of employer-based tax breaks with a targeted, multi-pillar subsidy model, we eliminate the distortions that have plagued the private market. This transition incentivizes insurers to compete on value rather than risk-avoidance and empowers individuals to navigate their own care, aligning federal spending with health outcomes rather than institutional inertia.

The path to enacting these reforms is more realistic than the current political climate might suggest. These provisions primarily involve adjustments to tax credits, deductions, and federal outlays, which can be enacted through the tax reconciliation process. A third party could force the issue by obtaining 20 or 30 seats in the House of Representatives creating a situation where they could force the election of a consensus Speaker.

Democrats would prefer a third-party Speaker over a Republican, and Republicans would prefer a third-party Speaker over a Democrat. This leverage allows us to bypass partisan obstruction and bring this common-sense legislation to the floor in the House. The Senate could, under its rules, pass a tax reconciliation vote with a simple majority.

However, significant work remains. We must move beyond the conceptual phase to consider various policy alternatives, conduct rigorous cost estimations, and draft the precise legislative language required for a reconciliation bill. Furthermore, this initiative is not limited to healthcare; it is the first step in crafting a comprehensive tax reconciliation bill that addresses the entire tax code.

Our goal is to ensure that federal revenue is adequate to tackle the defining challenges of our era—including student debt relief, retirement security, and environmental protection—while simultaneously reigning in deficit spending to stabilize the national debt trajectory.

To turn this vision into a reality, I need your direct support. Building a movement that can challenge the political duopoly and perform the complex policy work described above requires resources. Your paid annual subscription of $48 (with coupon) is not just a fee for information; it is a strategic investment in the future of your country. It is a far more effective use of your capital than a contribution to any individual candidate, as it funds the structural reform necessary to fix the system itself. Together, we can move past the cycle of “one step forward, two steps back” and build a healthcare system that works for every American.

#HealthcareReform #TaxReconciliation #UniversalPortability #FederalCatastrophicSubsidy #UniversalCHIP #MedicaidExpansion #PremiumTaxCredits #EconomicMemos #FiscalPolicy #ThirdParty #BudgetReform

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In the April 3, 2026, editorial “The ObamaCare Crisis That Isn’t,” the Wall Street Journal Editorial Board argues that Democratic warnings regarding the end of enhanced subsidies have proven unfounded. The Board claims:

· The 1.2 million person decline in number of ACA enrollees was smaller than anticipated and enrollment remains high at 23.1 million nearly twice the 2021 level.

· The decline of 1.2 million enrollees was largely result of removing people who were enrolled in both Medicaid and in state exchanges or had committed fraud.

· Average monthly premiums $137 or $73 for subsidized enrollees remained manageable and had not in fact risen.

· The most significant cost increase were limited to blue states with expensive mandates.

The objective of this essay is to systematically go through and evaluate these WSJ claims against broader economic data, state-level premium comparisons, and the clinical realities of coverage loss.

Concern One: The Omission of Medicaid-to-Exchange Transitions

The WSJ Claim: The 1.2 million decline in Exchange enrollment is a minor correction caused by the removal of “ineligible” enrollees and the curbing of “fraud.” This suggests the expiration of pandemic-era subsidies did not cause a meaningful loss of coverage.

The Counter-Analysis: Viewing Exchange data in isolation ignores the movement between Medicaid and the ACA Marketplace. Under the 2025 Tax Act, Medicaid eligibility was significantly tightened through 6-month redetermination cycles and stricter work requirements.

The Exchange acts as a safety valve for those losing Medicaid. If 2 million people were removed from Medicaid due to the 2025 tax bill, a healthy system would see those individuals transition to the Exchange.

If the Exchange lost 1.7 million previous members and only gained 500,000 “refugees” from Medicaid, the total number of people losing ACA-style coverage is significantly higher than the “1.2 million” headline suggests.

The 2026 CMS report shows a 13% drop in “New Consumer” sign-ups. In a year where Medicaid rolls were being cut, new sign-ups should have spiked.

Concern Two: The missing context of the 6.8 million growth

The WSJ Claim: There are 6.8 million more enrollees today than in 2023 and nearly twice as many as in 2021, implying the system remains robust despite the reduction in subsidies.

The Counter Analysis: This growth actually suggests the enhanced credits were a successful way to expand coverage. In addition, the WSJ does not account for other factors behind the growth of state exchange enrollment.

Between 2021 and 2025, many small businesses dropped coverage because heavily subsidized ACA plans were more affordable for their employees. This “crowd-out” means many of the 6.8 million were simply shifted from private employer budgets to the federal budget. One of the impacts of this substitution was lower costs for some small businesses, not a bad outcome.

This KFF article shows that a lot of the expansion of state exchange enrollment during the Biden years came in conservative states including Texas, Mississippi, Georgia, Tennessee and South Carolina that had higher uninsured rates.

Concern Three: The “Paperwork Barrier” vs. Actual Fraud

The WSJ Claim: The removal of 1.5 million people from the rolls is a victory for “program integrity” and a necessary step to stop subsidies going to those who “didn’t submit income records.”

The Counter-Analysis: The editorial conflates procedural ineligibility (paperwork errors) with intentional fraud. Data suggests this aggressive “cleaning of the rolls” creates a high-cost burden on the healthcare system.

Audits show that roughly 77% of Medicaid “improper payments” are due to “insufficient documentation”—meaning the person may legally qualify but failed to navigate new, stricter 6-month filing windows.

Double Counting of Medicaid and state exchange enrollments is often a timing issue caused by state data lags. Cutting these people instantly results in a coverage gap where the individual has no insurance for 30–60 days.

As depicted in medical literature (and dramatized in series like The Pitt), losing access to maintenance medications for chronic conditions like asthma leads to a massive spike in Emergency Room visits. Basically, a monthly subsidy of ~$500 for Symbicort is significantly cheaper for the taxpayer than a single $2,000 ER visit. See Emergency Department Visits for Acute Asthma by Adults Who Ran Out of Their Inhaled Medications (published in Allergy and Asthma Proceedings and indexed via NIH/PubMed) or The Lancet: Asthma Commission Report or Episode 13 Season Two of the Pitt.

Concern Four: The Statistical Illusion of “Average” Premiums

The WSJ Claim: Average monthly payments of $137 ($73) for subsidized consumers) are “hardly a great hardship reduction” as they mirror 2022 levels.

The Counter-Analysis: These averages are a classic example of survivor bias. The “stability” in the price is caused by the mass exit of the population from some of the more expensive cases.

People earning over 400% FPL faced 100%+ price hikes. They have largely fled the system. When the people with the highest premiums leave the data set, the mathematical “average” of those who remain stays low.

Many who stayed “bought down” from Silver to Bronze plans. They pay the “low” $73 premium but have seen deductibles spike from $5,300 to $7,500+. They are severely under-insured. This problem is about to get a lot worse because of the proposed HHS regulations, which I recently reviewed.

The increase in state exchange health insurance costs for some people over age 60 may have delayed retirements prior to the age of Medicare eligibility. The decision to retain employer based insurance rather than retire and switch to state exchange may lower premiums because state exchange premiums are age rated.

Concern Six: The “Blue State Mandate” Myth

The WSJ Claim: Premiums in “Blue” states are double those in the rest of the country due to mandates for social care, such as gender-affirming care and IVF.

The Counter-Analysis: The claim that blue states are more expensive is not consistent with other data See this KFF table for state cost estimates.

· Standard Silver Plan, premiums in “Red” Texas ($661) are actually higher than in “Blue” California ($570).

· The disparity is even more pronounced in the mid-Atlantic, where West Virginia ($1,073) is roughly 75% more expensive than its neighbor Virginia ($612).

West Virginia’s premiums are among the highest in the nation primarily because of the “double whammy” of an uncompetitive hospital market dominated by a few consolidated systems and a high-risk patient pool with the country’s highest rates of chronic diseases like diabetes and heart disease.

Actuarial data shows that “social” mandates like IVF or gender-affirming care typically account for only 1% to 3% of total premium costs. These are marginal “carve-outs” in a framework where 75% to 85% of a premium is dictated by provider prices and chronic disease management.

Blue states are not a burden to red state taxpayers because on net they pay more to the Treasury than the receive while red state get more than they give.

Conclusion

The “stability” celebrated by the Wall Street Journal editorial board is a snapshot of a shrinking market rather than a sustainable system. By pricing out the middle class and forcing the near-elderly to choose between their health and their retirement, the expiration of enhanced subsidies hasn’t solved a crisis—it has simply moved it from the federal balance sheet to the kitchen tables of American families.

A Note on the Limits of Editorial Discourse

The complexity of healthcare economics—where variables like hospital consolidation, regional risk pools, and federal subsidy structures intersect—rarely lends itself to the brief, high-level format of an op-ed or editorial. While the Wall Street Journal provides a valuable platform for policy debate, the board’s recent reliance on selective statistics to support a “Blue State Mandate” narrative serves as a reminder that opinion pieces are often an insufficient mechanism for exploring such intricate issues.

When data is curated to fit a specific ideological lens—such as focusing on marginal social mandates while ignoring the massive cost impacts of provider monopolies—the resulting commentary risks being more misleading than informative. For a framework as vital as the ACA, a commitment fact-based analysis is a prerequisite for any meaningful discussion on reform.

Deep Dive: Expert Video Analysis For a visual breakdown of how the 2026 subsidy expiration is reshaping the health insurance landscape, I highly recommend this KFF briefing: KFF Expert Briefing: The 2026 Coverage Gap and the Subsidy Cliff

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New York’s Climate Leadership and Community Protection Act (CLCPA) represents one of the most ambitious state-level climate frameworks in the United States, but its implementation is increasingly constrained by economic, institutional, and political realities. Governor Kathy Hochul’s proposed revisions—delaying enforcement timelines and modifying key targets -- highlight a broader dilemma: how to reconcile aggressive statutory targets with rising concerns about affordability, grid readiness, and deployment bottlenecks. This challenge is compounded by an emerging political divide, with progressive Democrats opposing delays and more moderate stakeholders supporting greater flexibility.

This paper argues that New York’s experience reflects a broader pattern across U.S. states and internationally, where ambitious climate policies are being recalibrated as they expand beyond the power sector into transportation and buildings. While cap-and-trade systems, subsidies, and regulatory mandates have achieved partial success, they represent second-best approaches shaped by political constraints that limit the use of more efficient, transparent carbon pricing. The analysis highlights the central role of utility structure, market access, and incentive design in determining outcomes, and suggests that aligning implementation reforms with adjusted targets may be necessary to sustain both political support and policy effectiveness.

Key Results

• Governor Kathy Hochul’s proposed rollback exposes a growing intra-Democratic divide, with progressives opposing delays and moderates aligning with Republican support for flexibility.

• Scaling back climate policy is becoming the norm as economy-wide programs face cost, complexity, and political constraints.

• New York’s subsidies function as both implementation tools and political cover for softening rigid climate targets.

• The main barrier to clean energy deployment is conflict between utilities and solar and battery developers, which results in slow approvals, unclear costs, and uncertain payments.

• Both cap-and-invest and mandate-driven approaches are second-best policies shaped by political limits on direct carbon pricing.

• Building mandates illustrate the core tradeoff: efficient fuel pricing is avoided because it raises visible costs for households, leading to more complex alternatives.

Introduction:

Governor Kathy Hochul faces a defining policy dilemma in New York’s implementation of its climate law: how to reconcile some of the most aggressive statutory emissions targets in the country with rising concerns about affordability, grid readiness, and economic competitiveness. Recent reporting highlights an unusual political alignment, with Republicans supporting efforts to delay or soften key mandates while progressive Democrats oppose any perceived rollback of the state’s climate commitments (See Hochul wants a climate reprieve, WSJ.)

This tension reflects a broader reality: the transition from ambitious legislative targets to practical implementation is proving far more complex than originally anticipated, particularly as costs become more visible and timelines more binding.

New York’s experience is not unique. Across the United States and internationally, governments are recalibrating climate policies that were initially designed under more optimistic assumptions about cost, technology, and political tolerance for higher energy prices. While cap-and-trade and related systems have delivered measurable emissions reductions in certain sectors, their expansion to economy-wide frameworks—especially in transportation and buildings—has encountered increasing resistance. The result is a growing pattern of delays, modifications, and policy adjustments, suggesting that scaling ambitious climate initiatives requires not only technical feasibility but sustained political and economic alignment.

Description of the New York Climate Law (CLPA)

The CLCPA is the most aggressive state-level climate mandate in the U.S. due to its unique “Real Zero” requirements rather than “Net Zero” goals.

· Unlike “Net Zero” targets in California or Europe, New York mandates an 85% absolute reduction in gross greenhouse gas emissions by 2050. Only 15% can be offset, effectively forcing the removal of fossil fuel infrastructure.

· A legally binding 40% reduction by 2030. As of March 2026, New York has achieved only a 9% reduction, leaving a massive gap to close in just four years.

· The original law requires a 20-year timeframe for methane, weighting its warming impact significantly higher than the 100-year standard used globally.

The CLCPA serves as a “framework law,” delegating specific enforcement to state agencies, primarily the Department of Environmental Conservation (DEC).

Affected Sectors

• Electric Power: 70% renewable by 2030; 100% zero-emission by 2040.

• Transportation: Economy-wide caps on fuel suppliers and distributors.

• Buildings: Large buildings face strict emissions limits; new construction under seven stories must be all-electric as of January 1, 2026.

• Waste/Heavy Industry: New “Part 253” regulations (effective 2026) require industrial sources to monitor and report all emissions data.

If the DEC fails to meet targets, it faces litigation, Article 78 proceedings. Under Environmental Conservation Law Article 71, violations of reporting rules carry fines of up to $18,000 for initial violations and $15,000 per day for continued non-compliance. Under Cap-and-Invest, firms exceeding their cap must buy allowances. Failure to do so triggers a “penalty multiple” (typically 3x the market price).

“Cap-and-Invest” was not written into the 2019 law. It was adopted as the “preferred mechanism” through administrative action: The Climate Action Council’s “Scoping Plan” recommended Cap-and-Invest as the primary enforcement tool. Governor Hochul formally endorsed the mechanism.

The implementation of the law has been stalled by executive caution and judicial intervention. The Hochul administration failed to meet a January 1, 2024, deadline to finalize regulations citing economic infeasibility and inflation.

An Ulster County Supreme Court judge ruled that the state could not ignore statutory deadlines. The judge ordered the DEC to finalize regulations by February 6, 2026.

In November 2025, the state appealed, triggering an automatic stay that paused the court’s deadline. As of March 25, 2026, the case is pending in the Appellate Division.

Governor Hochul is now attempting to rewrite the law through the April 1, 2026 budget: Her proposed revisions include:

· Moving mandatory enforcement to the end of 2030.

· Shifting to 100-year methane accounting to make natural gas look 25% “cleaner” on paper.

· Adding a midpoint milestone to stretch out the compliance timeline.

Comments:

Comment One: Scaling back ambitious climate initiatives is basically the new normal both by states in the United States and among nations.

Cap-and-trade and cap-and-invest programs have demonstrated measurable success in reducing emissions, particularly in the power sector where compliance is concentrated and alternatives are readily available. However, their expansion to economy-wide systems—especially in transportation and buildings—has proven more difficult, with a growing number of jurisdictions delaying implementation, scaling back requirements, or modifying timelines in response to cost, complexity, and political constraints.

U.S. State Climate Policy Status (March 2026)

· New York: Following a 2025 court ruling that found the state in violation of its own deadlines, Governor Kathy Hochulis now seeking to use the April 2026 budget to legally delay enforcement until 2030 and weaken methane accounting standards.

· Massachusetts: The Healey administration officially delayed the Clean Heat Standard (a tax on fossil heating fuels) from 2026 to 2028, citing the need to protect residents from projected annual heating bill increases of up to $425.

· California: While emissions reporting (SB 253) is moving forward for late 2026, a Ninth Circuit injunction has paused the Climate-Related Financial Risk Act (SB 261), making reporting voluntary until the court issues a final ruling.

· Washington: Lawmakers are currently fighting to protect Climate Commitment Act (CCA) revenues from being diverted to general budget gaps, while linkage with California’s carbon market has been pushed to 2027 to help stabilize record-high gas prices.

· Pennsylvania: The state officially exited the Regional Greenhouse Gas Initiative (RGGI) in late 2025 after a multi-year budget impasse, with Governor Shapiro signing a repeal that permanently blocks the state’s carbon-cap participation.

· Maryland: The legislature is currently debating a moratorium (SB 834) on the EmPOWER program, which would pause greenhouse gas reduction targets for utilities until at least 2027 to curb rising electricity surcharges.

· Oregon: After a “defend-and-deliver” 2026 legislative session, several major climate investments were sidelined due to a looming budget gap for 2027, leaving the Climate Resilience Superfund in a holding pattern.

· Illinois: While the state continues its fossil fuel phase-out, new 2026 legislation (SB 3664) has been introduced to create an Energy Choice Commission to re-evaluate the economic impact of current mandates on industrial competitiveness.

International Climate Policy Status (March 2026)

· China: The newly adopted 15th Five-Year Plan sets a slightly lower carbon reduction target, includes a data revision that lowers required emissions, and allows for the use of coal as a strategic stabilizer.

· European Union: On March 10, 2026, the EU formally postponed the launch of ETS2 (the carbon cap on home heating and vehicle fuels) until January 1, 2028, to prevent a populist backlash over rising energy costs and allow more time for “social buffer” funding.

· Canada: New changes transition to a purely industrial pricing model, this shift is projected by the Canadian Climate Institute to create a 15–20% shortfall in meeting 2030 targets due to the loss of consumer price signals.

· United Kingdom: In late 2025, the government issued a “Pragmatic Realignment” of its Carbon Budget after court rulings found previous plans unachievable; the 2026 strategy prioritizes energy security and nuclear expansion over immediate emissions cuts in transport.

· Australia: As of March 2026, the government is moving to exempt approximately 1,500 medium-sized firms from mandatory climate disclosure laws, citing regulatory burden concerns.

· India: The Ministry of Power announced it will revisit and likely approve several new coal-fired power projects originally sidelined in 2024, citing the need to ensure grid stability for a rapidly expanding industrial base.

Comment Two: Incentives as Political and Economic Justification for Target Modification

New York’s extensive financial incentives for heat pumps, distributed solar, and other clean energy technologies are not just implementation tools -- they are increasingly central to the political viability of modifying the state’s rigid climate targets.

New York offers some of the most generous energy subsidies in the country, including upfront rebates for air- and ground-source heat pumps, income-tiered subsidies for rooftop and community solar, and performance-based incentives for energy storage -- often exceeding comparable offerings in states such as California and Massachusetts in both scope and direct consumer support. As Governor Kathy Hochul seeks to delay enforcement timelines and introduce more flexible compliance mechanisms, reaffirming and possibly expanding these subsidies may be necessary to maintain credibility with stakeholders who supported the original CLCPA framework.

Comment Three: Linking Target Flexibility to Utility Reform and Market Access

Governor Kathy Hochul’s effort to relax or delay certain climate mandates could be more effectively paired with structural reforms in utility behavior, particularly around interconnection, grid access, and support for distributed energy resources such as battery storage. Despite ambitious targets for storage and distributed generation, New York’s interconnection system remains slower and more utility-controlled than more market-oriented regions such as Texas or more streamlined operators in parts of the Midwest and New England.

Recent experience with battery storage projects highlights how utility processes can become a binding constraint on clean energy deployment in New York. In New York City, interconnection requirements imposed by Consolidated Edison have added roughly $21 million in upgrade costs per project, leading to multiple cancellations and placing significant planned investment at risk.

In addition, the state’s shift from full net metering to the more complex VDER system, along with new fees and changing credit rules, has made it harder for developers and consumers to predict the value of selling excess solar power back to the grid.

Developers continue to encounter uncertainty over upgrade charges, shifting compensation frameworks, and utility-controlled approval processes, all of which slow deployment of clean energy projects even where policy support exists. Addressing these issues would reduce structural barriers and improve system efficiency and would have political value in demonstrating to the governor’s critics that the state was moving forward on environmental goals despite the proposed rollback to the climate law.

Comment Four: The Limits of Second-Best Climate Policy

New York and California have adopted different policy tools to reduce transportation emissions, but both reflect departures from the economically efficient approach of directly pricing carbon. New York’s cap-and-invest system applies an upstream constraint on fuel suppliers, generating revenue that is recycled into subsidies while indirectly embedding emissions costs into fuel prices. California, by contrast, relies more heavily on regulatory mandates, including zero-emission vehicle requirements and a planned phase-out of internal combustion engine sales. While these approaches differ in design, both seek to achieve emissions reductions without imposing a transparent, economy-wide price on carbon consumption.

Most economists view such systems as second-best alternatives to direct carbon pricing, such as fuel taxes or emissions-based vehicle fees. These more direct approaches would impose costs transparently on higher-emitting behavior while allowing markets to determine the most efficient path to decarbonization.

By comparison, upstream cap systems and technology mandates introduce complexity, obscure price signals, and require ongoing policy adjustments. New York’s cap-and-invest framework, in particular, can be understood as a politically feasible substitute for a carbon tax—one that generates similar revenue but with less transparency and greater administrative burden.

Comment Five: Building Electrification Mandates and the Shift Toward Flexibility
New York’s building sector strategy relies heavily on regulatory mandates, including emissions caps on large buildings and requirements that most new construction under seven stories be all-electric as of 2026. This framework is broadly similar to approaches adopted in jurisdictions such as California and cities like Boston, which use building codes to accelerate electrification. However, Governor Kathy Hochul has moved to soften implementation by delaying enforcement, emphasizing affordability and grid readiness, and placing greater weight on subsidies and phased adoption. This does not eliminate the mandate-based framework, but it does shift New York away from the more rigid, front-loaded versions seen elsewhere.

From an economic perspective, these mandate-driven approaches are generally viewed as second-best instruments relative to directly pricing emissions from building energy use. A first-best approach would impose a transparent carbon price directly on heating fuels such as natural gas or heating oil, allowing property owners to respond by choosing the most cost-effective combination of electrification, efficiency improvements, or alternative technologies.

The primary political challenge with such an approach is that it would directly raise heating costs for households, making it more visible and broadly distributed than building-specific mandates.

One potential alternative would combine a broad carbon price on heating fuels with targeted rebates to households and smaller building owners, offsetting the distributional impact while preserving incentives for efficiency and electrification. While such systems can address equity concerns and improve economic efficiency, they remain politically challenging due to the visibility of higher energy costs and the need for sustained, credible rebate mechanisms.

Conclusion

New York and numerous other jurisdictions are increasingly relying on second-best environmental policies as ambitious climate goals encounter the realities of cost. Rollbacks and delays are occurring not because objectives have changed, but because the economic and institutional challenges of implementation become more apparent as policies move from design to execution.

The next phase of climate policy should focus less on expanding targets and more on improving policy design. More direct, transparent approaches -- combined with reforms that reduce institutional bottlenecks and better align incentives -- may offer a more durable path forward. Without such adjustments, further delays and incremental rollbacks are likely.

Authors Note: For more on Policy, Politics and Personal Finance go to www.economicmemos.com. Get 20 percent off annual membership total $48 with this coupon. https://www.economicmemos.com/56428713

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The “Goldilocks” era of private credit is officially over with Jamie Dimon’s observation that the cockroaches are beginning to emerge from the walls.

With the primary stock index for private lending hitting its lowest point of the year and major funds like Morgan Stanley and BlackRock blocking investors from withdrawing their cash, a critical question has emerged: Is this a temporary liquidity hiccup, or the first sign of a systemic credit event?

Key Issues:

· The Liquidity Mirage: Many private credit funds are blocking promised withdrawals of up to 5% of their investment each quarter, leaving investors with no choice but to sell their shares at a 30% loss in unofficial secondary markets.

· The Shadow Default Wave: Lenders are reporting a “safe” 2% default rate by quietly restructuring failing loans behind closed doors, masking a “true” distress rate of 9% that is only visible when you look at how many companies can no longer pay their original terms.

· The PIK Snowball: Struggling companies are skipping cash interest payments and instead adding that debt to their total loan balance (Payment-in-Kind), creating a mountain of compound interest that they will never realistically be able to repay.

· The EBITDA Fiction: Lenders approved massive loans based on “projected” future earnings that never actually happened, leaving companies without the real-world cash flow needed to pay today’s 12% interest rates.

· The Software & AI Displacement: Approximately 25% of all private credit is now concentrated in the software sector, but these loans are under immense stress as Generative AI allows customers to build their own tools rather than paying for “sticky” subscriptions, gutting the collateral lenders relied on.

· The Insurance Contagion: Life insurance companies have shifted billions into these private loans to chase higher returns, meaning a crash in private credit could directly threaten the safety of annuities and insurance policies held by regular families.

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Unlock the full analysis below, featuring our exclusive 11 Questions and Answers on problems in this industry and the continuing deregulation push which would expand access to retirement accounts and less sophisticated investors. The blog is relatively inexpensive, and free subscribers are offered one free post under the paywall.

The continued growth and deregulation of private credit markets

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Introduction:

The Make Billionaires Pay Their Fair Share Act (March 2026), sponsored by Senator Sanders and Congressman Khann applies a 5 percent tax on household net worth exceeding $1 billion. It is projected to impact 938 billionaires in the United States. The objective of this memo is to evaluate the impact of this bill on the world’s richest person, Elon Musk, and his ventures.

Background on Elon Musk and his ventures and possible wealth tax effects:

Elon Musk, the world’s richest person, has an estimated net worth of $840 billion with $3 billion in liquid assets. Based on his current net worth estimate Elon Musk would have a $42 billion annual tax bill under the Sanders-Khanna proposal.

Elon Musk’s massive net worth is primarily distributed across four major ventures: Tesla, a public leader in electric vehicles and robotics; SpaceX, a private aerospace giant that now includes the xAI artificial intelligence division and the X social media platform; The Boring Company, a startup focused on underground tunnel infrastructure; Neuralink, a biotech firm developing high-bandwidth brain-machine interfaces. He also has personal holdings in various cryptocurrencies and smaller investments.

Most of the funds for the annual tax bill would come from sales of shares in Tesla and SpaceX. EV sales are now rapidly dropping because of the expiration of the EV tax credit and other financial incentives impacting EVs. The high valuation of Tesla stock stems from expectations that this firm will become a leader in autonomous driving and robotics, activities that require additional capital expenditures.

Annual mandatory selling of Tesla stock to raise funds to cover the tax bill would depress the stock price and increase the cost of capital at a time when Tesla needs more funds for capital expenditures and research and development.

Under the tax bill Elon Musk would owe $27 billion annually on Space X alone. SpaceX is private, Musk cannot simply sell a few thousand shares on an app to cover the bill; he would have to find massive institutional buyers or sovereign wealth funds willing to participate in private rounds every single year, potentially at a discount to the official valuation.

In high-risk ventures like SpaceX, founder control is what allows the company to prioritize multi-decade goals over short-term dividends. If Musk is forced by the tax code to dilute his ownership by 5% every year, he would eventually be outvoted by institutional investors who would likely pivot the company to maximize Starlink’s satellite internet profits while cutting the expensive, non-profitable development of the Starship Mars colony.

There are significant rumors that SpaceX will go public through an IPO. The wealth tax would likely reduce the incentive for Space X to go public because in the absence of a publicly traded price Musk could argue for a lower valuation.

Using Tesla as a “piggy bank” to pay the multi-billion dollar annual tax on SpaceX’s valuation would rapidly deplete Musk’s 12–20% stake in the carmaker. Within a few years, he would lose his voting majority at Tesla, potentially leading to a change in leadership that might move away from his long-term bets on robotics and AI.

This forced liquidation is particularly hazardous given Tesla’s current 2026 pivot. To maintain its lead in the global AI race, Tesla has signaled it will double its capital expenditures to over $20 billion this year, funding massive new data centers for FSD (Full Self-Driving) training and the transition of its Fremont facility into a dedicated production line for the Optimus Gen 3 humanoid robot.

· Watch: “The Humanoid Robot Revolution: What’s Coming in 2026”

o This video breaks down how Tesla Optimus and FSD are moving from demos to factory deployment in early 2026, providing visual context for why Musk views this as a $25 trillion opportunity that he cannot afford to lose control of.

Critically, this tax arrives as Tesla navigates its most vulnerable period since the Model 3 ramp. The domestic EV market has cooled into a ‘structural winter’ following the September 2025 repeal of the $7,500 federal tax credit and the rollback of state-level purchase incentives. With Tesla’s U.S. sales dropping 7% in 2025 and inventory levels hitting a record 149-day supply, the company has been forced to cannibalize its own margins to remain competitive against cheaper imports.

Forcing Musk to offload billions in stock during this downturn would be a ‘double-hit’: it would dry up the company’s internal cash reserves while simultaneously crushing investor confidence at a time when the stock’s premium is no longer supported by car sales, but solely by the promise of future AI breakthroughs.

Using Tesla as a source of tax liquidity would not only dilute Musk’s voting power but also signal to the market a lack of ‘founder conviction’ during the company’s most capital-intensive phase. Such large-scale, mandatory sales would likely depress the stock valuation, creating a feedback loop that increases the cost of capital and potentially starves these high-risk robotics projects of the very cash they need to survive.

Simultaneously, the tax bill for SpaceX would continue to rise as the company succeeds, eventually forcing him to sell SpaceX shares anyway once the Tesla reserves are exhausted.

Neuralink and the Boring company are smaller, but Musk might be forced to sell shares an act that leads to a higher cost of capital for these startups also.

The bill does contain a clause, initiated by Ro Khanna, to protect startups in a building phase with little or no cash. Under this rule, a founder can postpone their tax payments until a “liquidity event,” such as an IPO or a total sale of the company. This prevents a visionary from being forced to sell off pieces of a fragile, young company just to satisfy the IRS, which would otherwise dilute their control before the business is even off the ground.

The deferral clause would currently apply to Neuralink and The Boring Company but not to SpaceX, which is very profitable. SpaceX might be able to lose a lot of money on Starship and become eligible for deferral.

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Elon Musk is currently backed into a $42 billion corner—but he isn’t out of moves yet. Below the fold, we dive into the three ‘nuclear options’ Musk’s legal team is likely prepping for 2026, including the specific Supreme Court precedent that could strike down the Sanders-Khanna Act entirely. Upgrade to paid to unlock the full strategic breakdown and the ‘Exit Tax’ warning that changes everything.

Elon Musk’s potential responses to wealth tax:

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The wave of wealth tax proposals started in California and has moved to Washington DC. What follows is a description of key proposals and my assessment.

California’s “One-Time” Lever: The 2026 Billionaire Tax Act

California is currently navigating a high-stakes local experiment, known as the 2026 Billionaire Tax Act, a proposed statewide ballot measure for November 2026 that would impose a one-time 5% excise tax on individuals with a net worth exceeding $1 billion.

• The Retroactive Snapshot: The tax applies to individuals residing in California as of January 1, 2026. This retroactive “snapshot” is a deliberate attempt to prevent capital flight, though it has already sparked legal challenges and a notable exodus of ultra-high-net-worth residents prior to the deadline.

• The Liquidity Compromise: Acknowledging the “Illiquidity Trap” mentioned earlier, the act allows billionaires to pay the 5% bill in annual installments of 1% over five years, though these deferrals come with a 7.5% annual charge.

• Allocation: 90% of the projected $100 billion in revenue is earmarked for the Billionaire Tax Health Account to shore up Medi-Cal and public health services following federal funding shifts, with the remaining 10% designated for food assistance and K-14 education.

See my previous memo on the California initiative.

The Sanders-Khanna “Make Billionaires Pay Their Fair Share” Act

Introduced in March 2026, this is the most aggressive and direct redistribution model we have seen to date.

• The Mechanism: A 5% annual wealth tax on net worth exceeding $1 billion.

• The “Social Dividend”: Unlike previous versions, this bill specifically earmarks revenue to fund $3,000 direct annual payments to individuals in households earning $150,000 or less. For a family of four, this is effectively a $12,000 “wealth rebate.”

· Enforcement: To prevent a billionaire exodus, the bill includes a 60% “Exit Tax” on the total wealth of any billionaire who renounces their U.S. citizenship. Just like Hotel California, you can check out anytime you like, but we’re keeping more than half your luggage.

The Warren “Ultra-Millionaire Tax” Act

Senator Warren’s model remains the benchmark for “broad-base” wealth taxation, targeting the top 0.05% of households.

• The Mechanism: A 2% annual tax on net worth between $50 million and $1 billion, with a surtax bringing the rate to 6% for everything above $1 billion.

• Objective: The focus here is on structural social investment -- funding universal childcare, canceling student debt, and expanding Medicare—rather than direct cash transfers.

• Auditing: The bill mandates a 30% minimum audit rate for the affected group and provides $100 billion in new funding for the IRS to develop specialized valuation tools.

The Biden “Billionaire Minimum Income Tax” (BMIT)

The Biden BMIT: A ‘Billionaire’ tax that somehow manages to find its way into the pockets of anyone with $100 million. Apparently, in D.C., ‘Billionaire’ is now a flexible term.

The BMIT is the most technically nuanced of the three, framed as an income tax expansion to survive potential 16th Amendment challenges in the Supreme Court.

• The Mechanism: A 25% minimum tax on the “total income” of households worth over $100 million.

• The Critical Pivot: It redefines “income” to include unrealized capital gains. If your stock portfolio grows by $100 million, you owe tax on that growth even if you haven’t sold a single share.

• Prepayment Logic: This tax functions as a prepayment. When the asset is eventually sold, the taxpayer receives a credit for the BMIT already paid, effectively ending the “buy-borrow-die” strategy where the wealthy live off loans against untaxed assets.

Comments:

Comment One: Lack of liquidity and implications

· The 5% Cash Ceiling: According to the 2026 High-Net-Worth Asset Allocation Study, the average ultra-wealthy portfolio has compressed its cash and currency holdings to just 5% of net worth. This is driven by a “growth-first” shift into private equity and alternative assets (now 28-34% of total wealth).

· The Inherent Conflict: In a scenario like the proposed 5% annual Sanders tax, a billionaire with average liquidity would be forced to exhaust 100% of their available cash just to cover the first year’s tax bill.

· Forced Liquidation Spiral: Because “liquid” buffers are also required for operational costs -- such as interest on debt, capital calls for private ventures, and business reinvestment—any tax exceeding 1-2% of net worth would likely lead to the “fire sale” of core holdings.

· The “Paper Wealth” Paradox: Since over 50% of billionaire wealth is typically held in public equities (often concentrated founder shares), large-scale selling to meet tax obligations risks “market signaling” issues, potentially driving down the stock price and further eroding the tax base itself.

Lawmakers seem to think a billion-dollar valuation is a giant swimming pool of gold coins but you can’t pay a 5% tax bill with 5% of a factory’s roof or a fractional share of an unreleased AI algorithm.

Comment Two: The Constitutional “Apportionment” Wall

The primary legal hurdle is the 16th Amendment.

· The Direct Tax Conflict: The Constitution requires “direct taxes” to be apportioned by population. Because a wealth tax is a tax on ownership (not a transaction), it faces a likely Supreme Court strike-down. This creates “policy whiplash,” driving capital flight “just in case” the tax is enacted.

Comment Three: International Evidence (The European Exodus)

Europe has already run this experiment. In 1990, twelve European nations had wealth taxes; by 2026, almost all have been repealed (including France, Sweden, and Germany).

· The Revenue Paradox: France’s wealth tax reportedly raised €3.5 billion annually but cost the state €7 billion in lost VAT and income tax as 42,000 millionaires fled the country.

We’re desperately trying to import a European tax model that Europe itself has been frantically refunding and repealing for the last 30 years because their millionaires developed a sudden, passionate interest in moving to Switzerland.

Comment Four: The “Innovation Ceiling” (The Microsoft/Apple Test)

The most destructive impact is on the pre-revenue “Unicorn” phase.

· The Cost of Capital: A 5% wealth tax acts as a 5% “interest rate” on equity, raising the hurdle rate for every dollar of startup investment.

· Stifling the Future: If you had taxed Microsoft or Apple at 5% of their paper valuation the moment they hit $1 billion -- long before they were profitable -- the capital siphoned away would have drastically slowed the infrastructure they built. For today’s AI startups, this is a “penalty for success” that incentivizes selling out to incumbents just to pay the IRS.

Comment Five: The Philanthropy Paradox

By taxing wealth out of existence, the state effectively dismantles the engine of private philanthropy, replacing surgical, long-term capital with the broad, often inefficient spending of a centralized bureaucracy.

The Gilded Age: Giving “Everything” Away

The tradition of radical distribution is a fundamental pillar of American capital. In the early 20th century, the titans of industry shifted from accumulation to near-total liquidation for the public good:

· Andrew Carnegie: Living by the mantra, “The man who dies rich, dies disgraced,” Carnegie distributed over 90% of his fortune (nearly $14 billion in today’s dollars). His wealth built over 2,500 libraries and anchored institutions like Carnegie Mellon that still drive innovation a century later.

· The Rockefeller Legacy: John D. Rockefeller distributed over $500 million—creating the modern school of public health. When wealth is taxed at the source, the “seed corn” for these multi-generational engines is consumed before it can ever be planted.

Interesting video on the Gilded Age:

https://daily.jstor.org/philanthropy-and-the-gilded-age/

Modern “Philanthro-Capitalism”

Today’s ultra-wealthy continue this tradition, though with a focus on systemic “moonshots” that political cycles often ignore:

· The Gates & Buffett Pledges: Warren Buffett has committed 99% of his wealth to be distributed during his lifetime or at death. The Gates Foundation has used this concentrated capital to move the needle on global polio eradication—a feat of logistics and funding the public sector struggled to maintain.

· The San Francisco Impact: Mark Zuckerberg and Priscilla Chan have mirrored this with the Chan Zuckerberg Initiative, pledging 99% of their Meta shares. Locally, they provided a $75 million gift—the largest private gift to a public hospital in U.S. history—to San Francisco General, funding the critical trauma technology and seismic upgrades that tax bonds alone couldn’t cover.

So, the progressives who want a wealth tax to fund their vision of government are willing to sacrifice these projects. The tradeoff exists for two reasons. First, the money reallocated to government projects can’t be given to philanthropic projects. Second and arguably more importantly, taxes that reduce capital accumulation and economic growth will impede the existence of fortunes available for any purpose.

Conclusion: The Collision of Populism and Pragmatism

The three federal frameworks and the California initiative analyzed in this memo represent a significant shift in the American fiscal narrative—moving from taxing what citizens earn to taxing what they build. While the political appeal of a “Social Dividend” is undeniable in an era of high wealth concentration, the structural impediments outlined in our six comments suggest a profound disconnect between legislative intent and economic reality.

My cynicism regarding the practicality of these proposals is rooted not in ideology, but in the mechanical failures inherent to taxing illiquid, unrealized value.

The evidence from the European exodus and the “Innovation Ceiling” suggests that a wealth tax does not simply redistribute static piles of gold. Instead, it siphons the very capital required for high-risk, long-term R&D. If we mandate the extraction of capital from the frontier to pay for the present, we stop the next Microsoft, Apple, or SpaceX before they can reach maturity.

Subsequent essays will look essay on the likely concrete impacts of these wealth tax proposals on capital formation and economic growth.

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This paper synthesizes data from nine leading economic surveys to document a profound and growing trend of economic pessimism across the United States. Traditional economic measures of unemployment and inflation no longer track household perceptions of whether they are better off or not. Future research must develop a “New Cost of Living” framework that accounts for cash-flow burdens often excluded from current price indices including the CPI. This includes investigating the impact of rising healthcare cost-sharing (including higher deductibles and any increase in premiums paid by households) and the total cost of entry for first-time homebuyers. By refining these metrics, researchers can better explain the structural anxiety and “housing resignation” now surfacing in national sentiment data.

Key Findings

· Systemic Decoupling of Sentiment and Growth: Evidence from nine major surveys shows that consumer sentiment remains at near-recessionary levels despite strong headline GDP and employment data, suggesting a structural rather in the American mood.

· The Death of Intergenerational Optimism: Data from Pew, Gallup, and the WSJ-NORC poll reveal a historic collapse in the “American Dream,” with 75% of adults lacking confidence that the next generation will be better off—a sentiment driven by the perceived breakdown of the link between hard work and financial success.

· The “Housing Resignation” Phenomenon: Recent research into real estate trends confirms that skyrocketing nominal prices and institutional dominance have forced Millennials and Gen Z into a state of “housing resignation,” where the goal of homeownership is increasingly viewed as an impossibility regardless of individual effort.

· The Failure of the Traditional Misery Index: A critical finding of this study is that the traditional Misery Index is fundamentally flawed. Inflation is the change in an average price, which is not a measure of affordability. The CPI does not measure the share of health care paid by households, the costs for homebuyers, or the actual ticket price of a new improved item. As a result many other factors impact the household budget and financial outlook.

Introduction:

For much of the postwar period, there was a broadly shared assumption in economics and politics that personal financial well-being moved with the overall economy. When inflation and unemployment rose, households felt worse off. When growth accelerated, unemployment fell, and real incomes increased, sentiment improved.

This logic motivated the development of the “misery index,” a concept popularized by Arthur Okun. It shaped the famous 1980 presidential debate when Ronald Reagan asked -- “Are you better off than you were four years ago?” It was the underpinning of the model Ray Fair used to predict outcomes of presidential elections.

The relationship between the actual economy and economic sentiment is now weaker. Despite relatively strong headline macroeconomic indicators economic pessimism as measured by a number of indicators is on an upward trend and is in many cases near long term highs. Two recent highly publicized papers Matt Stoller’s “The Boomcession” (2026) and Lee and Yoo Giving Up: The impact of Decreasing Housing Affordability on Consumption, Work Effort and Investment (2026), document rising economic pessimism in a period where the macroeconomic indicators appear strong.

Matt Stoller argues that pessimism measured by the University of Michigan Consumer Sentiment Index, despite strong economic trends, reflects concentrated market power and persistent high prices in essential sectors, leaving households feeling squeezed and lacking economic agency even as headline GDP growth and employment data appear robust. His analysis draws on publicly available macroeconomic indicators and consumer sentiment surveys, is primarily descriptive, contrasting strong aggregate performance with weak household sentiment and evidence of elevated markups.

Lee and Yoo observe that declining homeownership expectation, driven by high mortgage rates and institutional investor dominance in single-family rentals, have pushed many Millennials and Gen Z households into a “housing resignation,” where abandoning the goal of buying a home reshapes savings and consumption behavior and weakens confidence in future living standards. They combine nationally representative survey data on housing expectations with housing market indicators such as mortgage rates, price-to-income ratios, and institutional investor purchase activity. Their empirical approach links changes in stated homeownership intentions to observed shifts in saving and spending patterns over time.

This memo reviews evidence comparing current and past values of questions designed to measure economic pessimism from several surveys including – (1) the University of Michigan Consumer Sentiment Index, (2) the Conference Board, (3) the Wall Street Journal-NORC poll, (4) the General Social Survey, (5) Gallup, (6) Pew Research Center, (7) the Harris Poll Real Estate Survey, (8) The Survey of Consumer Expectations, and (9) the National Finance Capability Study.

The objective of this analysis is to identify and document the long-term upward trend in economic pessimism across multiple decades and data sources; it is an examination of systemic structural shifts and is not intended to assign political blame to any specific administration or policy cycle. The paper concludes with a discussion of future research on why the disconnect between economic measure and pessimism measure exists and research proposing economic measure that better reflect the experiences of households.

Supporting Evidence on the Rise of Economic Pessimism:

The University of Michigan Consumer Sentiment Index:

The University of Michigan Consumer Sentiment Index is a monthly, nationally representative survey of U.S. households conducted since 1946. The survey typically samples about 500 respondents per month and produces both preliminary and final estimates. The headline Consumer Sentiment Index is constructed from five core questions covering: (1) personal financial situation compared to a year ago, (2) expected personal financial situation a year ahead, (3) expected business conditions over the next year, (4) expected business conditions over the next five years, and (5) current buying conditions for major household durables. The index is benchmarked to 1966 = 100, allowing nearly eight decades of comparison across business cycles, inflation shocks, and recessions. Detailed time series are publicly available.

· Current level vs. historical context: Recent readings (2023–2024) have generally been in the low-to-mid 60s. This is well below typical expansion-era levels (mid-80s to 90s), below the late-1990s peak above 110, and closer to recessionary trough ranges (mid-50s in 2008–2009). The index briefly fell to near 50 in mid-2022 during the inflation surge — one of the lowest readings outside the early 1980s. While sentiment has partially recovered from that trough, it remains significantly below long-run expansion norms.

For a detailed press release on the latest University of Michigan consumer sentiment results and components, see the University of Michigan’s report: Final Results for February 2026 (University of Michigan Surveys of Consumers).

The Conference Board Consumer Confidence Index:

The Conference Board Consumer Confidence Index is a monthly, nationally representative survey of roughly 3,000 U.S. households conducted by The Conference Board since 1967. The index is composed of two core subcomponents — the Present Situation Index (consumers’ assessment of current business and labor market conditions) and the Expectations Index (short-term outlook for income, business conditions, and employment) — and is benchmarked to 1985 = 100, enabling comparison across more than five decades of economic cycles and sentiment shifts. The Expectations Index is often highlighted because readings below 80 have historically been associated with increased probability of recession. Historical time series and documentation are published monthly.

· Current and pre-pandemic context: In January 2026, the Consumer Confidence Index fell to 84.5 (1985=100), down sharply from 94.2 in December 2025 and marking the lowest overall confidence reading since around 2014. This 84.5 reading sits well below its pre-pandemic level in early 2020 — for example, the index was around 132–135 in February 2020 — highlighting a large erosion of confidence compared with a robust pre-COVID outlook. The dive in 2026 reflects drops in both the Present Situation and Expectations subindices, with the Expectations Index at 65.1, well below the recession-warning threshold of 80.

For a detailed press release on the January 2026 index reading and components, see the Conference Board’s report: Consumer Confidence Fell Sharply in January 2026 (Conference Board press release).

The Wall Street Journal- NORC Center Poll:

The Wall Street Journal–NORC Center Poll is a recurring, nationally representative public opinion survey conducted by t NORC at the University of Chicago in partnership with The Wall Street Journal. The July 10–23, 2025 wave included 1,527 U.S. adults (margin of sampling error ±3.4 percentage points at the 95% confidence level) and is part of a long-running series of WSJ-sponsored polls dating back to 1987 that track core questions about economic opportunity, living standards, and belief in upward mobility. The series uses repeated nationally representative cross-sections rather than a panel design, enabling multi-decade comparison of consistent items.

· Share saying they have a good chance of improving their standard of living: 25% in July 2025, a record low in the series dating to 1987; prior recent readings were roughly 28%–29% in 2023–2024, indicating further decline.

· Confidence that children’s generation will have a better life: More than 75% report lacking confidence that life will be better for the next generation, reflecting historically elevated pessimism about intergenerational mobility.

· Belief that hard work leads to success: Roughly 70% say the idea that hard work leads to success either does not hold anymore or never did, among the highest skeptical readings recorded in the series’ modern tracking period.

For detailed reporting on the July 10–23, 2025 Wall Street Journal–NORC Center Poll, including results on confidence in standard of living, beliefs about the next generation’s prospects, and views on whether hard work leads to success, see this Axios article summarizing the WSJ poll results.

The General Social Survey:

The General Social Survey (GSS), conducted by NORC at the University of Chicago since 1972, is a nationally representative repeated cross-section survey of U.S. adults fielded roughly every one to two years. Typical sample sizes range from approximately 1,500 to 3,000 respondents per wave (larger in some earlier years). The GSS provides more than five decades of time-series data on economic attitudes, perceived mobility, financial satisfaction, class identification, and confidence in institutions. Public-use datasets, questionnaires, and detailed documentation are freely available. Not every economic sentiment question is asked in every single wave, so some long-run comparisons require using the years in which a variable was fielded consistently.

· Hard work vs. luck in getting ahead: In the late 1980s and 1990s, roughly 60–65% of respondents said hard work was more important than luck in getting ahead. In recent waves (2021–2022), that share has fallen to roughly 45–50%, while the share emphasizing luck or connections has risen from approximately 35–40% in the 1990s to about 50–55% recently — among the most skeptical readings in the series.

· Satisfaction with financial situation: During the late-1990s expansion, approximately 35–40% reported being “very satisfied” with their financial situation. During the Great Recession (2008–2010), that share fell to roughly 20–25%. In the most recent waves (2021–2022), “very satisfied” has been around the high-20% range, below late-1990s highs and closer to long-run averages than peak optimism periods.

· Subjective class identification (working class): In the 1990s and early 2000s, about 40–42% identified as working class. In recent waves (2021–2022), that share has risen to roughly 45–47%, while identification as middle class has declined several points relative to late-20th-century levels.

· Expectations that children will have a better standard of living: In the 1990s, around 60–65% believed children would have better lives than their parents. Following the Great Recession, that share fell into the mid-40% range. Recent readings remain around the mid-40% level, well below late-20th-century optimism and near post-2008 troughs.

· Confidence in major economic institutions (banks, big business): In the 1970s, confidence in banks and major corporations often exceeded 40–50% expressing “a great deal” or “quite a lot” of confidence. After the 2008 financial crisis, those shares fell into the 20–30% range and have remained roughly within that band in recent waves, far below late-20th-century highs.

The GSS also provides an excellent interactive data tracker through its Data Explorer tool, which allows users to search specific variables, review exact question wording, and generate time-series trend charts across decades. Readers can directly explore and verify trends by visiting the GSS Trends portal here: https://gssdataexplorer.norc.org/trends#

Gallup

Gallup has asked versions of the “better life for the next generation” question for several decades, with consistent trend data available since the late 1990s (and related standard-of-living and generational optimism questions dating back earlier). The specific item asking whether “today’s children will have a better life than their parents” has been tracked in modern form since the late 1990s, allowing roughly 25+ years of direct comparison. Recent readings (42% in 2022 saying youth will have a better life) represent among the lowest levels recorded in that multi-decade trend series.

· Belief that today’s youth will have a better life than their parents: In 2022, 42% of Americans said today’s children are likely to have a better life than their parents, down from roughly 60% in the late 2010s. The 2022 reading represents a sharp break from pre-pandemic optimism and is near historic lows in Gallup’s long-term tracking.

· Belief that today’s youth will be worse off: Correspondingly, the share saying today’s youth will be worse off rose into the majority range (roughly mid-50% range in 2022), compared with substantially lower readings during the late-2010s economic expansion.

The most recent Gallup result for this exact question (“how likely it is that today’s children will have a better life than their parents”) that I can find is from Gallup’s September 2022 poll:

Pew Research Center

Pew Research Center is a nonpartisan research organization that conducts nationally representative surveys in the United States (typically samples of about 5,000–10,000 adults depending on the study) and cross-national surveys through its Global Attitudes Survey. Pew has regularly examined perceptions of economic opportunity, intergenerational mobility, and children’s financial futures. Both the U.S. and global surveys have been available since around mid 2010s.

· U.S. view that children will be financially worse off than their parents: Approximately three-quarters of U.S. adults (around 74–75% in recent surveys) say children growing up today will be financially worse off than their parents. This represents one of the highest levels of intergenerational pessimism measured in recent decades.

· Global comparison: Across countries surveyed in Pew’s global studies, the median share saying children will be financially worse off is 57%. The U.S. figure is significantly higher than the global median, indicating comparatively elevated pessimism about intergenerational mobility in the United States.

The Harris Poll Real Estate Survey:

The Status of Real Estate in 2024 (fielded Jan 19–21, 2024; n = 2,047 U.S. adults) included a comparable prior wave fielded Nov 11–13, 2022 (n = 1,980). Respondents were asked on a 5-point agree/disagree scale to evaluate several statements about housing affordability and mobility, including whether hard work is enough to purchase a desired home. Based on publicly released materials, the “no matter how hard I work…” item appears in the 2022 and 2024 real estate waves; there is no publicly documented multi-year trend prior to 2022 for this exact wording, suggesting it is a relatively recent tracking item rather than a long-running decade-scale series.

· Housing mobility pessimism: 42% of U.S. adults in 2024 agreed with the statement “No matter how hard I work, I’ll never be able to afford a home I really love,” up slightly from 40% in 2022. Among Gen Z, agreement reached 46% in 2024.

· Perceived inheritance barrier: 71% of adults in 2024 agreed that they would need to be gifted or inherit money to own a home anytime soon, up sharply from 60% in 2022 — an 11-point increase in two years.

· American Dream is dead” (renters): 57% of renters in 2024 agreed that “The American Dream of owning a home is dead.” A directly comparable 2022 renter figure for this exact item is not reported in the published toplines.

The most recent Harris poll results on the status of real estate in 2024.

Survey of Consumer Expectations:

The Federal Reserve Bank of New York’s Federal Reserve Bank of New York Survey of Consumer Expectations (SCE) is a monthly, nationally representative panel survey that has tracked U.S. household expectations since June 2013. The survey typically collects responses from roughly 1,300 rotating panel respondents per month (producing annual samples in the several-thousand range), and covers inflation expectations, labor market prospects, income growth, credit access, and household financial risks. Because it is fielded monthly, it offers high-frequency time series back to 2013. Core labor market and financial fragility measures have been consistently tracked since inception, though specific modules and wording refinements have evolved over time. Public time series and downloadable microdata are available through the New York Fed’s Center for Microeconomic Data.

· Perceived job-finding probability (if separated from current employer): The mean perceived probability of finding a job within three months if one were to lose their job recently fell to about 43%, the lowest level recorded since the series began in 2013. The measure peaked during the 2021–2022 labor market expansion when job switching was strong and has since declined steadily as hiring conditions cooled.

· Probability of job loss (next 12 months): The mean perceived probability of losing one’s job has risen above 15% in recent readings, up from lower levels during the 2021–2022 labor market peak. However, it remains below its pandemic-era high of roughly 21% in April 2020, indicating elevated but not record insecurity.

· Probability unemployment rate will be higher one year ahead: The share of respondents expecting the national unemployment rate to rise over the next year has remained elevated relative to mid-2010s norms, fluctuating in the high-30% to low-40% range recently, consistent with softening labor market expectations but not at its historic maximum.

· Probability of missing a minimum debt payment (next 3 months): The mean perceived probability of missing a minimum debt payment has climbed to roughly 15% in recent data, its highest level in several years and well above pre-pandemic readings, though still below its early-series peak around 2013 and the spike during 2020.

In summary, the job-finding probability has recently reached a historical low, and the debt delinquency probability is at its highest in several years, while job-loss expectations and broader unemployment expectations are elevated compared with recent norms but not necessarily at all-time peaks. These patterns suggest that several key pessimism indicators in the SCE are unusually weak relative to much of the 2013–2025 period.

Recent SCE report on labor market expectations.

The National Financial Capability Study:

I am very appreciative of the people who put together this database because it enabled this publication on pre-retirement 401(k) disbursements.

The FINRA Investor Education Foundation’s FINRA Investor Education Foundation National Financial Capability Study (NFCS) is a large, nationally representative, state-by-state survey of U.S. adults conducted every three years since 2009 (waves: 2009, 2012, 2015, 2018, 2021, 2024), with each wave sampling roughly 500 respondents per state plus D.C. (more than 25,000 respondents per wave). Public reports, questionnaires, and datasets are posted for each wave, and FINRA also provides a merged “tracking” file covering multiple waves (at least 2009–2021). Inclusion and comparability of specific “pessimism” or stress indicators is not perfectly uniform before 2018: some questions were added in later waves (for example, financial anxiety/stress items were introduced in 2018), and some items were asked differently prior to 2015, limiting clean comparisons back to 2009/2012 for those measures.

· Spending more than income (cash-flow stress): Share spending more than income was 19% (2018), 19% (2021), and 26% (2024).

· No difficulty covering expenses (day-to-day ease): Share reporting no difficulty covering monthly expenses was 43% (2018), 54% (2021), and 38% (2024).

· Emergency savings buffer (three months of expenses): Share reporting they have set aside enough to cover three months of expenses was 49% (2018), 53% (2021), and 46% (2024).

· Credit card repayment discipline (always pay in full): Share reporting they always pay with credit cards in full was 47% (2018), 59% (2021), and 53% (2024).

· Personal financial satisfaction (subjective well-being): Share satisfied with their personal financial condition was 32% (2018), 33% (2021), and 24% (2024).

· Financial anxiety (sentiment-based pessimism; added in 2018): The NFCS introduced financial anxiety/stress questions in 2018. On the core anxiety item, the share agreeing that thinking about personal finances makes them anxious was 53% (2018), 56% (2021), and 63% (2024).

A paper on the most recent wave of the FINRA survey can be found here.

Conclusion

The collective evidence from these eight major surveys—ranging from the University of Michigan’s long-running index to the 2024 National Financial Capability Study—confirms a sustained and intensifying trend of economic pessimism that is increasingly decoupled from headline growth data. This “Boomcession” sentiment is driven by a combination of eroding purchasing power in essential sectors, a perceived breakdown of the link between effort and reward, and a historic decline in housing affordability.

When 75% of citizens doubt the future of the next generation and nearly two-thirds report that thinking about their finances causes anxiety, it suggests that the “Misery Index” of the future may be defined less by unemployment rates and more by a loss of economic agency and the death of the American Dream.

Future research must critically re-examine why the traditional “Misery Index” is failing as a barometer of the public mood. A primary reason for this divergence is that inflation, as a price index, is not the sole determinant of affordability. Three examples of this include:

· The Consumer Price Index (CPI) relies on “Owners’ Equivalent Rent,” which fails to account for the actual cash-flow burdens facing new homebuyers.

· The CPI does not capture the “hidden” inflation of shifting cost burdens, such as the increase in health insurance deductibles or the growing share of premiums paid by households.

· While hedonic adjustments may lower the CPI value of a computer because it is “better” than a previous model, the nominal cost to acquire that essential technology often remains high, squeezing household liquidity in ways the index ignores.

A misery index that incorporates information on the actual determinants of affordability might be more in line with survey data on household views on the economy than the original misery index.

The public mood is not just “bad”—it is becoming structurally cynical. The macro economy is growing but the cost of participation for the average person is prohibitive, and a large portion of our population no longer sees a viable path towards the middle class.

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Many economists (Gary Becker, Nada Eissa, Hilary Hoynes and others) have examined issues related to marriage, marginal tax rates and work incentives. Robert Moffit clarified that the phase-out of benefits is equivalent to higher implicit marginal tax rates.

There are additional AGI linked programs distorting behavior today. A recent SSRN paper shows how a decision to maximize liquidity in working years can motivate workers to choose conventional retirement accounts over Roth accounts, a decision that can backfire badly in retirement. A recent short post shows that a $20,000 salary increase does not go very far for people with student debt payments and insurance premiums linked to their AGI.

A new paper titled, Not Your Father’s Marginal Tax Rate and Marriage Penalty, shows how these stacked programs can push effective marginal rates into the 40 to 55 percent range, not because Congress raised statutory income tax rates, but because eligibility thresholds and percentage-based repayment formulas amplify income changes. The analysis also shows these new programs create and incentive for people to remain single.

In many cases, the largest burdens arise from design features such as abrupt subsidy cutoffs and full-income repayment jumps, not from the income tax schedule itself.

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The Supreme Court’s 6-3 decision on February 20, 2026, striking down the administration’s global tariffs, is a landmark for the separation of powers. It also serves as a significant validation of the analysis I published here months ago. In my previous post, The Legal Case Against Tariffs, I argued—well ahead of the current headlines—that these levies did not address a bona fide emergency.

Much like the student debt discharge of the Biden era, these claims of “emergency” were a mere pretext to seize powers explicitly reserved for Congress. The Court has now officially drawn the same line I highlighted early on -- the executive branch cannot use vague “emergency” statutes to bypass the legislative process.

The Refund Mess: $1,600 and the “Pass-Through” Problem

A critical difference between the student debt saga and this tariff crisis is the preliminary injunction. Biden’s debt discharge was halted before money moved; Trump’s tariffs were not. The government has already collected over $133 billion in duties that have now been declared unlawful.

• The Household Burden: Data from the Tax Foundation and recent consumer price indices suggest these tariffs cost the average household more than $1,600 per year.

• The Recovery Problem: Who is due the refund? The importer of record (the company) paid the duty at the border, or the consumer paid the inflated price at the shelf.

• A Potential Solution: One equitable path would be a flat $1,600 refund to households to cover passed-along costs, with companies receiving the remainder to cover unrecovered margins.

Litigation: A David vs. Goliath Battle

Currently, the only path to a refund is through the U.S. Court of International Trade (CIT). This creates a massive barrier for the “little guy”:

• Class Actions: While a class action would be the most efficient way to help small firms and consumers, they are notoriously difficult to certify in trade court.

• The “Lawyer Tax”: Even if successful, legal fees typically devour 30% of the recovery.

• The Deadline: Small companies are less equipped to sue, and if they didn’t formally protest their “liquidated” entries within 180 days, that money may be legally trapped in the Treasury forever.

The War Powers Trap: Why Iran is Different

There is a segment of the political left currently feeling “gleeful” about this ruling, believing it paves the way for Congress to use similar logic to invoke the War Powers Act and block the administration from military engagement with Iran.

I do not share this view. The Court just checked the President’s economic reach. Military “emergencies” are a much more complex legal thicket. Congress has the power to declare war but the president, the Commander in Chief, has to have the power to act quickly and use force when necessary.

Constitutional vs. Statutory: The tariff defeat was largely a matter of statutory interpretation—the Court ruled that the IEEPA simply doesn’t grant taxing power. War powers involve the intersection of the Constitution and the 1973 War Powers Resolution, a “political question” the Court often avoids.

The “Pretext” Bar: It is much easier for a court to prove that “trade deficits” are a pretext for a tax than it is to prove that “imminent threats” in the Middle East are a pretext for military action.

History warns that while the Court can safely correct an executive’s accounting error, it is ill-equipped to second-guess a tactical one. Consider the 1999 NATO bombing in Kosovo: When members of Congress sued to stop the campaign because the 60-day limit of the War Powers Resolution had passed, the courts refused to intervene, labeling it a ‘political question.’ Had the judiciary forced a mid-operation halt, it would have shattered a multinational alliance and likely led to a humanitarian catastrophe on the ground.

Forcing a President to litigate a withdrawal in the ‘zone of twilight’ between branches risks creating a vacuum of authority that, in a flashpoint like Iran, could prove far more dangerous than the action it seeks to restrain.

Linking the two may feel like a consistent “anti-emergency” stance, but legally, they are different animals. Those hoping the tariff ruling is a blueprint for stopping a war in Iran are likely overestimating the Court’s willingness to manage the battlefield from the bench.

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In our current political system, most policy proposals are designed to pander to the extremes of the party. Republicans who are slightly right of center and Democrats who are slightly left, who probably have more in common with each other than the people controlling their party, have very little input on the development and enactment of policy.

The consequence is lack of permanent meaningful progress on a wide variety of financial and economic issues. Initiatives on health care, student debt, and energy and the environment, taxes, and education adopted in one administration are reversed or phased out in the next one. The problem of entitlement spending is ignored despite the measurable costs of delay.

The nation is not on the right course and the inability of the two-party system to address economic problems is the primary reason. The primary purpose of this memo is to succinctly describe how the political process is impeding progress in seven areas – (1) entitlement reform, (2) tax and budget policy (3) health insurance coverage, (4) student debt, (5) incentives and rules shaping retirement savings, (6) energy and the environment, and (7) education reforms.

Entitlement Reform

Republicans and Democrats sharply differ on entitlement reform with Republicans in general favoring changes to benefits and Democrats favoring additional revenue.

Republican positions on entitlement reform fall into four camps – fiscal hawks favoring cuts to benefits, pragmatists favoring more gradual adjustments (mostly on the benefit side), reformers who want to divert existing tax revenue into private accounts, and supply siders who believe the imbalance will disappear due to economic growth from the President’s agenda.

Democratic policymakers generally favor closing projected entitlement gaps through higher revenues, particularly from upper-income households. Proposals include raising or extending payroll taxes on higher earners, increasing capital gains and other investment income taxes, and expanding corporate tax contributions to sustain scheduled benefits.

A few Senate centrists (Mark Warner, John Hickenlooper, Lisa Murkowski, and Susan Collins) and members of the problem solvers conference in the House have considered bipartisan reform packages based on both adjustments to revenues and taxes.

Neither party has prioritized action on this issue despite current law mandating automatic benefit cuts once the trust fund is depleted, projected to occur in 2033. Continued delay increases both the magnitude of the adjustment required and the likelihood that changes will be implemented suddenly rather than phased in gradually.

· Delaying reform until the depletion date would require a permanent payroll tax increase of roughly 4¼ percentage points—about 0.6 percentage points larger than acting immediately under current Trustees estimates—or an equivalent, abrupt reduction in scheduled benefits.

Social Security provides at least half of total income for about half of retirees, and it provides 90% or more of total income for roughly 25% of retirees. Reform to Social Security must therefore proceed in tandem with policies that reduce barriers to private saving, given the central role the program plays in retirement income.

A broader discussion on the need to advance solutions that address both Social Security’s finances and household saving constraints can be found here.

Tax and Budget Policy

Tax policy reflects a deep philosophical divide about the size and role of government.

Republicans generally prioritize lower marginal tax rates, particularly on capital gains and business income, arguing that investment and growth expand the economic base and ultimately strengthen revenues.

Democrats tend to favor higher rates on upper-income households and capital gains to finance social programs and address inequality; proposals such as a federal wealth tax illustrate the breadth of that ambition, though questions remain about administrative feasibility and revenue stability.

The divergence is especially pronounced on capital gains. Republican opposed all tax hikes but their assertion that increases in capital gains tax rates would be largely offset by declines in capital gains realizations has support in the economic literature.

An alternative approach which could raise more money than simply raising tax rates on capital gains involves expanding the capital gains tax base by eliminating 1031 exchanges, by reducing the step-up in basis at death and even by a small tax on unrealized gains upon death. One discussion of the literature on capital gains realizations with insights on the housing market can be found here.

Layered on top of this divide is a budget process increasingly built around sunset provisions and temporary policies. Major tax packages and spending initiatives are structured to expire within ten years, creating recurring “fiscal cliffs.” When control of the White House changes—from the Bush administration to Obama, from Obama to Trump, from Trump to Biden, and most recently from Biden to Trump the incoming administration confronts scheduled expirations, which will automatically trigger abrupt tax increases unless reversed by Congress.

As a result, most of the tax changes in a new tax bill are used to either prevent the automatic tax increase or fund new initiatives rather than reduce the trajectory of the ratio of debt to GDP. Tax policy impacts every sector of the economy, hence, these tax changes often disrupt important programs, as demonstrated by the recent impact of the 2025 tax bill on ACA state health insurance exchanges.

Health insurance coverage

The Republican Party has demonstrated over many years that expanding and improving health insurance coverage is not a governing priority. Their central focus has remained tax reduction rather than structural expansion of coverage or stabilization of insurance markets.

The progressive wing of the Democratic Party is increasingly tied to Medicare for All. The centrist wing of the Democratic party appears more focused on managing progressive expectations than on advancing and defending pragmatic reforms. A useful discussion of the conflict between progressives and centrists on Medicare for All can be found here.

The central consequence of the divides, both between and within parties, has been paralysis followed by policy whiplash. Rather than durable reform, health coverage has swung back and forth with each change in administration.

In the first Trump term, key Obama-era initiatives were scaled back or eliminated. The Biden administration restored many of those provisions and layered on temporary premium subsidy enhancements and Medicaid expansions. The second Trump term then reversed those expansions and allowed enhanced ACA premium subsidies to lapse. The instability culminated in a government shutdown fight centered on whether premium subsidies would be extended.

The current congress allowed the enhanced premium subsidy to lapse, a decision that is increasing costs and resulting in the loss of health insurance coverage for many households. Both parties deserve blame for this outcome, the Democratic party by making the enhanced credits temporary when they could have prioritized permanent credits and the Republican party for basically being indifferent about health care.

The ACA premium tax credit is not perfect, but it and Medicaid are the only options for most working-age households without employer-based insurance. Interestingly, the 2025 tax bill cut both programs.

State exchange health insurance market can and should be improved. Go here for a discussion of potential improvements.

The test over enhanced premium tax credits was in some ways the canary in the coal mine for the coming battle over the likely reaction to pending automatic cuts to Social Security benefits. Failure to act on automatic Social Security benefits, projected to occur around 2033, would impact more households and have a large effect on the overall economy than the decision to allow the enhanced ACA premium tax credits to lapse.

Financial distress caused by gaps in health insurance coverage increase medical debt can reduce quality and access to health services which reduces life expectancy and creates financial hardship by increasing medically related debt. The increase in medical debt makes it difficult for people to save for retirement, which makes it more difficult to implement a Social Security reform based on the assumption that household savings increase.

Student Debt Policy

Student debt policy reflects another sharp philosophical divide.

The Biden student debt policy was motivated by the progressive wing of the party, which has the goal of free college or debt-free college. The administration attempted to implement broad-based student loan discharges through two primary mechanisms: an initial effort grounded in the HEROES Act and a subsequent regulatory approach undertaken by the Department of Education pursuant to its authority under the Higher Education Act.

Biden also enacted an executive order to expand IDR loans (the SAVE act). Both the broad debt discharge efforts and the proposed SAVE program were either overturned or halted by the courts and eventually killed by the Trump administration.

Republicans, by contrast, have emphasized limiting federal exposure and curbing what they view as open-ended subsidies. The 2025 tax bill included a complete overhaul of student loan programs in the United States including the consolidation of all IDR student loans to one new program (RAP) and significant limitations on student use of federal loan programs.

The new student loan provisions were enacted without any Democratic input. It is accurate to say that Republicans are responsible for student loan policy and they appear to have gone too far.

· The increase in required payments prior to any loan discharge (360 verified payments under RAP) increases the likelihood that borrowers will approach retirement still carrying student debt.

· The elimination of most deferments and forbearances makes it harder for borrowers who experience abrupt job transitions or other financial hardships to every reach the full 360 qualifying payments.

· Payment tiers that are not indexed to inflation will quickly result in sharply higher student loan payments, undermining the ability of the RAP loan to keep payments affordable for future borrowers. The discussion of the impact of inflation or RAP payments can be found here.

· The current RAP loan payments increase implicit marginal tax rates, which in conjunction with ACA premium tax credits that are linked to AGI, will substantially reduce disposable income after an increase in AGI. See this paper.

· The provision of the RAP loan program applying the rate in each income category to all income instead of just incremental income can result in a small increase in income leading to a large increase in payments

· Borrowing caps and restrictions on graduate lending fall heavily on physicians leading to large increases in total student debt during residency and fellowship programs. This change could impact health care costs and access to training. Published here on my blog and at NASFAA.

Any student debt framework that increases long-run household indebtedness or impedes private retirement savings makes comprehensive Social Security reform more difficult to achieve. Neither current political party is offering an economically efficient way to reduce student debt burdens to facilitate additional savings for retirement and other purposes.

Savings Incentives

Unlike other economic issues, retirement savings incentives have drawn meaningful bipartisan cooperation. Congress enacted the SECURE Act in 2019 and followed with SECURE 2.0 Act in 2022, both designed to expand access to tax-advantaged retirement savings.

The original SECURE Act raised the required minimum distribution age, removed age limits for traditional IRA contributions, facilitated pooled employer plans to expand small-business access, and extended eligibility to long-term part-time workers. These changes modestly broadened participation and modernized plan rules.

SECURE ACT 2.0 added automatic enrollment requirements for many new employer plans, enhanced startup tax credits for small businesses, increased catch-up contribution limits for older workers, and replaced the Saver’s Credit with a federal “Saver’s Match” intended to boost incentives for lower-income households. The legislation reflects serious bipartisan effort to strengthen retirement security.

These reforms do not address the core problem: millions of households lack both sufficient income and financial margin to save meaningfully for retirement. Many provisions enhance tax advantages for workers already participating in plans rather than materially increasing net saving among households burdened by medical costs, housing expenses, or student debt.

A more detailed evaluation of SECURE 2.0, including distributional effects and long-term fiscal implications, is available at Economic Memos: https://www.economicmemos.com/p/evaluating-the-secure-act-20

Energy and the Environment:

Energy policy under President Biden and President Trump reflects sharp partisan differences — but also an uncomfortable similarity Both administrations based decisions on energy projects on its predetermined preferences rather than the economics of the proposal or even the national interest.

President Biden entered office committed to rapid decarbonization. The Inflation Reduction Act and aggressive EPA rulemaking tilted incentives decisively toward wind, solar, batteries, and electric vehicles. Federal oil and gas leasing slowed. Methane rules tightened. Pipeline politics became symbolic. Even when U.S. oil production later hit record highs — largely driven by private-land drilling and global prices — the federal message was clear: fossil fuels faced regulatory headwinds and a narrowing long-term runway.

President Trump’s return brought an equally forceful reversal. Withdrawal from the Paris Agreement, regulatory rollbacks, and a reopening of federal leasing re-centered oil, gas, and coal. At the same time, offshore wind permitting stalled and renewable tax preferences were narrowed.

On the surface, these are opposing philosophies. Biden favored wind; Trump favored LNG and oil. But neither Biden’s opposition to LNG nor Trump’s opposition to wind can be supported by a rigorous economic analysis and in both cases the administration’s actions were contrary to the national interest.

A more detailed examination of how Biden’s approach to LNG and Trump’s approach to wind favored political considerations over economic ones can be found here: https://www.economicmemos.com/p/trump-and-biden-on-wind-and-lng

Education Policy: Philosophical Divide and the Case for Competition

Education policy reflects a fundamental divide between the parties about the role of government and markets in delivering core public services.

The Democratic Party perspective emphasizes strengthening traditional public school systems through increased funding, regulatory oversight, and equity-driven accountability. The Republican Party perspective prioritizes parental authority and school choice.

The dispute is not primarily about funding levels, although funding is never irrelevant. The deeper dispute concerns whether the education system should be organized primarily as a public monopoly or as a regulated market with multiple competing providers.

This dispute is a traditional microeconomic and industrial organization question.

Is K–12 education best understood as a competitive market, or as a natural monopoly?

A natural monopoly exists when scale economies are so strong that a single provider can supply the market at lower average cost than multiple firms. In some rural areas, with sparse population and high fixed costs, that characterization is plausible. Moreover, in many communities there is strong political and cultural support for a neighborhood school.

Competition between schools is not the only way to bring Choice can be achieved by competition among providers inside a single school. Both the recent essay in The New York Times by Luis Elorza and the essay on Economic Memos titled Competition in the Education Industry: An Industrial Organization discuss how educational opportunities can be expanded and improved by allowing multiple education providers access to students inside a school. The Times article explicitly compares this approach to the one taken by Apple when it chose to open its App store to outside developers.

In this framework, competition occurs not through price but through institutional performance and parental choice. Providers compete on instructional models, culture, specialization, and results. The state maintains guardrails to protect equity and prevent cream-skimming.

Now personalize the situation. A middle-school student is struggling in math: the textbook is dense, the pace is misaligned, and the teacher is overwhelmed. Unless the parents are wealthy, there is little practical alternative—private tutoring costs hundreds per month, test-prep firms charge thousands, and specialized programs are geographically limited.

Under a modular course system, that student could enroll in math with a different approved provider while remaining in the same school for other subjects. Course-level competition makes targeted substitution possible and broadens access in a way whole-school choice often cannot.

The policy debate properly defined is not about eliminating schools but allowing the consumers (the students and parents) the right and ability to gravitate towards the courses giving the best outcomes.

Conclusion

Across entitlement reform, tax and budget policy, health insurance coverage, student debt, retirement savings, energy, and education, the pattern is consistent: neither party has demonstrated the capacity to deliver durable, economically coherent reform.

Republicans emphasize tax reduction, deregulation, and fiscal restraint, yet repeatedly defer structural entitlement adjustments, tolerate debt expansion when in power, and design student loan and health insurance retrenchments that create new distortions.

Democrats prioritize distributional goals and expansion of public programs, yet rely on temporary measures, aggressive executive action vulnerable to reversal, and revenue assumptions that often understate long-term fiscal constraints.

The result is not progress but pendulum swings—initiatives layered on, scaled back, reversed, and reinstated with each change in administration.

Nowhere is the cost of delay clearer than Social Security. Postponing reform until trust fund depletion, currently projected around 2033, would require a permanent payroll tax increase of roughly 4¼ percentage points—about 0.6 percentage points larger than acting today under current Trustees estimates—or an equivalent abrupt reduction in scheduled benefits. Delayed action converts a manageable, phased adjustment into a sudden and economically disruptive correction. The failure to address predictable arithmetic is not ideological disagreement; it is sustained avoidance of governing responsibility.

This instability carries measurable economic costs. Temporary tax and spending provisions undermine long-term planning. Health insurance expansions that lapse and student debt policies that oscillate create financial uncertainty for households and employers. Energy policy alternates between regulatory constraint and regulatory rollback rather than applying consistent economic criteria. Even in retirement policy, where bipartisan cooperation has been real, incentives alone cannot overcome stagnant income growth, rising medical debt, and educational borrowing burdens.

A viable third-party economic platform would begin from a different premise: durable reform requires combining elements traditionally claimed by both parties—measured entitlement adjustments with revenue reform, stable tax policy paired with base broadening, market competition alongside targeted safety nets, and energy and education rules guided by economic performance rather than ideology.

The objective has to become the betterment of society not partisan advantage. The analysis presented here casts doubt about whether this objective is achievable in our current two-party system.

About This Blog

This is a foundational post for the blog because it defines its core mission: advancing durable, economically grounded policy beyond the constraints of the two-party system. It serves as a framework for many of the analyses that follow. Most material here will remain free and accessible in order to encourage open and serious discussion. Support through free or paid subscription helps sustain the work and is appreciated.

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This paper identifies the limited but real set of U.S. House districts where a centrist or third-party candidate could plausibly compete in 2026 without functioning primarily as a spoiler. It starts from a simple premise: if a third party is to exercise real governing influence, it must combine electoral discipline with a substantive, forward-looking policy agenda, which would improve economic outcomes and prospects for Americans, rather than symbolic participation. Using explicit screening criteria and district-level classification, the paper distinguishes districts where a major party has ceased to function as a viable governing option from districts that are merely competitive, and explains where third-party entry is realistic and where it is not. The analysis presented here suggests that a third-party effort concentrated on gaining House seats could obtain real political influence much sooner than the political establishment realizes.

Key Findings

• The current two-party system is increasingly effective at blocking change while failing to produce durable solutions to widely acknowledged problems in housing affordability, health care costs, fiscal sustainability, and economic security. Voters dissatisfied with outcomes but alienated by ideological extremism lack a credible governing alternative.

• There is no realistic near-term path for a third party to achieve governing power at the presidential or U.S. Senate level. Presidential races are prohibitively nationalized and structurally winner-take-all, while Senate races are prohibitively expensive and dominated by entrenched party brands.

• The U.S. House of Representatives is the only federal institution in which a third party can plausibly gain durable governing leverage without first achieving national dominance. House races are less expensive, more candidate-sensitive, and capable of producing balance-of-power dynamics with relatively small seat totals.

• Using explicit screening criteria, this paper identifies 53 U.S. House districts in the 2026 cycle where a centrist or third-party candidate could plausibly compete without primarily functioning as a spoiler. Districts dominated by a single party at roughly 70 percent or more of the vote are excluded.

• Electoral closeness alone is insufficient to generate viable centrist opportunity. In addition to recent margins, districts are screened for party brand durability, nomination dynamics, ballot-access constraints, and the likelihood that a third-party candidacy could replace rather than fragment an existing governing coalition.

• Five mechanisms generate centrist opportunity: Democratic brand nonviability, Republican brand nonviability, even partisan balance combined with nomination instability, right-wing primary extremism, and progressive primary overreach. These mechanisms frequently overlap within the same district.

• The 53 districts identified can be grouped into five mutually exclusive categories reflecting their dominant pattern, including rural replacement districts, one-party urban and suburban districts, true swing districts, extremism-driven off-ramps, and progressive runaway primary districts.

• Primary election outcomes play a decisive role in shaping centrist opportunity in several districts. Third-party viability often depends less on baseline partisan balance than on whether primary electorates nominate candidates misaligned with the general-election median.

• Several states with recent close House races, including New Mexico, Washington, and Oregon, are deliberately excluded from the opportunity set. In these states, party brands and nomination processes remain sufficiently functional that third-party entry would likely fragment rather than replace existing coalitions.

• Entire states—including Texas and Florida—produce no plausible centrist opportunities in the 2026 cycle due to combinations of restrictive ballot-access rules, high media costs, entrenched party organizations, and high-propensity partisan turnout.

• A centrist third party that focuses narrowly on the House, secures a relatively small but cohesive bloc of seats, and aligns with the bipartisan Problem Solvers Caucus could plausibly exert disproportionate influence over House leadership and agenda-setting in a closely divided chamber.

• That influence would only be durable if anchored in a substantive, forward-looking economic agenda focused on affordability, household financial security, and long-term system sustainability rather than procedural obstruction or ideological signaling.

Introduction

This paper starts from a premise that has become increasingly mainstream: the United States is on the wrong trajectory, and the existing two-party system has shown limited capacity to correct course.

Polling over the past several years consistently shows that a majority of Americans believe the country is headed in the wrong direction and that their children will not enjoy the same economic opportunities they had. Public confidence in upward mobility, affordability, and institutional competence has eroded sharply.

That erosion is visible across multiple policy domains.

Housing affordability has deteriorated to the point where many younger Americans are abandoning expectations of homeownership.

Long-forecast fiscal challenges facing Social Security and Medicare remain unresolved despite years of bipartisan acknowledgment.

Health policy is moving in reverse, with the failure to sustain enhanced premium tax credits reducing coverage while fundamental problems of affordability, cost growth, and system design remain unaddressed.

Budget brinkmanship and government shutdown threats have become routine features of governance rather than exceptional failures.

Political discourse has simultaneously become more vitriolic and less constructive, with incentives in both major parties rewarding ideological performance over coalition-building and problem-solving.

The contemporary two-party system has become effective at blocking change while remaining unable to produce durable solutions to widely recognized problems. Voters dissatisfied with outcomes but alienated by ideological extremism are left without a credible governing alternative.

The second motivation for this paper is pragmatic. There is no realistic near-term path for a third-party breakthrough at the presidential or U.S. Senate level.

Presidential races are prohibitively expensive, nationally polarized, and historically unforgiving to new entrants. Senate races combine high costs with winner-take-all dynamics that strongly favor entrenched party brands. In both arenas, third-party efforts are far more likely to function as spoilers than as durable governing alternatives.

The House of Representatives is different. House races are less expensive, less nationalized, and more sensitive to candidate quality and local conditions. Control of the chamber often turns on a relatively small number of seats, making concentrated gains meaningful even without majority support. The House is therefore the only institution where a third party can plausibly acquire real governing leverage without first achieving national dominance.

A third party that secures even a modest bloc—on the order of ten to twenty seats—could, in combination with the existing problem-solvers caucus, plausibly hold the balance of power in a closely divided House. Such a bloc could influence the formation of a governing majority and condition its support on procedural reforms or substantive policy commitments. In practice, this would move the House toward a more coalition-oriented mode of governance, in which power is assembled through negotiation rather than assumed through party labels alone.

This paper therefore focuses narrowly on identifying where a third-party entry could plausibly succeed in House races, and where it cannot. It seeks to identify the races where the third party might win, get some influence and not be a spoiler between two candidates from the currently dominant parties.

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Where Centrist Third-Party Candidates Can Actually Compete in 2026: A framework for identifying plausibly competitive third-party House opportunities

The analysis that follows identifies a limited set of 2026 U.S. House districts where a centrist or third-party candidate could plausibly compete. It is not a comprehensive inventory and does not attempt to forecast outcomes.

Districts in which one major party reliably receives roughly 70 percent or more of the general-election vote are excluded from consideration. Even where such districts exhibit intense primary competition or internal factional conflict, third-party entry is not realistically viable under current conditions.

This screening rule is necessarily imperfect: some lopsided outcomes reflect weak nominees rather than stable voter preferences. Nonetheless, it excludes cases where third-party intervention would almost certainly be irrelevant or purely symbolic.

Electoral closeness alone is also insufficient to generate viable centrist opportunity. In addition to recent margins, the analysis applies several material filters: the durability of party brands, the capacity of dominant parties to nominate candidates aligned with the general-election median, ballot-access and procedural constraints, and the likelihood that a third-party candidacy would replace rather than fragment an existing governing coalition. These additional filters explain why some recent swing districts are excluded despite narrow outcomes.

Districts included in this memo exhibit one or more of the following factors. A single district may qualify under multiple factors.

Factor 1 — Democratic brand nonviability
Districts where Democratic nominees are not functioning as a credible general-election alternative under current political conditions, reflecting structural disadvantage rather than temporary candidate mismatch.

AK-AL; CO-03; MT-01, MT-02; WY-AL; SD-AL; ND-AL; NE-03; IA-02, IA-03; KS-02; MN-07; MO-03, MO-06, MO-07; PA-15, PA-16; KY-04; WV-02; NV-02; NM-02.

Total districts exhibiting Factor 1: 21

Factor 2 — Republican brand nonviability
Districts where Republicans are structurally noncompetitive in general elections and outcomes are determined within the dominant coalition rather than between parties.

CA-12, CA-17, CA-30, CA-32, CA-34, CA-37, CA-47, CA-51; IL-07; MA-07; MD-04; NY-16; NY-21; PA-12.

Total districts exhibiting Factor 2: 16 (see procedural note on California below)

Factor 3 — Even partisan balance

Districts with persistent two-party competition and narrow recent margins where neither party’s nomination process reliably produces candidates aligned with the general-election median.

CO-08; PA-07, PA-08; AZ-01, AZ-06; MI-07; NJ-07; NC-01, NC-13; VA-02; WI-03.
Total districts exhibiting Factor 3: 11

Factor 4 — Right-wing extremism risk

Districts where Republican primary dynamics or incumbents consistently alienate moderate general-election voters.

CO-05; CO-04; GA-14; OH-12, OH-14; PA-15, PA-16; MO-03; KS-02.
Total districts exhibiting Factor 4: 9

Factor 5 — Progressive extremism

Districts where Democratic primary outcomes routinely produce nominees misaligned with district medians.

NY-10; NY-12; NY-16; NY-21; PA-12; CA-34; CA-37.
Total districts exhibiting Factor 5: 7

Overlap and total flagged universe

Because districts may exhibit more than one factor, the factor lists contain 64 total factor assignments across 53 unique House districts, reflecting 11 overlapping cases. Explicit counts are shown to ensure transparency in classification.

Total unique districts exhibiting at least one factor: 53

Procedural note on California’s top-two primary

California’s top-two (“jungle”) primary system creates a narrow procedural pathway for a centrist or nonaligned candidate in otherwise one-party districts when the dominant-party field fragments and the opposing party is structurally weak. California districts appear here solely because this pathway exists. Absent the top-two system, they would not meet the competitiveness threshold applied elsewhere.

Categories of potentially competitive districts

Each district is assigned to one and only one category based on its dominant or recurring pattern. Categories are mutually exclusive even though the underlying factors are not.

Category A — Rural replacement districts
Dominant pattern: Democratic brand nonviability, often combined with extremism risk on the right.

AK-AL; CO-03; MT-01, MT-02; WY-AL; SD-AL; ND-AL; NE-03; IA-02, IA-03; KS-02; MN-07; MO-03, MO-06, MO-07; PA-15, PA-16; KY-04; WV-02; NV-02; NM-02.
Total districts in Category A: 21

Category B — One-party urban and suburban districts
Dominant pattern: Republican brand nonviability, with procedural viability concentrated in California.

CA-12, CA-17, CA-30, CA-32, CA-47, CA-51; IL-07; MA-07; MD-04.
Total districts in Category B: 9

Category C — True swing districts
Dominant pattern: Even partisan balance combined with nomination instability.

CO-08; PA-07, PA-08; AZ-01, AZ-06; MI-07; NJ-07; NC-01, NC-13; VA-02; WI-03.
Total districts in Category C: 11

Category D — Potential movement towards right fringe in Republican party

CO-05; CO-04; GA-14; OH-12; OH-14.
Total districts in Category D: 5

Category E — Potential movement towards left fringe in Democrat Party

NY-10; NY-12; NY-16; NY-21; PA-12; CA-34; CA-37.
Total districts in Category E: 7

Category reconciliation check

Category totals sum to 53, exactly matching the number of unique districts identified under the factor framework.

Role of primary outcomes in shaping centrist opportunity

The classifications above describe structural conditions rather than fixed outcomes. In several districts identified here, the viability of a centrist or third-party candidacy will depend materially on the nominees produced by the major-party primary process.

Centrist opportunity expands when primary electorates generate nominees misaligned with the general-election median. This dynamic operates in both ideological directions. In some rural and exurban districts, hardline Republican primary victories can weaken otherwise durable party brands, creating space for a centrist candidate to consolidate rather than split the governing coalition. A parallel mechanism applies in selected urban, suburban, and swing districts where progressive primary outcomes shift Democratic nominees meaningfully left of district medians.

Accordingly, the districts identified in this memo should be understood as a conditional watch list rather than a static roster. In several cases, centrist opportunity will turn less on baseline partisan balance than on evolving nomination dynamics. As the 2026 cycle develops, close monitoring of primary contests will be necessary to distinguish districts where third-party entry could plausibly replace a failing nominee from those where restraint remains the correct strategic choice.

States producing no plausible centrist opportunities

Under the criteria applied here, the following states produce no U.S. House districts worth tracking in the 2026 cycle: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oregon, South Carolina, Tennessee, and Texas.

In much of the Deep South, Democratic collapse reflects partisan realignment rather than ideological vacancy, leaving no displaced center to consolidate.

Oregon differs in form rather than outcome. Polarization there is geographically clean rather than electorally unstable, with ultra-blue metropolitan districts and reliably red rural districts separated by a small number of competitive but brand-stable seats. While individual Oregon races may be close, existing party structures continue to supply nominees capable of assembling majority coalitions, leaving little room for third-party replacement under current conditions.

Texas and Florida merit special notice. Although frequently cited as potential targets, both fail every mechanism that generates centrist opportunity. Ballot-access rules require early commitment before nomination dynamics are known, media markets are prohibitively expensive even for ostensibly rural districts, party brands are fully institutionalized, and turnout is dominated by high-propensity partisan voters. Taken together, these conditions eliminate any realistic centrist path in 2026, even in districts that may appear demographically tempting in isolation.

Implications and Conclusions

The analysis above leads to a clear strategic implication: there is a narrow but real pathway for a centrist third party to acquire durable governing influence in the U.S. House of Representatives over the next two election cycles. That pathway does not exist at the presidential level and does not plausibly exist in the Senate under current political and institutional conditions. Everything depends on whether the third party behaves like a governing institution rather than a protest vehicle.

House races are the only federal contests where a third party can realistically win seats, accumulate bargaining power, and translate votes into policy leverage. Even in relatively inexpensive media markets, Senate races are prohibitively costly and structurally nationalized. The Iowa experience illustrates this contrast clearly: competitive House races typically require single-digit millions of dollars, while Senate races quickly escalate into tens of millions even in smaller states. In large or competitive states such as Texas and North Carolina, Senate races regularly exceed one hundred million dollars, with spending driven not by persuasion but by national partisan mobilization. These cost dynamics alone make Senate contests an inefficient and strategically unsound target for a new party attempting to build durable representation.

The presidency is even less viable. Presidential races are fully nationalized, winner-take-all exercises dominated by two entrenched party brands with deep donor, ballot-access, and media advantages. Third-party presidential efforts almost inevitably function as spoilers rather than governing entrants, and they risk discrediting any downstream effort to build legislative credibility. Concentration on the House is therefore not merely a tactical choice but a prerequisite for success.

A limited caveat applies to Maine and Alaska, which possess idiosyncratic electoral features that marginally reduce the structural barriers facing non-major-party candidates, including ranked-choice voting and a weaker attachment to national party brands. In both states, a centrist or independent Senate candidacy is not mechanically impossible. Nonetheless, such efforts remain long shots and should be understood as exceptions that prove the general rule rather than counterexamples to it. More importantly, even in Maine and Alaska, Senate contests risk diverting scarce organizational attention, donor capital, and candidate recruitment away from the House, where the same resources are far more likely to translate into durable governing leverage. Any engagement in these Senate races should therefore be strictly subordinate to a House-first strategy.

If a centrist third party were to secure a relatively small but cohesive bloc of seats, its influence would be disproportionate to its size. In a closely divided House, a group of ten to twenty members, particularly when aligned with the existing bipartisan Problem Solvers Caucus, could determine control of the chamber. Speaker elections already demonstrate the fragility of party discipline under polarized conditions. In a scenario where Republicans hold a narrow numerical edge but cannot unify behind a Speaker, a third party could credibly insist on selecting the Speaker and conditioning its support on a negotiated governing agenda. The alternative would be to allow the Democratic leader, currently Hakeem Jeffries, to assume the Speakership. That choice point gives a centrist bloc real leverage rather than symbolic influence.

That leverage would only be sustainable, however, if it is exercised constructively. A third party that limits itself to procedural obstruction or ideological signaling would quickly lose credibility with both voters and potential coalition partners. To function as a governing force, the party must present a substantive, forward-looking policy agenda that speaks directly to voter concerns about affordability, economic security, and long-term growth.

In that respect, the agenda should be centered on the economy, understood through the lens of household finances rather than abstract macroeconomic indicators. Rising costs of living are not a single-issue problem; they are the cumulative effect of policy failures across multiple domains. Existing analyses highlight two especially important dimensions. One examines how rising electricity and energy costs feed directly into inflation and erode affordability across housing, goods, and services. Another evaluates the economy through its concrete impact on household balance sheets, concentrating on four areas where stress is most acute and policy responses are weakest: health insurance affordability, student debt burdens, inadequate retirement saving, and the long-term instability of Social Security. Taken together, these perspectives point toward a centrist governing platform focused on cost containment, system design, and long-run sustainability rather than ideological positioning.

The uneven geographic distribution of centrist opportunity is not a weakness of this framework but one of its central conclusions. Viable third-party entry does not arise simply where voters describe themselves as moderate. It arises where existing party structures fail to supply candidates capable of assembling and governing a durable coalition. In those districts, a centrist candidacy can sometimes replace a failing party brand rather than fragment the electorate. Where those conditions do not exist, restraint is not caution but strategic discipline.

If a centrist third party concentrates on the House, targets only districts where replacement rather than spoilage is plausible and anchors its coalition role in a substantive economic agenda, it could plausibly acquire real governing influence after 2026 and, under favorable conditions, compete for majority control later in the decade. If it does not, the opportunity identified here will close quickly and may not reappear under current institutional conditions.

Author’s Note

The analysis in this paper draws on and complements two longer-form economic analyses by the author that examine affordability and household financial stress from distinct but related perspectives.

One paper focuses on the role of electricity and energy costs in driving inflation and eroding affordability across the broader economy. It examines how rising power costs transmit through housing, goods, and services, amplifying cost-of-living pressures even where headline inflation appears to be moderating. It also discusses how Trump Administration restrictions on renewable energy are contributing to the spike in electricity prices, which appears linked to higher inflation. That analysis is available at:
https://www.economicmemos.com/p/rising-power-costs-rising-prices

A second paper evaluates the U.S. economy through its impact on household balance sheets rather than aggregate indicators. It concentrates on four areas where economic stress is most acute and policy responses are weakest: health insurance affordability, student debt burdens, the adequacy of retirement saving, and the long-term financing of Social Security. That analysis is available at:
https://www.economicmemos.com/p/neither-party-is-solving-the-household

Together, these pieces are intended to inform a centrist policy framework focused on cost containment, household economic security, and long-term system sustainability rather than short-term partisan positioning.

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Key Results

· Electricity prices are rising roughly 2.5× faster than overall inflation, creating a direct input cost channel for inflation persistence.

· Utilities across major states are pursuing large, multi-year base-rate increases tied to grid investment, demand growth, and capital costs.

· Rapid expansion of AI data centers is driving structural electricity demand growth that current systems were not designed to absorb cheaply or quickly.

· Trump administration tax and regulatory actions are slowing renewable energy deployment at the exact moment new supply is most needed.

· Politically constrained energy supply—under both parties—raises long-run electricity prices and exacerbates inflation and affordability risks.

Introduction:

During the 2024 campaign, Donald Trump repeatedly emphasized two economic claims. First, inflation had spun out of control under the Biden administration, with food prices—especially eggs—serving as the most frequently cited example. Second, the Biden administration’s energy policy, particularly its restrictions on oil production and drilling, was portrayed as a key driver of higher prices and weaker economic growth.

Now that Trump has returned to office, inflation is lower than at its peak during the Biden years but remains meaningfully above target. Electricity prices, in particular, continue to rise faster than overall inflation. Utilities across much of the country are seeking additional rate increases, citing higher capital costs and rapidly growing demand, including demand from AI data centers. Because electricity is a core input into nearly all economic activity, sustained increases in electricity prices risk feeding back into broader inflation pressures.

At the same time, the administration has taken several steps that may further strain electricity supply over the medium term. These include efforts to rescind or weaken tax incentives for solar and wind power, along with new regulatory actions targeting wind projects and likely to affect solar development as well. Democrats have been slow to recognize that, despite different rhetoric, the Trump administration is repeating elements of the Biden energy-policy mistake it once criticized: constraining energy supply in ways that raise prices and risk undermining economic growth.

Recent increases in electricity prices and overall inflation

Recent inflation data show that electricity prices are rising far faster than overall consumer prices. Using Consumer Price Index data from the Bureau of Labor Statistics, electricity prices increased substantially over the most recent year, with gains that exceed headline inflation at both the national and regional level.

Nationally, electricity prices rose 6.7 percent from December 2024 to December 2025. Over the same period, the CPI for all items increased 2.7 percent, roughly 2.5 times the pace of overall inflation.

This divergence is not confined to a single region. Electricity prices increased 10.0 percent in the Northeast, 11.4 percent in the Midwest, and 5.5 percent in the South over the same period, while remaining below overall CPI inflation only in the West.

These consumer price increases are corroborated by upstream producer price data. The Producer Price Index for industrial electric power rose 5.6 percent from December 2024 to December 2025. This increase indicates that electricity-related cost pressures are appearing at the producer level as well as in retail electricity bills to consumers.

When electricity prices rise faster than overall inflation, these higher input costs can reinforce broader inflationary pressures and contribute to persistence over time.

The link between Electricity Prices and Future Inflation

There is a large economic literature linking energy price shocks to higher inflation and weaker real growth. Most of the foundational evidence focuses on oil and gas shocks during the 1970s, when energy costs rose sharply and fed into broad wage–price dynamics but there is substantial literature on the impact of electricity prices on future inflation.

Some academic studies:

Work by Kilian and coauthors shows that sustained increases in energy prices can spill over into core inflation through input costs and inflation expectations rather than remaining confined to headline measures.
Kilian et al. (2022), “Energy Price Shocks and Inflation,” Federal Reserve Bank of Dallas Working Paper
https://www.dallasfed.org/~/media/documents/research/papers/2022/wp2224.pdf

Recent IMF analysis similarly finds that energy prices were a major contributor to post-pandemic inflation and that these effects persisted beyond the energy sector, particularly in Europe where electricity prices transmitted gas price shocks to households and firms.
IMF (2025), “The Energy Origins of the Global Inflation Surge”
https://www.imf.org/en/Publications/WP/Issues/2025/05/09/The-Energy-Origins-of-the-Global-Inflation-Surge-566804

Central bank research, including from the Federal Reserve Bank of Kansas City, suggests that energy price pass-through to core inflation is smaller today than during the 1970s oil shocks, reflecting better-anchored expectations and institutional changes. These findings are best interpreted as ruling out a return to 1970s-style wage–price spirals rather than eliminating the possibility of persistence from sustained energy cost increases.
Leduc and Wilson, “Has the Pass-Through of Energy Prices to Inflation Changed?”
https://www.kansascityfed.org/documents/5321/pdf-rwp09-06.pdf

Bednář et al. use European data to show that electricity price increases spill over into inflation excluding electricity itself, particularly after 2009, suggesting effects beyond mechanical CPI weighting.
Bednář et al. (2022), “Energy Prices Impact on Inflationary Spiral,” Energies
https://www.mdpi.com/1996-1073/15/9/3443

Patzelt and Reis show that increases in household energy prices raise inflation expectations in a persistent manner. Electricity is not isolated empirically, but electricity bills are among the most visible and salient household energy expenditures, making the results directly relevant for electricity-driven inflation persistence.
Patzelt and Reis, “Energy Prices and Anchoring of Inflation Expectations”
https://personal.lse.ac.uk/reisr/papers/99-oilanchoring.pdf

Firm-level evidence also supports gradual and persistent pass-through from cost shocks into prices. Bils et al. show that firms typically adjust prices slowly when input costs rise, and that price increases tend not to reverse quickly once implemented. Electricity is not modeled separately, but as a basic, hard-to-substitute input, sustained increases in electricity prices plausibly feed into broader prices over time.
Bils et al., “Input Cost Shocks and Firm Pricing,” NBER Working Paper
https://www.nber.org/papers/w22281

Time-series evidence linking electricity prices and inflation is more heterogeneous. Vector autoregression and Granger-causality studies that explicitly include electricity prices find mixed directional relationships across countries. In some cases, electricity prices Granger-cause CPI inflation; in others, inflation predicts electricity prices, or no statistically strong relationship appears.
For example:
“Electricity Prices, Renewable Energy, and Inflation,” VAR evidence for Latin America
https://e-ahuri.org/wp-content/uploads/1-Ahuri1494.pdf

Related VAR studies in emerging markets similarly find that electricity prices and inflation interact over time, but with country-specific dynamics rather than a universal causal ordering.
Kabir (2025), TEM Journal
https://www.temjournal.com/content/144/TEMJournalNovember2025_3107_3117.pdf

The consistent takeaway from this literature is not the existence of a universal causal rule, but that electricity prices and inflation interact in ways that can support persistence, particularly in regulated systems where price adjustments are delayed and then implemented in discrete steps. These dynamics align with a view of electricity prices as a potential amplifier of inflation persistence rather than as a one-time shock.

Recent utility rate filings and implications for electricity prices

Recent developments in regulated utility rate cases provide direct and contemporaneous evidence of continued upward pressure on electricity prices.

High-profile and increasingly contentious rate proceedings in large states including New York, California, New Jersey, and Colorado point to sustained increases in customer bills.

Some examples of recent rate hikes:

The scale and structure of rate filings in 2024 and 2025 suggest that current price increases likely reflect the early stages of a broader, filing-driven adjustment process that will continue to work through retail electricity prices over time.

In New York, major investor-owned utilities have sought multi-year rate increases tied to grid investment, reliability, and electrification-related capital spending. Consolidated Edison and National Grid have both faced public opposition and regulatory scrutiny over the size of requested increases, but filings nonetheless point to materially higher average bills even after expected regulatory modifications.

In California, utilities including Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric have pursued large base-rate increases driven by wildfire mitigation, hardening investments, and system resilience. Although rate design and approval timing vary, cumulative increases remain substantial and have drawn political and consumer backlash.

In New Jersey, Public Service Electric & Gas and other utilities have filed for rate increases linked to grid modernization, storm hardening, and rising capital expenditures associated with load growth and reliability standards. Rate cases have prompted extensive public hearings and political attention, with regulators weighing affordability concerns against infrastructure investment requirements.

In Colorado, Xcel Energy has filed rate cases reflecting transmission investment, resource replacement, and demand growth, with regulators explicitly citing system expansion and infrastructure needs as drivers of higher costs passed through to customers.
https://www.denverpost.com/2024/01/18/xcel-energy-colorado-rate-increase/

Broader Studies and Databases:

Beyond individual state cases, the clearest public signal on the aggregate magnitude of recent rate activity comes from PowerLines, a project that tracks utility rate increase requests and approvals using public utility commission dockets and contemporaneous reporting. PowerLines estimates that utilities requested and/or received approval for more than $34 billion in electric and natural gas rate increases through the first three quarters of 2025, affecting approximately 124 million customers nationwide. PowerLines characterizes this total as more than double the comparable amount in 2024 and among the highest levels of rate increase activity observed in recent years.

While PowerLines does not publish a fully standardized utility- or state-level dataset and relies on public reporting rather than a unified regulatory database, its quarterly aggregates provide a useful top-level indicator that the dollar volume of rate filings in 2025 was unusually large.

Industry research from S&P Global Market Intelligence points in the same direction using a different methodology. Drawing on its Regulatory Research Associates rate case database, S&P reports that U.S. investor-owned utilities requested a record amount of rate increases in 2025, even as the number of new rate cases declined relative to 2024. This pattern implies fewer but substantially larger filings, consistent with utilities pursuing broad base-rate resets tied to capital spending, grid hardening, system expansion, and rising demand rather than incremental adjustments.

Other commonly cited public data sources are less informative for assessing forward-looking price pressure. The Bureau of Labor Statistics and the U.S. Energy Information Administration provide high-quality data on realized electricity prices and inflation, but do not track filed or pending rate cases. State public utility commissions publish primary docket materials, but there is no centralized national database suitable for systematic aggregation. As a result, public assessment of the rate-filing pipeline necessarily relies on partial aggregations such as PowerLines and high-level industry summaries from vendors such as S&P Global.

Electricity inflation is already evident in realized price data, rate hikes are ongoing across major states, and utilities continue to pursue large base-rate resets.

Two factors – ongoing increases in demand from growth of AI data centers and reduced supply in renewables – from Trump Administration regulatory and tax actions – threaten to exacerbate these trends.

Structural growth in electricity demand from AI data centers

Electricity demand growth is shifting structurally as AI data centers expand rapidly across multiple regions of the United States.

Unlike many historical sources of load growth, AI-related demand is highly concentrated, continuous, and capital intensive. Large data centers require reliable, around-the-clock power, placing sustained demands on generation capacity, transmission infrastructure, and local distribution networks. The growth of AI computing is increasingly intersecting with electricity affordability debates at the state, regional, and local level.

Recent reporting documents how this demand surge is already reshaping electricity markets and regulatory discussions.

In parts of Virginia and Maryland with dense data-center development, wholesale electricity prices have risen sharply over recent years, and those increases are feeding into retail rates faced by households and small businesses. In the Mid-Atlantic more broadly, grid operators serving large multi-state regions, including PJM, are weighing proposals to manage the affordability and reliability implications of rapidly growing large-load customers. At the local level, communities in states such as Georgia, Maryland, and New Jersey have debated moratoria, zoning restrictions, and special rate structures in response to concerns that data center growth is contributing to higher electricity bills and straining grid infrastructure.

The link between AI-driven demand growth and consumer electricity prices is well grounded in standard demand and cost pass-through dynamics rather than analytically ambiguous. Electric systems were not designed for sudden additions of hundreds of megawatts of continuous load in specific locations, and the resulting generation, transmission, and distribution investments are typically financed through regulated rates. As a result, even when data centers ultimately support regional economic growth, their expansion can place upward pressure on electricity prices during the adjustment period, particularly where cost-allocation rules allow portions of the investment burden to be shared across the broader rate base.

Industry groups and large technology firms broadly acknowledge this adjustment challenge and argue that expanded supply can ultimately benefit consumers if investment keeps pace with demand and if pricing structures prevent cross-subsidization. Utilities and data center operators emphasize commitments to finance new generation and grid upgrades, to pay higher rates reflective of their load characteristics, and to coordinate capacity additions with system planners. These commitments reflect growing awareness of affordability and political risks associated with rising power costs, but they also imply significant execution challenges and long lead times before potential cost relief could materialize.

Recent legal, regulatory, and market analyses reinforce the distinction between clear demand-side pressures and uncertain cost incidence. Research highlights how utility rate design, special contracts, and negotiated tariffs can shift part of the cost of serving large data centers onto other customers, even when utilities assert that industrial load pays its full cost. At the system level, grid operators increasingly frame large-load integration as a reliability and affordability planning challenge, underscoring that price outcomes depend not only on demand growth but on the timing of supply additions and the structure of rate recovery. Consistent with this view, recent reporting shows that regions experiencing rapid data-center growth have also seen sharp increases in wholesale and retail electricity costs, reinforcing the risk that demand expansion translates into persistent price pressure when supply and regulatory adjustments lag.

Mitigating effects are neither automatic nor immediate. Supply additions take time, interconnection and transmission constraints remain binding in many regions, and rate design decisions determine whether industrial load genuinely bears its incremental costs. In the short to medium term, demand growth can outpace supply expansion, and in regulated systems the costs of accelerated investment are typically recovered through customer bills over time rather than absorbed upfront by large users. From a rate-setting perspective,

In this context, policies that slow or discourage new renewable generation appear misaligned with prevailing demand and cost conditions. Instead of easing adjustment pressures in a period of rapid load growth, recent actions affecting renewable supply risk reinforcing the very price dynamics that policymakers have previously sought to avoid.

Policy actions affecting renewable energy supply

Despite branding himself as an “energy growth” president, President Donald Trump is constraining renewable energy supply through tax and regulatory actions in much the same way that President Joe Biden constrained fossil fuel supply. In both cases, executive discretion and political preferences have been allowed to shape energy supply conditions, rather than demand growth, cost minimization, or scientific assessments of system needs.

Tax policy actions affecting solar and wind under Trump:

The One Big Beautiful Bill Act (H.R. 1), enacted in July 2025, significantly weakens clean-energy tax incentives that had previously supported wind and solar investment. The legislation accelerates phaseouts and tightens eligibility criteria for production and investment tax credits, reducing their effective value and increasing financing costs. Legal and tax analyses highlight that the law disrupts previously stable investment assumptions and raises policy risk premiums for new projects.

https://www.fticonsulting.com/insights/articles/h-r-1-energy-transition

Subsequent executive guidance directs Treasury to interpret these credits narrowly and frames them as market-distorting subsidies, reinforcing investor expectations that renewable incentives will continue to erode.
https://www.whitehouse.gov/presidential-actions/2025/07/ending-market-distorting-subsidies-for-unreliable-foreign%E2%80%91controlled-energy-sources/

The effects are not limited to utility-scale projects. Reporting indicates that residential solar credits are ending earlier than previously expected, with industry forecasts pointing to a sharp contraction in installations beginning in 2026, directly reducing demand for new renewable capacity.
https://www.ft.com/content/7704e28a-5ec3-4921-acc7-bbbd1fb97980

Regulatory and legal actions affecting wind and solar under Trump:

A direct parallel to federal leasing restrictions imposed on fossil fuels under the Biden administration can be found in Trump-era actions affecting wind. On January 20, 2025, the administration issued a memorandum temporarily withdrawing all areas of the Outer Continental Shelf from consideration for new or renewed offshore wind leasing, pending a review of leasing and permitting practices. This action effectively halted new offshore wind development across federal waters.
https://www.whitehouse.gov/presidential-actions/2025/01/temporary-withdrawal-of-all-areas-on-the-outer-continental-shelf-from-offshore-wind-leasing-and-review-of-the-federal-governments-leasing-and-permitting-practices-for-wind-projects/

Congressional analysis describes the memorandum as suspending offshore wind leasing and delaying project approvals while reviews proceed, increasing regulatory risk and pushing back construction timelines even for projects with advanced development status.
https://www.congress.gov/crs-product/IN12509

The administration has also emphasized ending what it characterizes as preferential treatment for wind and solar in federal permitting and land-use decisions. This posture increases uncertainty for utility-scale solar projects that depend on federal land access, environmental review, or coordinated permitting.
https://www.whitehouse.gov/presidential-actions/2025/07/ending-market-distorting-subsidies-for-unreliable-foreign%E2%80%91controlled-energy-sources/

These actions are occurring at a time when electricity demand growth is accelerating, and regulated utilities are already seeking sizable rate increases to recover rising capital costs.

Similarities Between Trump and Biden:

The animus that the Trump Administration is displaying towards renewables is similar to the animus the Biden administration displayed towards fossil fuels.

Executive actions directing federal regulators to assess climate-related financial risk raised expectations that fossil fuel activities would face higher scrutiny and capital costs over time.

Critics argued that this policy signaling discouraged lending and investment during and after the COVID period, with long-run implications for supply growth.
https://www.federalregister.gov/documents/2021/05/25/2021-11168/climate-related-financial-risk

Under the Biden administration, federal control over land access was used to constrain fossil fuel supply. In January 2021, the Department of the Interior paused new oil and natural gas leasing on public lands and offshore waters while conducting a programmatic review, reducing expected future supply growth.

https://www.doi.gov/pressreleases/fact-sheet-president-biden-take-action-uphold-commitment-restore-balance-public-lands

Under the Trump administration, federal control over offshore areas is being used in a similar manner to constrain renewable supply. The 2025 withdrawal of the Outer Continental Shelf from offshore wind leasing prevents any new wind development in federal waters during the review period. The mechanisms differ, but the economic effect is comparable: delayed capacity additions and higher long-run costs.

Implication

The core risk is not the specific energy technology favored or disfavored, but the growing tendency for energy supply conditions to be dictated by political preference rather than system needs. By constraining renewable deployment through tax and permitting policy, the current administration risks repeating the same supply-side error it once criticized under Biden-era fossil fuel restrictions. In an environment of strong electricity demand growth, politicized supply restraint increases cost pressures and contributes to higher long-run electricity prices.

Conclusion

Electricity inflation is no longer a theoretical risk or a future concern. Prices are already rising faster than headline inflation, utility rate hikes are locked into regulatory pipelines, and demand from AI data centers is arriving faster than supply can respond. Against this backdrop, Trump administration actions that weaken wind and solar deployment are not neutral corrections—they actively tighten an already strained system.

The deeper economic story is broader than any single administration: regulated rate dynamics, capital-intensive infrastructure, and structural demand growth all matter. But the immediate political reality is sharper. By constraining renewable supply today, the administration is amplifying near-term electricity price pressure and feeding the very inflation narrative it campaigned against. In energy economics, physics still beats politics—and the power bill always shows up on time.

Author’s Note

I’m keeping this post free and pinned to the web page for the next week or two because electricity prices and inflation have become an immediate economic and political issue, and the analysis should circulate.

For readers who want to support this work, there’s also a Founders Subscription option. From time to time, I may choose to highlight a founder’s perspective in a new Founders’ Viewpoints section, where it adds substance to the discussion. Editorial judgment and acceptance decisions remain entirely with me, and subscriptions can be canceled at any time.

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This memo evaluates a set of housing policy ideas associated with President Trump.

Given his background in real estate, it is not surprising that he has advanced a wide range of proposals touching mortgage finance, taxation, and housing market structure.

The sections below assess which ideas are more likely to improve affordability and housing supply, which are likely to have limited effect, and which could be counterproductive. Several proposals are accompanied by technical appendices, available behind a paywall, that provide more detailed quantitative and institutional analysis.

Monetary Policy and Mortgage Purchases: The goal is to lower interest rates, particularly mortgage rates, through easier monetary policy and targeted mortgage-bond purchases. But the Federal Reserve does not directly control the 10-year Treasury yield or inflation expectations, which are the primary determinants of long-term mortgage rates. Efforts that pressure the Fed or weaken its independence risk raising inflation expectations and could ultimately push long-term rates higher rather than lower.

Some proposals would also direct federal housing agencies, such as Fannie Mae and Freddie Mac, to purchase additional mortgage-backed securities in an effort to push mortgage rates lower. But even purchases on the order of a few hundred billion dollars would be small relative to the overall mortgage market and unlikely to materially affect long-term mortgage rates, which continue to be driven primarily by the 10-year Treasury yield and inflation expectations rather than by incremental agency demand.

Changing Savings Rules Governing 401(k) Plans and 529 Plans: Proposals would allow retirement and education savings to be used more flexibly for non-traditional purposes, such as housing or student debt.

The central risk is increased leakage from retirement systems, which already face substantial early withdrawals and inadequate saving. For empirical evidence on the link between pre-retirement use of 401(k) funds and weaker retirement security, see the technical appendix, which cites the academic literature on this topic starting with one of my own articles.

Benefits flow mainly to households that already have meaningful 401(k) or 529 balances, leaving constrained households largely untouched and raising distributional concerns. Under standard mortgage underwriting, total monthly debt payments—including mortgage, student loans, and other consumer debt—generally must remain below roughly 38 percent of income, so households constrained by student debt or low earnings typically cannot qualify for a mortgage regardless of access to 529 funds.

Even without new legislation, many 401(k) plans already permit participant loans for a range of purposes, and recent rule changes have made hardship withdrawals easier in some plans by eliminating prior suspension requirements. The SECURE Act 2.0 further expanded access through limited penalty-free emergency withdrawals and employer-sponsored emergency savings features. In addition, current IRA rules already allow up to $10,000 in penalty-free withdrawals for a first-time home purchase, while extending a similar exception to 401(k) plans would require new legislative authority. Taken together, these existing flexibilities underscore that additional expansions would primarily increase leakage from retirement systems rather than

50-Year Mortgages: This would be a very bad idea. Extending a $500,000 mortgage at 6.0 percent from 30 years to 50 years lowers the monthly payment only modestly, from about $3,000 to about $2,630, a reduction of roughly $370 per month. In exchange, it would substantially increase the share of households carrying mortgage debt into retirement, effectively making mortgage debt in retirement the norm rather than the exception.

Carrying large mortgage balances into retirement materially increases household financial risk by locking retirees into fixed debt service when incomes are stable or declining and vulnerability to health and longevity shocks rises. Compared with a standard 30-year mortgage, a 50-year term dramatically delays principal repayment and makes it far more likely that borrowers will still be servicing mortgage debt well into retirement. This undermines the traditional role of home equity as a source of retirement security and illustrates why extending mortgage maturities addresses monthly payments only superficially while compounding long-run financial risk.

For a detailed assessment of how mortgage debt in retirement affects household balance sheets, tax flexibility, and longevity risk, see:
https://www.economicmemos.com/p/when-mortgage-debt-meets-retirement

Portable Mortgages: Portable mortgages are meant to help homeowners who are locked into very low interest rates by allowing the existing mortgage balance to transfer to a new home at the original rate. In addition, many homeowners may still be reluctant to move if the transaction requires taking on additional borrowing at today’s much higher rates—for example, to purchase a more expensive home, bridge timing gaps, or cover transaction and closing costs.

Making mortgages portable would also be a major change to how U.S. mortgages are structured and sold, since most loans today are designed to be paid off when a home is sold and then bundled for investors based on that expectation. If more loans stay outstanding longer than anticipated, risk shifts to lenders and investors, who may respond by charging higher rates on new mortgages. A useful historical warning is the savings-and-loan crisis, when institutions were damaged because they were stuck holding long-term, low-interest mortgages while their own costs rose; portability could recreate similar risks unless they are carefully priced and managed.

Homeownership Depreciation: This idea has been floated by President Trump as allowing a depreciation-style tax deduction for owner-occupied homes. It would do little for households shut out of buying because of low income or high student-loan debt, since the benefit flows through the income tax system and is largest for higher-income households with substantial tax liability.

Depending on design, it could encourage people to stay in their homes longer in order to keep claiming the deduction, potentially reducing turnover. What is the next step -- accelerate depreciation schedules?

A clear and persuasive critique of this idea is provided by the American Enterprise Institute, which explains why homeownership depreciation would largely benefit incumbent owners and worsen housing-market distortions rather than solve affordability problems: https://www.aei.org/economics/trump-gets-housing-taxation-backwards/

Restrictions on Institutional Investors: This is another bad idea that is largely politically motivated and unlikely to meaningfully improve housing affordability. Institutional investors account for a relatively small share of single-family housing overall, and limiting their participation does little to address the core problem of inadequate housing supply. Such restrictions could also reduce rental availability and discourage capital from flowing into housing construction or rehabilitation, potentially tightening markets rather than easing them.

A clear and well-argued explanation of why restricting institutional investors is unlikely to help affordability—and may instead backfire—is provided by the American Enterprise Institute, which carefully distinguishes headline rhetoric from the underlying market realities: https://www.aei.org/housing/why-targeting-investors-wont-fix-the-housing-market/

Eliminating Capital Gains Taxes on Primary Home Sales: Eliminating capital gains taxes on primary home sales could materially increase housing inventory by reducing lock-in effects, especially for older homeowners. Under current law, many households delay moving because remaining in the home until death allows heirs to receive a step-up in basis and avoid capital gains taxes entirely, discouraging downsizing or relocating earlier. Removing capital gains taxes on primary residences would make it easier for some households to move up and potentially free starter homes for younger and first-time buyers.

In that sense, capital gains reform could be one of the more economically meaningful elements of recent housing supply proposals by directly addressing tax-induced lock-in. But approaches that focus narrowly on housing risk could overstate benefits if they are not paired with broader capital gains reform that addresses revenue, step-up in basis, and the treatment of other assets. A housing carve-out may improve mobility at the margin, but a lasting reduction in market distortions would require a more comprehensive framework for capital gains taxation (see Capital Gains Reform Can’t Be Just a Housing Patch: https://www.economicmemos.com/p/capital-gains-reform-cant-be-just)

Technical Appendix:

Technical appendices provide additional information and citations to economic literature on potential adverse impacts of these housing proposals. Appendix A shows that expanded pre-retirement access to 401(k) funds, to facilitate downpayments on houses would likely be associated with increased leakage and weaker retirement outcomes. Appendix B documents that liberalizing expenditures from 529 plans for the purpose of facilitating home ownership would not target the people who are having trouble making their first home purchase. Appendix C analyzes how mortgage portability could shift risk within the mortgage and securitization system without materially improving affordability.

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