None of the existing partisan approaches is working. Centrist Democrats continue to patch the Affordable Care Act with temporary subsidies rather than establish durable, adequate coverage. The enhanced Premium Tax Credits were enacted temporarily and extended only through 2025, making them exceptionally easy for a later Congress to allow to expire. Whatever the political rationale, temporary benefits turn health coverage into a recurring election issue rather than a stable national commitment. Progressive Democrats answer with Medicare for All, while Republicans largely respond with eligibility restrictions and spending cuts that make existing coverage problems worse.

This instability has consequences beyond health care. Many Americans cannot accumulate sufficient retirement savings when premiums, deductibles, and medical bills repeatedly drain household finances. Without greater private savings, it will be much harder to make the adjustments eventually required to stabilize Social Security and the nation’s finances.

Here are ten features of the new approach:

1. It focuses on lowering the actual cost of insurance.

Instead of relying exclusively on ever-larger premium subsidies, federal reinsurance would pay part of exceptionally expensive claims before those costs are incorporated into premiums.

2. It could expand coverage at a relatively low net federal cost.

Reinsurance requires federal spending, but it lowers the underlying premiums used to calculate Premium Tax Credits, so part of its cost is automatically offset by smaller subsidy payments. Medicaid may also cover some low-income households more cheaply than heavily subsidized private plans that pay higher provider prices, while portable employer contributions could reduce coverage losses and recession-related Medicaid enrollment when workers lose or change jobs. The proposal is therefore less fiscally expensive than its individual spending provisions might initially appear: several reforms replace or reduce existing federal costs rather than simply adding new ones. These interactions must be incorporated into a dynamic, systemwide budget analysis that measures net costs across reinsurance, Premium Tax Credits, Medicaid, CHIP, and employer-financed coverage.

3. It protects families with seriously ill children.

A separate pediatric reinsurance program would help finance neonatal intensive care, childhood cancer, rare diseases, organ transplants, complex disabilities, and extremely expensive new treatments without loading the entire cost into family premiums.

4. It makes health coverage portable from job to job.

Workers could own their Marketplace policies while employers contribute toward the premiums. Changing jobs, starting a business, reducing hours, or retiring before Medicare would no longer automatically require changing insurance.

5. It reduces job lock and coverage interruptions.

After a layoff, the employer contribution could end and the federal subsidy could be recalculated, but the worker’s underlying insurance policy could remain in place.

6. It protects household savings as well as health coverage.

The book recognizes that insurance is inadequate when families cannot afford their deductibles. It proposes targeted assistance through Health Savings Accounts and would end the wasteful FSA use-it-or-lose-it rule, allowing workers to preserve unused medical savings or transfer excess balances into retirement accounts under carefully designed rules.

7. It reduces penalties on work, raises, and marriage.

A smoother Premium Tax Credit formula would prevent modest increases in earnings from causing abrupt losses of assistance. It would also reduce the marriage penalties that can arise when two incomes are combined and a household suddenly loses a large subsidy.

8. It uses Medicaid where Medicaid works better.

For many lower-income households, Medicaid can provide more comprehensive protection at lower public and household cost than a private policy with a large deductible. The objective is not to maximize government coverage, but to use the most efficient system for each population.

9. It combines private choice with public responsibility and better insurer incentives.

Consumers would continue choosing among privately administered health plans, but a federally sponsored reinsurance program would assume part of the cost of exceptionally expensive claims. Insurers would still negotiate prices, manage care, and bear substantial financial risk, while public rules would determine which high-cost claims qualify for reimbursement and require the resulting savings to reduce premiums. By sharing catastrophic risk, the system would reduce insurers’ incentives to avoid high-cost patients, deny legitimate claims, or impose overly aggressive utilization controls without turning every coverage decision over to the federal government.

10. It provides an implementable legislative roadmap.

The book identifies 25 specific provisions that could translate the four reforms into law. Most operate through taxes, mandatory spending, Medicaid financing, Premium Tax Credits, or employer-benefit rules and therefore appear suitable for the budget-reconciliation process.

The result is not a promise that health care can be made free. It is a serious strategy for making affordable and continuous coverage available to almost everyone while preserving private choice, encouraging work and mobility, protecting household savings, and obtaining better value from public spending.

A Durable Path Forward on American Health Care is for readers who believe the country needs something more ambitious than another temporary subsidy, but more practical, affordable, and politically durable than replacing the entire health-care system with a single federal program.

The Kindle edition costs $5.99. View the book on Amazon.

Most of the revenue from my Kindle publications and paid subscriptions supports economic research and the development of a third-party economic platform.

Subscribe now

Share

A recent Wall Street Journal article should force a reassessment of one of the most celebrated development ideas of the last half century. Microfinance was once presented as capitalism with a conscience: tiny loans to poor entrepreneurs, often women, who were supposedly denied the chance to build businesses only because traditional banks would not serve them. Muhammad Yunus and Grameen Bank gave the idea moral authority, and foundations, development banks, celebrities, and political leaders turned it into a global cause, culminating in the 2006 Nobel Peace Prize.

The Journal’s reporting turns that origin story upside down, suggesting that an idea created to protect poor borrowers from loan sharks sometimes evolved into a more respectable version of the same debt trap.

The dark joke writes itself: What is the difference between microfinance and payday lending? Branding. Payday lenders smell blood in the water; microfinance lenders call it financial inclusion.

That joke is unfair to the best nonprofit lenders and to borrowers who genuinely use small loans productively. But it captures the danger of the industry’s evolution. Once borrower desperation becomes a scalable asset class, development language can become a disguise for debt extraction.

The Journal’s shorter companion piece makes three claims that are strongly supported by the academic and policy literature. First, microfinance has not delivered the broad anti-poverty gains its advocates promised. Second, the industry changed as microfinance became commercialized. Third, the worst outcomes appear where commercialization, weak regulation, competition among lenders, and borrower desperation interact. Those three claims are enough to support a reassessment of one of the most celebrated development ideas of the last half century.

The leading academic correction came in 2015, when the American Economic Journal: Applied Economics published six randomized evaluations of microcredit. The studies differed across countries and institutional settings, but the overall conclusion was sobering. Microcredit produced some modest changes in borrowing and business activity, but it did not transform income, consumption, business profits, or women’s empowerment for the average borrower.

A later meta-analysis by Rachael Meager reached a similar conclusion: the average effects on household business and consumption outcomes were unlikely to be transformative and might be negligible. The evidence does not prove that every microloan is harmful. It does show that microfinance was oversold as a general cure for poverty.

The second problem is that the industry’s incentives changed. What began as a development project increasingly became an investable financial product. For-profit lenders, development-bank capital, securitized microfinance debt, and private investors encouraged scale, portfolio growth, and high repayment rates. The Journal notes that global microfinance loans reached nearly $220 billion in 2025, covering more than 140 million borrowers, while average loan size increased sharply.

The 2007 Compartamos Banco IPO became an early symbol of the shift: a lender serving poor borrowers could generate large investor profits while charging very high interest rates. Muhammad Yunus, one of microfinance’s founders, warned that poor people’s willingness to pay high interest did not justify charging it; he described the Compartamos model as making money from poor people desperate for cash.

That does not mean for-profit firms caused every failure in microfinance. The more precise point is that commercialization magnified a preexisting weakness. Microfinance was always a narrow tool being asked to do too much. It might help some existing entrepreneurs expand a business, and it might help some households bridge short-term cash shortages. But once lenders, investors, and development banks treated loan growth as success, a disappointing anti-poverty tool became a more dangerous one. The metric quietly shifted from borrower welfare to portfolio expansion.

The third problem is the one that turns disappointment into something darker. In Cambodia, India, and other stressed markets, multiple lenders competed for poor borrowers, loans grew larger, repayment pressure intensified, and some households borrowed not to finance profitable investment but to repay old debts, cover medical bills, or survive income shocks. Human-rights groups in Cambodia have linked excessive microfinance debt to coerced land sales, migration, child labor, bonded labor, reduced food consumption, and suicides. Recent reporting on World Bank/IFC watchdog findings reinforces the central concern: lenders and their funders did not adequately protect borrowers from unaffordable debt and coercive repayment pressure.

The evidence therefore points to a two-part verdict. Microfinance was never the miracle its advocates claimed. But it was not necessarily rotten at birth. It became far more dangerous when a narrow financial tool was scaled into a global lending industry and judged by repayment, growth, and investor return rather than by borrower welfare. The problem was not simply lending to the poor. The problem was treating debt as development.

That is the process of enshittification. A useful or at least plausible service is built around a real need. It gains moral legitimacy, political support, and access to capital. Then the metric of success changes: not whether the user or borrower is better off, but whether the platform, lender, or investor can extract more value from the relationship. Microfinance is not the only industry to follow that path, but it is a particularly painful example because the people being monetized were among the least able to absorb the cost.

Further reading

1. Gabriele Steinhauser, The Wall Street Journal, “Hundreds of Billions in Loans Didn’t Make a Dent in Global Poverty.”
https://www.wsj.com/finance/banking/poverty-microfinancing-loans-entrepreneurs-de458ee8

2. Abhijit Banerjee, Dean Karlan, and Jonathan Zinman, “Six Randomized Evaluations of Microcredit: Introduction and Further Steps,” American Economic Journal: Applied Economics, 2015.
https://www.aeaweb.org/articles?id=10.1257/app.20140287

3. Rachael Meager, “Understanding the Average Impact of Microcredit Expansions: A Bayesian Hierarchical Analysis of Seven Randomized Experiments,” American Economic Journal: Applied Economics, 2019.
https://www.aeaweb.org/articles?id=10.1257/app.20170299

4. Human Rights Watch, “Debt Traps: Predatory Microfinance Loans and the Exploitation of Cambodia’s Indigenous Peoples.”
https://www.hrw.org/news/2025/09/24/cambodia-microfinance-lending-harming-indigenous-groups

Subscribe now

Share

Introduction

Since 2017, federal health policy has alternated between expansions of public assistance and efforts to deregulate insurance markets and restrain federal spending. The first Trump administration reduced the individual-mandate penalty to zero, supported Medicaid work requirements, and expanded the availability of short-term insurance. The Biden administration moved in the other direction by expanding Marketplace Premium Tax Credits, simplifying Medicaid enrollment, and restricting short-term plans. Following the 2024 election, the enhanced Premium Tax Credits expired at the end of 2025, while the 2025 budget reconciliation law imposed new Medicaid eligibility and work-related requirements and expanded Health Savings Account eligibility.^[1]

The result has been instability rather than a durable settlement. KFF estimates that average monthly effectuated Marketplace enrollment could fall from 22.3 million in 2025 to about 17.5 million in 2026 and could be as low as 16.5 million. Average Marketplace deductibles also rose from $2,759 in 2025 to $3,786 in 2026 even though more consumers shifted into less expensive bronze plans. Separately, the Congressional Budget Office estimates that the Medicaid provisions of the 2025 reconciliation law will increase the number of uninsured people by 7.5 million in 2034. CBO also estimates that permanently restoring the expanded Premium Tax Credits would increase insurance coverage by 3.8 million in 2035. Those estimates use different baselines and years and should not simply be added together, but both indicate that recent policy changes will materially reduce coverage.^[2]

Households that retain insurance increasingly confront a second problem: coverage that does not provide adequate financial protection. High deductibles, coinsurance, prescription costs, and narrow provider networks can leave insured families postponing treatment, accumulating medical debt, or reducing retirement contributions to pay current medical bills.

Progressive lawmakers have often responded by proposing Medicare for All. Current legislation includes a phased transition rather than an immediate overnight conversion, but the economic and administrative challenge would remain extraordinary. Hospitals, physicians, insurers, employers, workers, and households would all face major changes in payment, employment, taxation, and compensation. Concentrating most health-care financing and benefit decisions in a single federal program would also magnify the consequences of changes in national political control. Decisions involving reproductive care, gender-related treatment, medical necessity, and other contested services would become more directly dependent on federal regulation and appropriations.^[3]

The United States therefore needs an alternative to the recurring choice between dismantling the Affordable Care Act and replacing nearly the entire financing system with a single federal program. The objective should be a durable structure that preserves private contracting and individual choice while using public resources where markets perform poorly.

The Path Forward

The proposed framework consists of four mutually reinforcing reforms: catastrophic reinsurance to lower underlying premiums; portable employer contributions toward employee-owned coverage; modernized Health Savings Accounts and Flexible Spending Accounts; and expanded use of Medicaid where public coverage is less expensive and more protective than heavily subsidized private insurance.

The current system suffers from four broad structural problems. First, premiums remain unaffordable for many households, while income-based Premium Tax Credits impose high implicit marginal tax rates as assistance declines. These subsidies help people purchase coverage but do too little to reduce the underlying cost of insurance.

Second, insurers remain exposed to highly concentrated catastrophic claims. This raises premiums and strengthens incentives to avoid high-risk enrollment. It may also contribute to aggressive utilization controls and administrative disputes, although reinsurance alone would not eliminate the need for consumer-protection and claims-review standards.

Third, the tax preference for employer-sponsored insurance still ties most coverage to a particular job. Workers can lose or disrupt their insurance when they change employers, are laid off, retire before Medicare eligibility, or move into self-employment. Small businesses also bear the financial and administrative burden of operating firm-specific group plans.

Fourth, high deductibles and other out-of-pocket expenses leave many insured households unable to afford the care their policies technically cover. These costs increase medical debt, discourage necessary treatment, and reduce the liquid savings available for retirement and other long-term needs.

Each of the following reforms can be enacted independently. Their greatest value, however, comes from operating together: reinsurance lowers premiums, portable benefits make individual coverage more practical, modernized savings accounts protect households from unavoidable cost sharing, and Medicaid provides more appropriate coverage for families that cannot realistically absorb private-plan deductibles.

REFORM ONE: Shift Federal Assistance from Back-End Premium Tax Credits to Front-End Reinsurance

Premium Tax Credits have expanded coverage, but they do not directly reduce the underlying claims cost of insurance. Because the subsidy declines as income rises, the current system can also impose substantial implicit marginal tax rates on households that earn additional income. After the expiration of the enhanced credits, eligibility again ends abruptly at 400 percent of the Federal Poverty Level, recreating a sharp subsidy cliff.

A more efficient strategy would shift part of federal assistance from back-end premium subsidies to front-end catastrophic reinsurance. The federal government would reimburse insurers for a share of exceptionally high annual claims. An illustrative program might reimburse 50 percent of an enrollee’s annual claims above $50,000, subject to an annual cap. The attachment point, reimbursement percentage, cap, and treatment of prescription drugs would require actuarial modeling rather than being fixed by the example in this paper.

State reinsurance programs operating under Affordable Care Act Section 1332 waivers demonstrate the basic mechanism. By paying part of the highest-cost claims, reinsurance reduces the premiums insurers must collect from all enrollees. CMS has found substantial premium reductions across states operating these programs, although results vary with program size, market conditions, and design.^[4]

Reinsurance should also reduce some incentives to avoid high-risk enrollment. It may modestly reduce pressure for unusually aggressive utilization controls and could incentivize reduction in prior authorization and claim disputes.

Because reinsurance lowers benchmark premiums, it also lowers the amount of Premium Tax Credits required to make coverage affordable. That offset is central to the proposal: federal reinsurance is not free, but part of its gross cost would be recovered through lower premium subsidy payments.

The remaining Premium Tax Credits should be redesigned rather than eliminated. One illustrative target would limit household premium contributions to approximately six percent of income, with assistance declining through a smooth quadratic formula rather than through abrupt changes. The revised premium tax credit reduces the abrupt increase in premiums at 400 percent FPL under current law and would allow for elimination of the subsidy cliff because most subsidies will disappear because required household payments rise with income and the subsidy percent is a much lower percent of income.

REFORM TWO: Make Portable, Employee-Owned Coverage the Default Use of Employer Health Contributions

Most workers value employer contributions toward health insurance because those contributions receive favorable tax treatment. The problem is not the employer contribution itself; it is the connection between that contribution and a firm-specific insurance contract.

Federal regulations have permitted Individual Coverage Health Reimbursement Arrangements, or ICHRAs, since 2020. ICHRAs allow employers to reimburse workers on a tax-preferred basis for individually purchased insurance. Yet they remain a secondary and administratively constrained alternative rather than the normal structure of employer health benefits.^[5]

Reform should build on the ICHRA framework by placing portable individual coverage on equal footing with traditional group insurance for purposes of the employer mandate, tax exclusions, small-business assistance, and enrollment administration. The employer mandate should be revised—not eliminated—so that large employers remain responsible for helping finance employee coverage, while allowing a qualifying contribution toward an employee-owned Marketplace policy to satisfy the mandate when the resulting coverage meets applicable affordability and minimum-value standards. The long-run objective should be to make a portable contribution toward employee-owned coverage the default use of employer health benefits. A politically feasible transition could preserve traditional group plans as an alternative while the portable market develops sufficient scale.

Under this approach, an employee would choose and own a state Marketplace policy. The employer would make a tax-advantaged contribution toward its cost. The contribution could vary by lawful employee categories and family status, but the rules should be simpler and more standardized than the current ICHRA structure. Small employers would gain a practical alternative to administering a group plan, while larger employers could continue offering traditional coverage when workers prefer it.

Employer contributions and Premium Tax Credits would need to be coordinated through a single affordability formula. Employer payments should reduce the worker’s required contribution, while federal assistance supplements rather than unnecessarily displaces qualifying employer support. The rules must prevent both gaps in assistance and duplicate subsidies.

The application of Reform One, exclusively to state exchange health insurance plans, makes this transition more practical. Reinsurance lowers the baseline cost of individual policies, allowing employer contributions and household payments to purchase more comprehensive coverage. A worker who changes jobs would keep the same policy and simply receive a contribution from a new employer, assuming the worker remains in the same service area.

A layoff would end the employer contribution, but it would not end the insurance policy. Loss of the contribution should trigger an automatic subsidy redetermination based on the worker’s expected annual income, together with temporary continuation assistance while the new Premium Tax Credit is calculated. Congress should also protect workers from unreasonable tax-reconciliation penalties when an unexpected layoff makes annual income difficult to predict.

Past proposals and temporary programs—including federal assistance with COBRA premiums and support connected to trade-adjustment programs—demonstrate that Congress can subsidize transitional coverage during periods of unemployment. Proposals to require large employers to help finance temporary COBRA coverage have also received attention, although debate over such mandates generally follows familiar partisan lines. These approaches are worth preserving as possible emergency tools, but they are not central to this reform. The principal advantage of employee-owned coverage is that a layoff would normally require only an automatic recalculation of the worker’s Premium Tax Credit, not enrollment in a new insurance policy. Reform One would make that response more affordable by lowering the underlying premium that federal assistance must support. During an unusually severe recession, Congress could supplement the recalculated tax credit with temporary premium assistance, but the existing individual policy would remain in place throughout the transition. By reducing coverage interruptions and job lock, portable benefits would allow workers to change jobs, start businesses, or retire early based more on economic opportunity and less on fear of losing insurance.

REFORM THREE: Modernize Health Savings Accounts and Flexible Spending Accounts

The substantial growth of deductibles has shifted more first-dollar medical costs onto households. In 2025, the average single deductible among covered workers with a general annual deductible was $1,886, and the average at firms with 10 to 199 workers was $2,631. In the individual Marketplace, the average deductible reached $3,786 in 2026. Cost exposure of this size can make insured families delay care or ration prescriptions.^[6]

Health Savings Accounts can help households prepare for these expenses, and the 2025 reconciliation law expanded HSA eligibility to bronze and catastrophic plans beginning in 2026. But the tax benefits are most valuable to households that already have enough disposable income to contribute. A deduction alone provides little help to a family that cannot spare the cash.^[7]

The federal government should therefore provide a refundable credit or direct matching contribution for moderate-income households enrolled in private high-deductible coverage. The match should be deposited directly into the HSA and should decline gradually with income. It should be concentrated above the Medicaid eligibility range proposed in Reform Four. For households eligible for comprehensive Medicaid with limited cost sharing, public coverage is generally more sensible than subsidizing a multi-thousand-dollar private deductible.

Flexible Spending Accounts present a different problem. Although employers may permit a limited carryover or grace period, many workers still forfeit unused balances. EBRI found that roughly half of FSA account holders forfeited money in 2023, with an average forfeiture of $436.^[8]

Congress should permit unused FSA balances to carry forward without an artificially low ceiling. As an alternative, balances above a reasonable health-care reserve could be transferred into a specially designated retirement account. Because FSA contributions are made with pre-tax dollars, the transfer rules must prevent a double tax benefit. Congress could treat transferred funds as pre-tax retirement money taxable upon withdrawal, impose an annual transfer limit, and restrict early nonmedical withdrawals.

This approach would end the unnecessary conflict between preparing for medical expenses and building retirement security. Workers would not have to spend balances merely to avoid forfeiture, nor would they need to reduce retirement contributions to maintain a health-care reserve. The objective is not to subsidize unlimited tax sheltering; it is to let households preserve savings that were set aside prudently but not needed immediately.

If policymakers must choose between these two proposals, FSA reform should take priority because high-deductible plans and HSAs are generally a poor vehicle for assisting lower-income households that lack both the disposable income to fund an account and the financial capacity to absorb a large deductible.

REFORM FOUR: Use Medicaid Where It Is Most Efficient While Preserving Private Choice Above Moderate Incomes

Health policy should match the financing mechanism to household resources rather than treating either public or private insurance as an end in itself. For many lower-income adults, Medicaid can provide more comprehensive financial protection at a lower total cost than purchasing private coverage through large Premium Tax Credits.

National research has generally found that private coverage costs more than Medicaid for comparable lower-income adults, although the precise difference varies by population and state. More direct evidence comes from a matched study of Colorado adults immediately above and below the Medicaid eligibility boundary. Mean annual spending was $2,484 for Medicaid enrollees and $4,553 for Marketplace enrollees, while average out-of-pocket costs were $45 and $569, respectively. When Marketplace services were repriced at Medicaid payment rates, the remaining spending difference was not statistically significant. This suggests that Medicaid’s cost advantage arose primarily from lower provider-payment rates rather than substantially lower use of care.

These findings support enhanced federal assistance for states that extend Medicaid eligibility for adults toward 200 percent of the Federal Poverty Level. Families near this income level often lack the liquid assets needed to absorb large Marketplace deductibles and may be forced to borrow, sell assets, delay care, or miss other obligations when medical expenses arise.

A refundable HSA credit large enough to offset multi-thousand-dollar deductibles for millions of lower-income households would require substantial new spending and create another income-based benefit. It would help pay the deductible without addressing the higher underlying prices paid by private insurance. Medicaid instead combines limited cost sharing with lower administered or negotiated prices.

Medicaid nevertheless involves important tradeoffs. Lower provider-payment rates can reduce provider participation and make specialist appointments more difficult in some states or geographic areas. Any expansion should therefore monitor appointment availability, network adequacy, specialty access, and continuity of care. Targeted payment supplements may be necessary for primary care, behavioral health, obstetrics, rural providers, and pediatric specialties.

The federal budget effect would depend on the matching rate assigned to newly eligible beneficiaries. Medicaid may reduce total medical and public spending while reallocating costs between the federal government and the states. Legislative estimates should therefore report total medical spending, combined public spending, federal outlays, state costs, displaced Premium Tax Credits, and beneficiary out-of-pocket savings separately.

Reform One could also protect Medicaid managed-care programs from unusually high claims through a federal high-cost risk pool or reinsurance mechanism. The design would need to complement rather than duplicate existing capitation, risk-adjustment, and state risk-sharing arrangements. Properly structured, it could reduce the cost of rare and catastrophic cases while preserving incentives for effective care management.

Children require separate consideration. One option is to expand CHIP eligibility toward 300 percent of the Federal Poverty Level. Another is a pediatric reinsurance program that substantially lowers the private cost of rare diseases, complex disabilities, behavioral health treatment, developmental services, and other high-cost care. The appropriate balance may vary across states. Federal policy could permit states to choose among approved approaches subject to common standards for benefits, affordability, provider access, and continuity of care.[4]

Extending Medicaid toward 200 percent FPL would displace some heavily subsidized private Marketplace enrollment. In this setting, however, crowd-out need not be an economic loss. If Medicaid provides comparable or better financial protection at lower total public cost, shifting some enrollment from private plans to Medicaid can improve economic efficiency. The objective is not to maximize either public or private insurance; it is to use the financing system that provides the best combination of access, protection, and taxpayer value for each population.

Fiscal and Administrative Considerations

The numerical parameters in this paper are illustrative rather than final legislative specifications. The reinsurance attachment point, reimbursement percentage, Premium Tax Credit contribution schedule, Medicaid eligibility threshold, HSA match, pediatric coverage model, and federal Medicaid matching rate all require actuarial, distributional, and budgetary analysis.

Any legislation should separately report gross federal costs; savings from lower Premium Tax Credits; changes in federal and state Medicaid spending; beneficiary premium and out-of-pocket savings; employer effects; and administrative expenses. The reforms should be phased in with periodic evaluation and authority to adjust parameters as actual enrollment, premium, claims, and access data become available.

Several of the reforms could nevertheless be highly cost-effective because their direct costs would be partly offset by savings elsewhere in the health-financing system. General reinsurance would lower Marketplace premiums and therefore reduce the Premium Tax Credits required at every subsidized income level; sufficiently large premium reductions could also make a more limited subsidy eligibility ceiling or phaseout financially and politically sustainable. Pediatric reinsurance would lower the cost of family coverage, reduce related Premium Tax Credits, and lessen the need to move some children into publicly financed CHIP coverage. Portable state-exchange coverage supported by employer contributions would reduce coverage disruptions during job transitions and could limit some of the increase in Medicaid enrollment that ordinarily accompanies recessions. Finally, extending Medicaid to lower-income adults may cost less than providing those same households with especially generous Premium Tax Credits for private plans that pay higher provider prices. These offsets do not eliminate the need for formal budget estimates, but they mean that the gross cost of each reform would substantially overstate its likely net fiscal cost.

The four reforms also require coordination across the tax code, the Affordable Care Act, Medicaid, CHIP, ERISA, employer-mandate rules, and state insurance regulation. The framework is modular, but each module needs a complete statutory architecture rather than relying on broad administrative discretion.

Conclusion

The United States does not need to choose between dismantling the Affordable Care Act and replacing nearly the entire health insurance system with Medicare for All. A more durable strategy would preserve what works, correct identifiable market failures, and direct public resources toward the places where they produce the greatest benefit for patients and taxpayers.

The four reforms reinforce one another. Reinsurance lowers the underlying cost of individual coverage and reduces the amount required for Premium Tax Credits. Lower premiums make portable employer contributions more practical. Modernized HSAs and FSAs help moderate-income families manage unavoidable cost sharing without sacrificing retirement security. Medicaid provides a more efficient and protective alternative for households that cannot realistically absorb private-plan deductibles.

Each reform could be enacted independently, but together they offer an alternative to the recurring cycle of partisan expansion and retrenchment. The objective is neither to maximize government insurance nor to preserve private insurance for its own sake. It is to provide affordable and continuous coverage, encourage work and mobility, protect household savings, preserve meaningful choice, and obtain better value from every public dollar.

Health care reform should not require Americans to surrender the coverage they value, remain trapped in jobs they would otherwise leave, or risk financial ruin when illness strikes. A well-designed system can provide security without imposing uniformity, support markets without ignoring their failures, and expand coverage without abandoning fiscal discipline. That is the practical path forward.

Appendix: Notes

Technical Notes for “A Durable Path Forward on American Health Care”

These notes provide additional evidence and explain legal, budgetary, and administrative considerations underlying the four reforms. They supplement the main discussion without interrupting its flow.

Share

Note 1. Trump Administration Health Policy Changes and Coverage Effects

During the first Trump administration, the 2017 tax legislation reduced the Affordable Care Act’s individual-mandate penalty to zero, the administration approved Medicaid work-requirement demonstrations under Section 1115 waivers, and federal rules expanded the availability of short-term limited-duration insurance. The Biden administration later reversed or limited several of those policies, expanded Premium Tax Credits through the end of 2025, streamlined Medicaid enrollment, and again restricted short-term plans.

Federal policy shifted again after President Trump’s return to office. The enhanced Premium Tax Credits expired after December 31, 2025. Public Law 119-21, signed on July 4, 2025, requires certain Medicaid expansion adults to document work or other qualifying activities, requires eligibility redeterminations every six months, shortens retroactive coverage, imposes cost sharing on some expansion adults, constrains several state Medicaid financing mechanisms, and tightens Marketplace subsidy eligibility, verification, and repayment rules. The law also expands Health Savings Account eligibility by treating bronze and catastrophic Marketplace plans as HSA-compatible beginning in 2026.

Early 2026 data indicate substantial coverage and affordability effects. KFF estimates that average monthly effectuated Marketplace enrollment could decline from 22.3 million in 2025 to approximately 17.5 million in 2026 and could be as low as 16.5 million. Average enrollee premium payments increased from $113 to $178 per month, while average Marketplace deductibles increased from $2,759 to $3,786 as many consumers shifted toward lower-premium, higher-deductible plans. These figures remain preliminary because complete effectuated-enrollment data for 2026 are not yet available.

The Congressional Budget Office separately estimates that the Medicaid provisions of Public Law 119-21 will increase the number of uninsured people by 7.5 million in 2034 relative to its January 2025 baseline. That estimate should not be mechanically added to separate estimates of the effects of the Premium Tax Credit expiration because the estimates use different policy comparisons and may use different projection years.

Sources: KFF, Health Provisions in the 2025 Federal Budget Reconciliation Law; KFF, What We Know So Far About 2026 ACA Marketplace Enrollment, Premiums, and Deductibles; Congressional Budget Office, Supplemental Cost Estimate for Public Law 119-21; Internal Revenue Service, One Big Beautiful Bill Provisions.

Subscribe now

Note 2. ICHRAs and Portable Employer Benefits

Individual Coverage Health Reimbursement Arrangements have allowed employers to reimburse employees for individual-market insurance on a tax-preferred basis since 2020. The portable-benefit proposal would build on this framework by placing employee-owned coverage on equal footing with traditional group insurance, simplifying employee-class rules, coordinating employer contributions with Premium Tax Credits, and standardizing treatment under the employer mandate and small-business tax rules.

Under current law, an offer of an affordable ICHRA generally affects an employee’s eligibility for Premium Tax Credits. A broader portable-benefit system would therefore require an integrated affordability formula under which employer assistance and federal subsidies complement one another without leaving coverage gaps or providing duplicate benefits.

Source: U.S. Department of Labor, Individual Coverage Health Reimbursement Arrangements Final Rule and Model Notice materials.

Note 3. Deductibles, HSAs, and FSAs

KFF reports that the average 2025 single deductible among workers enrolled in plans with a general annual deductible was $1,886. At firms with 10 to 199 workers, the average was $2,631. Public Law 119-21 broadened HSA eligibility, but broader eligibility alone does not provide the cash needed by households that cannot afford to contribute.

The Employee Benefit Research Institute reports that roughly half of FSA account holders forfeited funds in 2023 and that the average forfeiture was $436. Current law permits, but does not require, an employer to offer a limited carryover or grace period.

Allowing unused FSA balances to move into retirement accounts would require a specific tax rule because FSA contributions were excluded from taxable income when contributed. One possible structure would treat transferred balances as pre-tax retirement funds that are taxable when withdrawn. Other structures could achieve the same objective, provided they prevent both forfeiture and a double tax benefit.

Sources: KFF, 2025 Employer Health Benefits Survey; EBRI, Updates from EBRI’s Flexible Spending Account Database; IRS Publication 969; IRS, One Big Beautiful Bill Provisions.

Note 4. Medicaid Cost, Access, Financing, and Pediatric Coverage

Two often-cited 2018 Congressional Budget Office figures provide historical context. CBO estimated average federal Marketplace and Basic Health Program subsidies of $6,300 per subsidized enrollee and average federal Medicaid benefit spending of $4,230 per adult enrollee. Because the figures cover different populations and categories of expenditure, they do not establish a fixed percentage saving from moving a particular enrollee from Marketplace coverage to Medicaid.

More direct evidence comes from a matched Colorado study of adults near the Medicaid eligibility threshold. Average annual spending was $2,484 under Medicaid and $4,553 under Marketplace coverage, while average out-of-pocket spending was $45 and $569, respectively. When the researchers repriced, services using Medicaid payment rates, the statistically significant total-cost difference disappeared, indicating that lower provider prices explained much of Medicaid’s cost advantage. Earlier national studies estimated that private coverage would cost approximately 18 to 26 percent more for comparable low-income adults. The evidence therefore supports a Medicaid cost advantage, but not a single national savings percentage applicable in every state or population.

Lower Medicaid spending partly reflects lower payments to hospitals, physicians, and other providers. These payment levels can affect physician participation, specialist access, and appointment availability, although the magnitude varies across states and services. Any expansion above the current Affordable Care Act eligibility threshold should include network-adequacy standards, reporting on appointment wait times, and authority for targeted payment supplements where access is inadequate, particularly in behavioral health, obstetrics, rural care, primary care, and pediatric specialties.

The budgetary effects of expansion would depend heavily on the federal matching rate. A complete estimate should separately report total medical spending, federal outlays, state outlays, displaced Premium Tax Credits, beneficiary premiums and cost sharing, and administrative expenses. Medicaid may reduce total medical spending while shifting costs differently between the federal government and the states.

For children above current Medicaid eligibility limits, policymakers could use broader CHIP eligibility, pediatric reinsurance, or a combination of the two. The most efficient approach may vary by state because Marketplace premiums, CHIP thresholds, provider networks, and family cost-sharing rules differ. Any approved model should cover essential pediatric services and protect continuity of care for children with complex medical, developmental, behavioral, or disability-related needs.

Sources: JAMA Network Open, Comparison of Utilization, Costs, and Quality of Medicaid vs. Subsidized Private Health Insurance for Low-Income Adults; KFF, Medicaid Spending Growth Compared to Other Payers; Urban Institute and Robert Wood Johnson Foundation, Is It Still Less Expensive to Serve Low-Income People in Medicaid Than Private Coverage?; Medicaid and CHIP Payment and Access Commission, Provider Payment and Delivery Systems; MACPAC, Evaluating the Effects of Medicaid Payment Changes on Access to Physician Services.

Selected Sources

1. KFF: Health Provisions in the 2025 Federal Budget Reconciliation Law

2. KFF: What We Know So Far About 2026 ACA Marketplace Enrollment, Premiums, and Deductibles

3. Congressional Budget Office: Supplemental Cost Estimate for Public Law 119-21 Medicaid Provisions

4. IRS: One Big Beautiful Bill Provisions

5. U.S. Department of Labor: Individual Coverage HRA Final Rule

6. CMS Data Brief on State-Based Reinsurance Programs

7. KFF: 2025 Employer Health Benefits Survey

8. EBRI: Updates From EBRI’s Flexible Spending Account Database

9. IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans

10. JAMA Network Open: Medicaid vs. Subsidized Marketplace Coverage for Low-Income Adults

11. KFF: Medicaid Spending Growth Compared to Other Payers

12. Robert Wood Johnson Foundation and Urban Institute: Medicaid Compared with Marketplace Coverage

13. MACPAC: Provider Payment and Delivery Systems

14. MACPAC: Evaluating Medicaid Payment Changes and Access to Physician Services

The line between medical care and social development has blurred. Historically, health insurance excluded non-medical behavioral therapies, leaving them to schools and families. Today, state and federal mandates require commercial plans and Medicaid to cover long-term behavioral interventions like Applied Behavior Analysis (ABA). While these mandates have largely survived broader federal budget cuts to Medicaid and private insurance, they significantly increase health insurance premiums. Transitioning to a new federal program that pays for developmental and autism treatments outside the traditional health insurance infrastructure would modestly decrease premiums and reduce the overall number of uninsured Americans.

The growth in insurance mandates for developmental services has triggered substantive fiscal strain. A prominent Wall Street Journal investigation, “The Boom in Autism Therapy Is Medicaid’s Largest Jackpot,” revealed that Indiana’s Medicaid program paid a single provider $29 million in one year to treat just 84 children—roughly $340,000 per child. This far exceeds the annual cost of treating a lung cancer patient. Similarly, federal audits found that Colorado spent more Medicaid funds on pediatric autism therapy than on emergency room care for all patients combined, documenting widespread billing for napping, eating, and playing video games.

The push for mandatory coverage began in the mid-2000s, driven by rising autism diagnoses and aggressive lobbying by advocacy groups like Autism Speaks. Between 2007 and 2019, these campaigns successfully established insurance mandates across all 50 states, applying heavily to employer-based and state exchange insurance. The Affordable Care Act (ACA) further reinforced these requirements by classifying autism treatment as an Essential Health Benefit (EHB) in many states.

In contrast, most large corporate employer-based plans are “self-insured”—covering roughly 57% to 60% of all insured American workers. Under these arrangements, the company pays medical claims directly out of its own pocket, utilizing a standard commercial carrier only for administrative services. Under federal law, these plans are governed strictly by the Employee Retirement Income Security Act (ERISA), which entirely exempts them from state-level insurance mandates.

Driven in part by federal mental health parity compliance and the safety net of stop-loss reinsurance, a growing number of large enterprises still choose to offer these benefits voluntarily. Historical data from Autism Speaks notes that roughly 45% of companies with 500 or more employees explicitly opt to include ABA or intensive behavioral therapies within their self-funded plan designs.

However, because an intensive, 40-hour-a-week ABA regimen introduces significant financial volatility, most mid-to-large, self-insured employers do not take on this risk entirely exposed. Instead, they purchase stop-loss insurance (a form of private reinsurance) to transfer liability to a secondary carrier once an individual child’s annual therapy claims clear a specific “attachment point” or deductible—which typically ranges from $70,000 to over $300,000 depending on firm size.

Politically, autism mandates have proven to be exceptionally resilient, creating a sharp paradox within conservative healthcare policy. For example, the Trump administration issued sweeping regulations modifying the ACA’s EHB framework via the 2019 Notice of Benefit and Payment Parameters. This rule granted states unprecedented flexibility to choose new benchmark plans or swap out entire benefit categories to lower costs. Yet, notably, this regulatory mechanism was never applied to this specific clinical group.

Similarly, the administration’s sweeping Medicaid overhauls—anchored by aggressive fiscal tightening, state budget caps, and strict work requirements—deliberately avoided targeting autism benefits. Despite pushing for massive Medicaid spending reductions, federal reforms left the Early and Periodic Screening, Diagnostic and Treatment (EPSDT) mandate completely intact.

Because EPSDT legally compels states to provide any “medically necessary” treatment to low-income children under 21, pediatric ABA therapy survived federal budget battles entirely unscathed. While states under pressure from fiscal caps may scale back optional adult dental or vision benefits, the statutory framework protecting pediatric behavioral health remains virtually impossible to roll back without triggering insurmountable legal risks.

Because intensive behavioral therapies frequently require up to 40 hours a week per child, they create an expensive, continuous drain on standard commercial insurance pools. Small businesses purchasing group coverage and individuals buying policies on state exchanges end up subsidizing these long-term developmental services through higher monthly premiums.

Extracting these developmental services from the standard commercial insurance framework entirely—and transitioning them to an independent, standalone federal program—would correct these distorted insurance mechanics. Rather than dropping or eliminating access to autism services, a structural pivot to a dedicated Federal Developmental Assistance Program would isolate the costs of long-term behavioral therapy from basic medical insurance pools.

A well-designed program could preserve access while vastly improving the financing and oversight of autism and developmental services. The framework would require:

• Clear eligibility standards and a precise division between developmental services and ordinary medical care.

• Strict coordination rules with Medicaid, EPSDT, state insurance mandates, and school-based services under the Individuals with Disabilities Education Act (IDEA).

• National requirements for provider qualifications, standardized treatment plans, independent medical-necessity reviews, periodic recertification, and strict auditing to prevent fraud.

The enacting legislation would also need to determine whether the federal program serves as the primary payer or reimburses states, require insurers to legally reflect transferred claims costs in lower consumer premiums, and identify a sustainable financing mechanism that accounts for offsetting reductions in Medicaid spending and ACA premium subsidies. With these protections, the reform could broaden the financing base, strengthen program integrity, and modestly reduce commercial insurance premiums without withdrawing needed assistance from families.

This policy shift would immediately drop commercial premiums. For a typical 40-year-old couple with two children purchasing an unsubsidized silver plan on a state exchange (costing roughly $1,800 a month), a modest 1% to 3% rate reduction would save that household $18 to $55 a month, translating to $216 to $660 in annual savings.

From a macroeconomic perspective, establishing a separate federal developmental program would reallocate public capital without drastically altering total national healthcare spending as a share of GDP. While a new federal program represents a new spending line item, it would yield a non-trivial decrease in private health insurance premiums and federal premium subsidies. While not a complete transformation of American medicine, the resulting premium drop would modestly reduce the number of uninsured Americans, moving national healthcare policy in a more sustainable direction.

Subscribe now

Share

Introduction

The Affordable Care Act has substantially reduced the number of uninsured Americans, but its reliance on income-based premium subsidies creates three persistent challenges. Premiums remain unaffordable for many middle-income households, implicit marginal tax rates discourage additional work and income, and federal health care assistance increasingly relies on back-end tax credits -- a design that fails to tackle the root causes of high insurance costs.

Previous research on this blog and at SSRN has shown that the interaction of multiple Adjusted Gross Income (AGI)-based taxes and benefit programs can create de facto marginal tax rates that substantially exceed statutory income tax rates. (An improved and updated version of the SSRN paper is under review and will be available shortly.) The Affordable Care Act premium subsidy structure is one important contributor to these distortions, particularly for households whose eligibility for assistance changes rapidly as income increases.

This paper proposes shifting a portion of federal support from back-end premium tax credits to front-end catastrophic reinsurance while replacing the existing subsidy schedule with a smooth quadratic contribution formula. The objective is not necessarily to reduce government spending, but to allocate public resources in a manner that improves affordability, reduces labor-market distortions, and creates a more stable and transparent health insurance market.

The Proposal

The proposal supplements the existing Affordable Care Act framework with two complementary policy instruments: publicly financed catastrophic reinsurance and a continuous household premium contribution schedule. Rather than relying primarily on premium tax credits to make coverage affordable, the proposal seeks to reduce the underlying cost of insurance while allowing household premium obligations to increase gradually with income.

The first component is an upstream reinsurance program under which the federal government would reimburse 50 percent of commercial insurance claims exceeding $50,000. Rather than requiring insurers to price the full cost of catastrophic medical events into every policy, a portion of these low-frequency, high-cost risks would be shared across taxpayers. The expected result is a structural reduction in retail insurance premiums for all marketplace participants.

The second component replaces the existing stepwise subsidy schedule with a continuous household contribution formula. Household premium responsibility would increase gradually with income, beginning at a low contribution rate for lower-income households and rising smoothly as income increases. Because public reinsurance reduces the underlying benchmark premium, the premium tax credit would often phase out naturally once the household’s calculated contribution equals the reduced market premium. At that point, no additional subsidy would be needed. The proposal therefore does not require an arbitrary subsidy cliff at 400 percent or 600 percent of the Federal Poverty Level. Instead, assistance would decline continuously and disappear only when the household contribution formula exceeds the reinsurance-reduced premium.

For many households, this framework is more generous than the baseline Affordable Care Act subsidy structure. That outcome is intentional rather than accidental. The current system limits explicit government expenditures but often does so by exposing middle-income households to rapidly rising premiums and large effective tax rates on additional income. The proposed framework instead allocates a greater share of public resources toward lowering underlying insurance costs and providing a smoother transition from subsidized to unsubsidized coverage.

The proposal therefore should not be evaluated solely by comparing federal expenditures with current law. Public resources are finite. Additional spending on health care ultimately requires either higher taxes, reductions in other government programs, or higher budget deficits. This proposal does not claim otherwise. Instead, it argues that improving the efficiency and affordability of health insurance should rank among the highest priorities for public investment because health care affects labor-market participation, household financial stability, entrepreneurship, and economic mobility. The relevant policy question is therefore not whether public resources are scarce, but whether allocating additional resources to a more efficient health insurance system generates greater social benefits than available alternatives.

Whether this approach justifies somewhat higher public expenditures is ultimately a policy judgment. The central hypothesis of this paper is that a system built on lower retail premiums and gradual subsidy withdrawal will produce superior economic outcomes by expanding insurance affordability, reducing labor-market distortions, improving household financial stability, and creating a more predictable insurance marketplace.

Illustrative Example

The interaction between catastrophic reinsurance and a continuous contribution schedule is best illustrated through a representative marketplace participant. The example below is intended to demonstrate the mechanics of the proposal rather than provide a comprehensive simulation of all household types.

Consider a 45-year-old single individual purchasing the benchmark silver plan in the Affordable Care Act marketplace. Under the baseline system, the benchmark premium is assumed to be approximately $551 per month. At 400 percent of the Federal Poverty Level (FPL), the household pays approximately $427 per month while the federal government provides a premium tax credit of approximately $124 per month. A modest increase in income beyond the statutory threshold causes the subsidy to disappear immediately, increasing the household premium from $427 to $551 per month—an annualized increase of approximately $1,488 resulting from only a minimal increase in earnings.

Under the proposed framework, publicly financed catastrophic reinsurance reduces the benchmark premium to approximately $358 per month. At 400 percent FPL, the household contribution is approximately $283 per month, and the remaining federal subsidy is approximately $75 per month. Unlike the current system, however, that subsidy does not disappear at 400 percent FPL. Instead, as income rises, the required household contribution increases gradually while the subsidy correspondingly declines.

Eventually the required household contribution equals the compressed retail premium of $358 per month, at which point the subsidy naturally phases out to zero.

A second example illustrates the marginal tax-rate effect more directly. Suppose the same individual receives a $10,000 raise after reaching 400 percent of the Federal Poverty Level. Under the baseline system, the raise causes the remaining premium tax credit to disappear. Monthly premiums rise from approximately $427 to $551, an increase of $124 per month, or $1,488 per year. The loss of premium assistance therefore absorbs nearly 15 percent of the raise before considering income taxes, payroll taxes, or other income-tested benefits.

Under the proposed framework, the same raise has a smaller and smoother effect. Because public reinsurance has already reduced the benchmark premium to approximately $358 per month, the maximum additional premium exposure is limited. The household’s monthly premium rises from approximately $283 to $358, an increase of $75 per month, or $900 per year. The effective marginal burden from premium changes alone is therefore approximately 9 percent of the raise rather than nearly 15 percent.

This comparison shows why the structure of the subsidy matters. The proposal does not eliminate income-related premium increases, but it reduces their size and prevents a household from facing a large discontinuous loss of assistance after a modest increase in earnings.

The proposal therefore does not eliminate subsidy phase-outs; rather, it changes both their size and their shape. Public reinsurance substantially reduces the amount that must be subsidized, while the continuous contribution formula replaces an abrupt statutory cliff with a gradual reduction in assistance over a limited income range.

This interaction between the two components is central to the proposal. Reinsurance lowers the underlying cost of insurance for all marketplace participants, reducing reliance on premium tax credits. The continuous contribution schedule then allows the remaining subsidy to taper smoothly as household income rises, substantially reducing the de facto marginal tax rates created by the current system without requiring a simple across-the-board expansion of premium subsidies.

Although this example focuses on a single individual, the same economic principles apply more broadly. Premium reductions and subsidy phase-outs will vary with age, household composition, and benchmark premiums, but the underlying design remains the same: catastrophic medical risk is addressed through public reinsurance, while affordability is addressed through a continuous income-based contribution schedule rather than abrupt eligibility thresholds.

Discussion

The combination of public catastrophic reinsurance and a continuous premium contribution schedule create three principal benefits: improved affordability, lower de facto marginal tax rates, and reduced distortions in insurer behavior arising from low-frequency, high-cost medical claims..

Improved Affordability

The proposal improves affordability through a mechanism that differs from a conventional expansion of premium tax credits. Public reinsurance reduces the underlying retail cost of marketplace coverage before income-based subsidies are calculated, allowing many households to benefit from lower premiums regardless of their subsidy eligibility. Middle-income households that currently face rapidly increasing premiums may therefore experience meaningful reductions in out-of-pocket costs while maintaining a stronger connection between premium obligations and ability to pay.

Reduced De Facto Marginal Tax Rates

The Affordable Care Act subsidy structure illustrates a broader public finance problem in which multiple AGI-linked taxes and benefit programs interact to create de facto marginal tax rates substantially above statutory income tax rates. Abrupt subsidy withdrawal can discourage additional work, career advancement, entrepreneurship, and self-employment by imposing large financial penalties on relatively small increases in earnings.

The proposed contribution schedule addresses these distortions by replacing abrupt eligibility thresholds with a continuous phase-out of assistance. Rather than facing a sudden increase in premium obligations, households experience a gradual and predictable increase that more closely reflects their economic capacity. The resulting reduction in de facto marginal tax rates may improve labor-market efficiency while reducing the financial uncertainty associated with income-tested benefits.

Reduced distortions in Insurer Behavior

Public reinsurance addresses distortions in insurer behavior caused by the insurance firms desire to avoid or mitigate the impact of low-frequency, high-cost medical events. The reinsurance subsidy reduces the incentive for insurers to design policies that discourage enrollment by people with chronic health conditions, reduce the incentive for insurers to deny claims and reduce the need for strict time consuming and costly prior authorization procedures. In fact, some of the claim denial and prior authorization procedural decisions might be handled by standards created by economists and doctors hired by the reinsurance agency instead of the private health insurance company.

Conclusions and Limitations

The examples presented in this paper are illustrative rather than comprehensive and are intended to demonstrate the mechanics of the proposed framework rather than estimate its aggregate fiscal effects. The assumed reduction in retail premiums depends on the design and effectiveness of the reinsurance program and would require empirical validation through actuarial modeling and microsimulation.

The examples in this paper use one continuous contribution schedule to illustrate the proposed framework rather than to prescribe a unique mathematical solution. Alternative functional forms could achieve many of the same objectives while preserving the central principle of smooth subsidy phase-outs and lower de facto marginal tax rates. Future research should examine aggregate budgetary effects, insurance market participation, labor supply responses, and interactions with other AGI-linked federal benefit programs.

Public reinsurance lowers the underlying cost of insurance, reducing the amount that must be financed through premium tax credits, while a continuous contribution schedule allows the remaining subsidy to phase out gradually rather than disappear at an arbitrary statutory threshold. The combination of these two complementary policy instruments seeks to improve affordability, reduce de facto marginal tax rates, strengthen labor-market incentives, and create a more coherent system of health insurance support. Whether these benefits justify somewhat higher public expenditures is ultimately a policy judgment, but the proposal demonstrates that alternative subsidy designs may achieve superior economic outcomes without relying exclusively on ever-larger premium tax credits.

Author’s Note: This paper is part of a broader research agenda on reducing economic distortions created by AGI-linked taxes and benefit programs including the paper A Third-Party Tax Reconciliation Approach to Health Care. Planned projects include pediatric reinsurance, alternative methods for smoothing income-based subsidies and loan repayments, and detailed estimates of the fiscal costs and economic effects of these proposals. Paid subscriptions directly support the purchase of data, statistical software, computational tools, and the time required to produce independent policy research.

Share

Subscribe now

The United States has rapidly become the world’s largest market for digital infrastructure, hosting more than 5,400 operational data centers and roughly 1,500 additional projects in various stages of planning or construction. Driven by explosive growth in artificial intelligence and cloud computing, these facilities have become one of the largest sources of new electricity demand in the country. Their rapid expansion is reshaping regional electricity markets, water systems, and state economic-development strategies.

Unlike most industries, data centers are remarkably mobile. They require abundant electricity, reliable fiber connections, land, and cooling capacity, but they do not need to be located near customers. As a result, geography matters. The social cost of building a hyperscale AI campus varies dramatically depending on local electricity capacity, water availability, environmental conditions, and public infrastructure.

This geographical sorting, however, is heavily distorted by a ubiquitous patchwork of state-level corporate incentives. Data center development is no longer isolated to traditional tech hubs; instead, state governments have engaged in an aggressive, nationwide bidding war. According to data tracked by the economic development watchdog Good Jobs First, at least 32 states have enacted statutory tax exemptions specifically engineered to attract the data center industry. These programs primarily waive sales and use taxes on high-value server equipment, cooling infrastructure, and the massive quantities of electricity these facilities consume.

Because these tax abatements are frequently uncapped and can span decades, the fiscal strain on state budgets has become massive. Disclosed annual revenue losses have reached $1 billion in Texas, $1.02 billion in Virginia, and an estimated $2.5 billion in Georgia. Compounding the issue, a recent 2026 Good Jobs First study revealed that 14 states completely fail to disclose their revenue losses under the guise of taxpayer confidentiality. This baseline policy approach treats data centers as traditional economic development engines, ignoring the structural reality that they generate very few permanent local jobs relative to the immense, multi-decade resource burdens they shift onto local communities.

The current pattern of development reflects these combined tradeoffs of physical limits and aggressive fiscal courtship. Northern Virginia remains the historical center of global internet traffic but is increasingly constrained by transmission congestion and local opposition. Ohio has aggressively pursued data center investment through lucrative tax incentives and infrastructure support. Tennessee benefits from the extensive generating capacity of the Tennessee Valley Authority. Texas offers abundant land, a completely decoupled utility grid, and one of the nation’s largest electric systems.

The most controversial expansion, however, is occurring in the arid West. Arizona and Utah have emerged as major destinations for hyperscale AI infrastructure because they offer inexpensive land, business-friendly regulatory environments, and access to growing western technology markets. Yet both states also face chronic water scarcity, increasing electricity demand, and long-term environmental challenges. Their experience raises a broader policy question: should governments encourage resource-intensive industries in regions where the underlying resources are already scarce?

The economic benefits of data center growth are uneven. Construction creates substantial short-term employment for electricians, engineers, construction workers, and specialized contractors. Once completed, the facilities become highly automated, capital-intensive operations requiring relatively few permanent employees. The strongest economic case exists when projects generate lasting improvements in infrastructure, tax revenue, or complementary business activity rather than simply large construction expenditures.

The principal costs of new data centers involve the use of electricity and water and additional pollution or traditional external costs associated with any industrial project.

Data centers place enormous new demands on electric grids. If utilities must build additional generation, transmission lines, or substations, the central policy question becomes who pays. Residential customers should not subsidize infrastructure constructed primarily to serve private hyperscale facilities.

Water presents an equally important challenge. In humid regions electricity may be the binding constraint. In the arid West, however, water scarcity may be even more significant. Facilities using evaporative cooling consume substantial quantities of water throughout their operating lives because server heat generation is continuous. Switching to dry cooling reduces direct water consumption but substantially increases electricity demand, shifting rather than eliminating environmental costs.

Local political and water authorities often eager to attract investment fail to protect local consumers. The lopsided nature of this development is laid bare: for example, a Blackstone-owned data center in Fayetteville, Georgia, consumed nearly 30 million gallons of unmetered water through unauthorized hookups during a severe drought without having to pay fines.

Data centers also generate localized externalities through diesel backup generators, cooling equipment noise, wastewater management, and construction impacts. These costs are real even when they are not reflected in market prices.

The appropriate response is neither a blanket ban nor an unconditional subsidy.

Instead, states should require data centers to internalize the full cost of the resources they consume.

Utilities should establish separate large-load rate classes so ordinary households are not forced to finance grid expansions serving hyperscale facilities.

Water-stressed regions should require water budgets, recycled or non-potable water where feasible, drought contingency plans, and pricing structures that reflect the true marginal cost of scarce supplies.

Pollution should be addressed through Pigouvian taxes, emissions standards, generator restrictions not subsidization of a private industry. In reality, state and local governments compete and provide tax abatements, infrastructure commitments, utility concessions, and favorable zoning decisions to attract jobs.

The political economy of data center development increasingly resembles the economics of publicly subsidized sports stadiums. The sports stadium literature provides a useful warning. Decades of research conclude that promised economic gains often fail to materialize while taxpayers absorb substantial long-term costs. AI infrastructure is unquestionably more productive than a football stadium, but the underlying lesson remains valid: visible capital investment does not guarantee positive social returns.

Utah and Arizona illustrate the central challenge of AI infrastructure policy.

Both states have become attractive locations for hyperscale developments because of available land and favorable business climates. Both also face chronic water scarcity, increasing electricity demand, and long-term environmental pressures.

Utah is particularly instructive. This scarcity is acute in the west where the seven Southwest basin states have blown past multiple federal deadlines to negotiate usage cuts as a catastrophic 2026 snow drought has pushed Lake Powell and Lake Mead to record-low inflows, prompting unprecedented federal management intervention to stabilize the collapsing river system.

The sheer absurdity of building hyper-scale computing in this fragile arid zone is underscored by Kevin O’Leary’s recent high-profile retreat, where intense public backlash and state pressure forced him to slash his proposed 40,000-acre Utah data center plan in half—vividly proving that the region simply cannot hydrologically or politically sustain the unmitigated footprint of AI.

Unlike many industrial facilities, hyperscale AI campuses generate continuous cooling requirements for decades. Water consumption is therefore not a temporary construction issue, but an ongoing operating requirement directly tied to electricity consumption and server heat generation.

The broader lesson is national rather than regional. AI infrastructure should be located where resource constraints are smallest rather than where subsidies are largest. Regions with abundant water supplies, excess generating capacity, existing transmission infrastructure, or access to hydroelectric or nuclear power can provide the same computing services at substantially lower social cost.

The unmitigated expansion of digital infrastructure has become one of the defining issues of the 2026 political cycle at the local, state and national level. The WSJ has identified 150 digital infrastructure projects that were halted in the last year alone.

In New Albany and Hebron, Ohio, a wave of emergency municipal bans on new data center footprints forced the state legislature to abruptly suspend long-standing corporate sales tax exemptions for the industry while launching an urgent grid-impact study.

City councils in Baltimore, Maryland, and Oklahoma City, Oklahoma, unanimously passed emergency moratoria halting all new applications, rezoning, and building permits to shield over-allocated municipal water supplies.

In Port Washington, Wisconsin, citizens took the resistance a step further, enacting a first-in-the-nation municipal referendum mandating that any future large-scale data center project seeking public tax incentives must first secure a majority vote from local residents on the ballot.

Over a dozen states—including New York (S.B. 9144) and Pennsylvania (H.B. 2533)—have introduced bills to enforce multi-year, statewide freezes on hyperscale development pending comprehensive environmental and grid-resiliency reviews.

In Maine, shortly after vetoing a bill imposing a moratorium on the construction of data centers Governor Janet Millsdropped out of the race for the Democrat nomination for the U.S. Senate.

A moratorium is a blunt, non-market instrument. Rather than pricing a scarce resource (like water or power), it drops the supply curve to zero by fiat. While it temporarily shields an over-allocated grid or aquifer, it creates a massive deadweight loss (lost economic efficiency) because it treats all digital infrastructure equally—whether a facility uses highly efficient, closed-loop water recycling or an outdated, resource-heavy cooling plant.

Economists generally prefer pricing externalities through a cap-and-trade system or targeted resource tariffs (e.g., charging exponential premiums for peak-hour megawatts). This forces the industry to innovate its way out of the bottleneck rather than halting development entirely. However, for local town councils facing immediate resource depletion, a moratorium acts as an emergency circuit breaker when they cannot afford to wait for a multi-year tax structure to phase in.

Opposition to data centers at the federal level is centered on a national moratorium on all facilities over 20 megawatts in a proposal offered by Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez.

Senator Sanders is also proposing a sovereign wealth fund which would own 50 percent of all AI firms over $100 million dollars. This would create an incentive for the federal government to drastically expand AI.

This escalating political debate over AI data centers increasingly mirrors the gridlock of the American health care debate. On one side, a laissez-faire faction argues for giving the private sector unbridled power, claiming that any regulatory friction will stifle innovation and cede technological dominance to global rivals. On the other side, populist critics offer performative resistance tailored for their political base rather than serious policy solutions, proposing sweeping bans and moratoria that would effectively cripple a vital, nascent industry. This polarization leaves a massive vacuum where pragmatic governance should be—trapped between a corporate blank check and an outright technological freeze.

Artificial intelligence infrastructure may well become as vital to the twenty-first-century economy as railroads, interstate highways, and telecommunications networks were to earlier generations. However, economic importance is not a license to transfer massive structural costs onto households, localized utility ratepayers, or future generations. The era of unfettered state-level competition to attract hyperscale data centers through blank-check fiscal sacrifices is rapidly ending, fractured by both hard physical resource limits and an aggressive legislative backlash. The geographic sorting of digital infrastructure is no longer dictated purely by a state’s willingness to forfeit its tax base; it is running directly into the physical boundaries of local energy grids, depleting municipal water supplies, and triggering severe political liabilities at every level of government.

Ultimately, the core objective of modern public policy should not be to maximize the raw number of data centers crammed within a state’s borders, but rather to minimize the total social cost of providing the computing infrastructure the nation requires. Achieving this outcome requires adhering to a straightforward economic rule: data centers must pay the full, unsubsidized marginal cost of the electricity, water, pollution, and public infrastructure they consume. This result will lead developers to search for the location where costs are the smallest.

Authors Note: Did you find this post informative? You will probably also enjoy A Tale of Three Energy Sectors and Trump and Biden on Wind and LNG.

Subscribe now

Share

The foundational question of modern political economy is straightforward: Why is a new political party even necessary?

It is necessary because the two existing parties have fundamentally abandoned the core duty of governance: choosing how to responsibly allocate the nation’s finite resources. Instead, they operate on a shared delusion. One concentrates on massive, unaffordable tax cuts; the other pushes for unlimited, unchecked spending. Both act as if the bill will never come due.

This third party exists because we recognize a hard truth that neither major party will admit: resources are limited, money is completely fungible, and to govern is to prioritize. We make decisions based on what best serves both the current generation and the next.

To understand why this platform is different from all other platforms, we must answer the four questions that the establishment parties refuse to touch.

1. On the Decision to Avoid the Long-Term Entitlement Time Bomb

On all other platforms, parties ignore the compounding math of our major entitlement programs, pretending they can be sustained without structural change. Why on this platform do we face the time bomb directly?

Because the major parties are playing chicken with our future, waiting to see who blinks first while the clock runs down. The tragedy is that these systemic problems could have—and should have—been fixed far less expensively ten years ago. Because of a decade of political cowardice, the fixes required today will be harder and more painful. We refuse to participate in this generational betrayal. We choose to address the structural design of these programs now, before a sudden, unmanaged fiscal crisis forces catastrophic cuts on those who rely on them most.

Now, the math is unyielding. Congressional scorekeepers project that the Social Security retirement trust fund will be exhausted by 2032. If we allow the establishment parties to drift into that insolvency cliff, current law mandates an immediate, unmanaged 24% to 28% across-the-board benefit cut. -- slashing about $500 a month from the typical retiree’s check.

To avert that crash at the final hour would require a sudden, crushing 31% tax increase or immediate, sweeping benefit reductions. We choose to address the structural architecture of these trust funds now, replacing panic-driven brinkmanship with deliberate, pro-savings reform before an unmanaged fiscal crisis breaks our promises to those who rely on them most.

2. On the Scarcity of Resources and Fungibility of Money

On all other platforms, parties treat public funds as isolated pots of infinite monopoly money. Why on this platform do we treat resources as strictly limited and fungible?

Money is completely fungible; a dollar spent chasing a political trend is a dollar taken directly from a core human need. Look at the shifting political landscape: the major parties eagerly authorize massive, convoluted outlays—like spending billions on electric vehicle (EV) tax subsidies that disproportionately benefited high-income earners, only to see those subsidies restricted, lapsed, and ultimately abolished under shifting administrations. Meanwhile, vital, baseline safety nets are left to twist in the wind. They passed temporary expansions for healthcare premium tax credits and allowed critical nutrition programs for the hungry to face abrupt sunsets, treating human survival as a disposable political bargaining chip while locking in unstable corporate incentives.

We must explicitly ask: Could the core environmental and economic goals of the multi-trillion-dollar Build Back Better and Infrastructure initiatives have been accomplished far more effectively by simpler tax changes that directly alter relative prices, rather than launching massive, bureaucratic spending initiatives?

The answer is a definitive yes. Instead of spending billions to pick corporate winners—such as direct grants to build specific EV charging stations or complex tax credits for select manufacturers—we favor efficient, neutral market mechanisms. Implementing targeted user fees on infrastructure use or a uniform, transparent carbon fee relies on the market to efficiently adjust relative prices across the entire economy.

We can go even further: by pairing a corrective tax on carbon-intensive energy with a direct subsidy or tax credit for a vital household necessity—such as permanent healthcare coverage or early childhood education—we can leave both the government and household balance sheets completely untouched. The government’s ledger remains neutral because the revenue raised is designed to offset the new benefit. The average family’s balance sheet remains stable because the increased cost of energy is directly neutralized by the reduced cost of a core necessity. Yet, because relative prices have shifted, the market is powerfully incentivized to innovate, allowing private capital to find the most efficient path toward a cleaner economy without draining a single dollar from the American household.

3. On Balancing Fiscal Responsibility with Household Financial Strength

On all other platforms, parties force a false choice—either obsessing over the federal ledger while ignoring the family checkbook or passing short-term handouts that worsen the national debt. Why on this platform do we treat fiscal stability and household balance sheets as inseparable?

Because you cannot fix a macro-economic problem with a micro-economic crisis. This mirrors the famous 1992 Democratic primary debate between Tom Harkin, Paul Tsongas, and Bill Clinton. Harkin prioritized combating inequality, Tsongas focused strictly on the debt, and Clinton won by recognizing that a viable economic strategy had to deal with both.

Today, the establishment parties offer competing disasters for household stability. The progressive left relies on short-term, legally fragile handouts like blanket loan discharges or the SAVE program. Meanwhile, the populist right counters with draconian repayment overhauls that eliminate inflation-adjusted poverty protections and stretch loan terms to a punishing 30 years, trapping families in debt for decades.

Worse, neither party understands how their fractured agendas collide. The populist right routinely targets the safety net with blunt instruments, pushing for deep Medicaid retrenchments and stripping away ACA premium tax credits in a way that leaves millions of vulnerable Americans completely without health insurance. Meanwhile, by blindly stacking temporary ACA premium tax credits on top of income-driven student loan repayment formulas, the left has constructed a devastating, de facto marginal tax rate on the middle class. As a young family works harder to earn an extra dollar, that dollar is simultaneously clawed back by phased-out healthcare subsidies and higher mandatory loan payments.

The math is unforgiving: it is mathematically impossible to defuse our largest fiscal time bombs—the Social Security and Medicare trust funds—without policies that actively allow households to build equity. If families are squeezed by draconian repayment formulas, left uninsured by reckless safety net cuts, or trapped by a stealth tax system that punishes upward mobility, they cannot save. Increased private saving is a mathematical prerequisite for any successful, long-term entitlement reform. By stabilizing baseline costs and eliminating these punitive, overlapping cliffs, we enable the private capital accumulation necessary to secure both the household’s future and the nation’s ledger.

4. On Ideological Purity and Partisan Pandering

On all other platforms, parties shape their proposals to satisfy the dogmas of their extreme bases, ignoring both economic science and practical reality. Why on this platform do we prioritize empirical evidence over political posturing?

Because a complex, modern society cannot be responsibly governed by bumper-sticker slogans. The two major parties have abandoned evidence-based policymaking, preferring instead to perform ideological theater for their primary voters while leaving real-world consequences to sort themselves out.

Look at the progressive left’s demands for “Medicare for All.” Their preferred architecture would completely outlaw private health insurance overnight with zero transition plan. It ignores the reality of an advanced, highly integrated healthcare system that cannot simply be dismantled by fiat—especially when successful universal systems across Europe routinely integrate private insurance to maintain capacity and choice. Rather than doing the hard work of building a continuous, stable healthcare safety net, they demand an all-or-nothing ideological purity test. Simultaneously, to appease activists, they pander on complex foreign policy crises like the conflict in Gaza, taking performative rhetorical stances that ignore the ground-level security threats facing Israel and undermine stable, long-term diplomacy.

Look across the aisle at the populist right. Their legislative agenda is driven by a desire to take a sledgehammer to anything with an opponent’s name attached, regardless of the economic fallout. Under the banner of ending the “Green New Scam,” they seek to gut production tax credits for wind energy and advanced manufacturing. This rash move willfully ignores the billions in private capital already deployed and the thousands of manufacturing jobs created in their own domestic districts. They treat soft power institutions like USAID as partisan targets rather than strategic assets, slashing global health and development programs just to secure a short-term win on cable news.

We reject this governing-by-grievance model. We believe that economic policy must be tethered to science, arithmetic, and institutional stability. We do not design proposals to win a Twitter fight or feed a primary base; we design them to work in a complicated world.

The Conclusion

On all other nights, the American people are asked to choose between two competing illusions. But on this night, we offer a choice rooted in reality: an acknowledgment of scarcity, a commitment to concurrent household and fiscal strength, a refusal to ignore the entitlement time bomb, and a dedication to pragmatic, empirical governance. That is why this platform is different from all other platforms.

For centuries, this was not a statement about where people stood, but where they aspired to go—a prayer of transition from bondage to freedom, from a broken present to a rebuilt future.

Our political journey carries that same prospective duty. We do not accept that our current state of fiscal decline and ideological captivity is permanent. We reject the fear-driven paralysis of the status quo. With a clear-eyed view of our challenges and a firm commitment to the generation to come, we close this manifesto with our own shared determination for the nation:

Next year in a redeemed republic.

Subscribe now

Share

The United States is facing an accelerating private retirement savings crisis that requires immediate structural tax reform. The upcoming 2029 sunset of temporary federal tax provisions presents policymakers with a stark choice: extend narrow, consumption-focused tax carve-outs or deploy those same fiscal resources to build a resilient, broad-based foundation of private savings.

Because federal tax expenditures are resource-constrained and federal capital is entirely fungible, the budget cannot sustain untargeted income exemptions while simultaneously expanding the domestic savings safety net. We must choose.

Prioritizing a permanent extension of the “No Tax on Tips” policy represents a significant misallocation of public funds due to several problems:

Exempting tips from federal income tax does absolutely nothing to address the structural retirement deficit. Tipped and service-sector workers are among the least prepared for retirement in the American workforce. The Bureau of Labor Statistics data shows that only about 25% of service workers -- and 23% of workers in the lowest earnings quartile -- participate in an employer-sponsored retirement plan.

Worse, a blanket income tax exemption completely fails the lowest earners. More than one-third of all tipped workers have baseline earnings low enough that they owe zero federal income tax before applying refundable credits. A “No Tax on Tips” policy provides a $0 benefit to these low-income families while scaling its upside entirely to high-income tipped earners in upscale venues. It subsidizes current consumption without building a single dollar of long-term financial security.

A tax code must maintain horizontal equity. The No-Tax-On-Tips provision violates a fundamental provision -- individuals with identical economic capacity should face identical tax liabilities. There is no economic or ethical justification for why a retail clerk, a distribution center packer, or a home health aide earning $35,000 entirely in standard hourly wages should pay higher federal income taxes than a restaurant server or bartender earning an identical $35,000 split between base wages and $5,000 in discretionary tips.

This arbitrary favoritism distorts labor markets, creates immense industry pressure to reclassify ordinary wage income as “discretionary tips” to evade taxes, and forces standard low-wage workers to subsidize their peers.

The key selling point of a “no-tax-on-tips” policy is liquidity. People reliant on tip income often face tight financial constraints and avoid saving because they cannot afford to lock up their cash. The Retirement Security Act (RSA) solves this by introducing a dual-ledger IRA system that blends complete tax deductions with immediate cash flexibility.

Under this framework, 100% of an individual’s IRA contribution is tax-deductible, but the funds are automatically split: 60% goes into a locked Retirement Reserve, and 40% goes into a completely liquid Flexible Savings ledger. Savers can withdraw from this 40% buffer at any time, permanently tax-free and penalty-free. For example, if a worker contributes $4,000 to an IRA, they get a tax deduction on the full $4,000, yet they can immediately access and spend $1,600 of it without penalty. The remaining $2,400 is locked until age 59½. This simple shift provides a powerful incentive to save for people who are liquidity-constrained, eliminating the fear of asset lock-up while firmly protecting the core retirement nest egg from premature leakage.

Traditional deductible IRAs suffer from an inherently regressive design. A high-income earner in the 32% marginal tax bracket saves $320 in immediate taxes for every $1,000 contributed, whereas a low-income worker in the 10% bracket saves only $100 for making the identical economic sacrifice. If a worker has zero income tax liability, a traditional deduction yields a $0 financial benefit.

The RSA framework completely flips this incentive structure to prioritize wealth-building at lower incomes. While high-income earners continue to receive a standard tax deduction (balanced by the new ledger rules), low-income workers qualify for a progressive federal match. Under the traditional framework, a low-income worker in the 10% bracket captures a minor $100 tax benefit per $1,000 saved, while a high-income earner in the 32% bracket extracts a $320 federal subsidy for the same contribution level.

The RSA framework changes these dynamics entirely. A high-income earner continues to receive their standard tax deduction, but a low-income worker with zero income tax liability receives a direct, 50% federal matching contribution ($500 for every $1,000 saved) deposited straight into their locked retirement core, all while keeping 40% ($400) of their own principal 100% liquid.

The combination of the progressive match and the 0% effective tax rate on the flexible buffer ensures that the federal government provides its highest aggregate subsidy rate to lower income quartiles. The credit phases down smoothly as income rises, transitioning into a standard deduction for high-income earners who utilize the account primarily for its structural liquidity advantages.

Because the 40% flexible allocation removes the primary behavioral barrier to retirement plans—the fear of asset lock-up during a financial emergency—the overall surge in both individual participation and average contribution rates across the entire economy will be substantial. Consequently, the near-term federal tax expenditure impact will be quite large, as billions of dollars in adjusted gross income are deferred from the immediate tax base by savers capitalizing on the 40% untaxed cash allowance. High-income individuals will aggressively maximize their contributions to capture the unique benefits of the liquid asset split, further compounding this near-term revenue effect.

However, this elevated public expenditure represents a high-leverage shift from consumption-side tax breaks to structural asset accumulation. A massive influx of private capital expands the domestic investment pool, reducing household dependence on state-sponsored safety nets and creating a highly resilient, self-funded workforce. Crucially, building this broad-based foundation of robust private savings serves as an indispensable prerequisite for systemic Social Security reform. By successfully engineering a parallel asset base for every American worker, policymakers will finally possess the structural flexibility and financial cushion needed to stabilize long-term public entitlement programs for generations to come.

Through this design, a worker who chooses to save does not lose their tax preference; they capitalize on it through asset accumulation. Instead of receiving a tax break when spending cash, the worker receives a functionally identical “no tax on cash” benefit when saving their income.

Appendix: Statutory Language of the RSA

Section 101. Structural Modification of Individual Retirement Accounts (IRAs)

Effective January 1, 2029, the Individual Retirement Account (IRA) architecture under Internal Revenue Code Section 408 is modified to transition individual, non-employer-sponsored retail savings into a dual-ledger system. All individual contributions are 100% deductible from adjusted gross income (AGI) in the taxable year of the contribution, up to a statutory individual limit of $7,000 (adjusted annually for inflation).

• Workplace Plan Preservation: This structural modification applies strictly to individual retail IRAs. Employer-sponsored qualified retirement plans—including traditional 401(k), Roth 401(k), 403(b), and 457(b) frameworks—remain completely unchanged, operating under their existing statutory contribution limits, non-discrimination testing, and withdrawal rules.

• The Bifurcated Ledger Split: Upon receipt of any individual IRA contribution, the qualifying financial institution must automatically segment the principal according to a strict 60/40 structural split:

  • The Retirement Reserve Ledger (60%): Formulates the locked core. To eliminate premature account leakage, funds on this ledger and all associated investment earnings are completely locked and cannot be distributed under any circumstances until the holder passes age 59½, except in cases of total permanent disability or death.

  • The Flexible Savings Ledger (40%): Establishes the liquid buffer. Funds on this ledger may be withdrawn at any time, permanently tax-free and penalty-free, up to the aggregate amount of the historical principal deposited.

Section 102. The Progressive Low-Income IRA Match

For single filers with an AGI below $35,000 (and joint filers below $70,000), the federal government will provide a direct, matching contribution equal to 50% of the worker’s qualified individual IRA contribution, deposited directly into the account’s locked Retirement Reserve Ledger.

• Phase-Out: This matching credit phases out linearly at a rate of 5% per $1,000 of AGI above the baseline, reaching 0% at $45,000 for single filers and $90,000 for joint filers.

• Workplace Exclusion: Contributions made by an employee to an employer-sponsored 401(k) or similar workplace plan are excluded from this specific retail IRA federal match mechanism, ensuring zero cross-contamination of public funding between workplace plans and individual retail accounts.

Section 103. Repeal and Transition of Special Income Exemptions

Any temporary provision excluding tip income from federal gross income calculation is repealed effective December 31, 2028. All earned income, whether received as base salary, hourly wages, or discretionary tips, shall be treated identically under the federal income tax code. Funds captured from the sunset of this exemption are structurally earmarked to fund the Section 102 low-income retail savings match.

Related Reading: For a deeper analysis of the broader legislative vehicles and budget mechanics driving these structural changes, readers should review the companion paper, Tax Reconciliation and Retirement Policy.

Subscribe now

Share

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.

Share

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.

Share

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.

Share

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.

Share

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.

Share

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.

Subscribe now

Share

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.

Share

Subscribe now

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.

Share

Subscribe now

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

Share

Subscribe now

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.

Special Offer for New Readers

If you find this analysis valuable, consider becoming a subscriber. I am currently offering a 90-Day Free Trial for full access to the Economic and Political Insights premium research, including deep-dive memos on retirement adequacy, mortgage-payoff strategies, and tax-efficiency audits.

Claim Your 90-Day Free Trial Here

Share

Subscribe now

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

Share

Subscribe now

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

Share

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

Subscribe now

Share

Share

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.

Subscribe now

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

Read more

Share

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.

Subscribe now

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:

Read more