Federal Waste??? Or tax dodges...

Here’s Trillions in Federal Waste the DOGE Bros Could Actually Target

Because what’s more wasteful than giant tax breaks for people who don’t need them?

Mike Mechanic and Michael Mechanic

As you may know, our felonious president-elect put billionaire Elon Musk and wannabe billionaire Vivek Ramaswamy in charge of a commission—though not an actual government department, because only Congress can create those—named for the same silly dog meme as Musk’s favorite “shitcoin.” But even in an advisory role, the so-called Department of Government Efficiency could cause significant upheaval if Congress and agency chiefs follow its lead, or if Donald Trump launches a flurry of executive orders—and then lawsuits are filed and everything is messy and chaotic and journalists are all in a tizzy, just as Trump likes it.

DOGE’s supposed goal is to identify $2 trillion in savings and reduce the size of government—and the deficit—by slashing federal waste and redundancy. (It’s been tried before, with limited success.) Based on their activities and statements, Musk and Ramasawmy would accomplish this by gutting the federal workforce, eliminating certain agencies, slashing regulations, ending selected entitlements, and, as a corollary, privatizing as much as possible as quickly as possible.

For starters, the DOGE bros have proposed killing veteran’s health benefits, Pell grants, Head Start, and the Bureau of Prisons—which simply means the government would spend its “savings” on contracts with private prison companies, and what could go wrong? They also seek to eliminate the National Institutes of Health, which would be a disaster for US leadership and innovation in science, because the NIH funds most basic biomedical research—work that brings about lifesaving drugs and procedures and vaccines, which, whatever you may think of them, have saved millions of Americans from gruesome deaths.

But suppose, for a moment, that DOGE’s mission is earnest. If they really want to target waste and inefficiency, as Judd Legum pointed out recently, they might start with the Pentagon, which has been failing audits for ages and is notorious for things like $14,000 toilet seats. Defense will eat up nearly half of the $1.8 trillion discretionary budget for fiscal 2025, and Social Security and Medicare will account for most of the $4 trillion mandatory budget—both sacred cows that lawmakers mess with at their peril.

But there’s a far richer target that nobody, certainly not the DOGE boys, has been talking about: wasteful tax breaks. These wouldn’t be spending cuts, technically speaking, but they amount to the same thing, as evidenced by the fact that the government calls them “tax expenditures.” And what is more wasteful, honestly, than giving huge breaks to people who don’t need them?

There are myriad examples, but we’ll just highlight seven big-ticket items that are costing the Treasury hundreds of billions or trillions of dollars. To be clear, some of these are not all bad, and with the right guardrails can be quite good. The devil is in the details of who gets to take advantage of them, and to what extent.

Musk and Ramaswamy may be even less likely to push for these reforms as they would to target the Pentagon budget. But let’s game it out anyway. The cost figures below are five-year estimates, mostly from the congressional Joint Committee on Taxation (JCT) for 2023 through 2027.

Tax breaks for private retirement plans: $2.5 trillion

Some Republican lawmakers are eyeing Social Security reductions to cover the cost of extending the tax cuts for the wealthy that Trump signed into law in December 2017. But if the goal is to eliminate waste, they’re barking up the wrong tree. The Social Security Administration estimates it will disburse about $110 billion more in benefits this year than it receives from the taxes that are deducted from our paychecks to fund the program. And that’s a fair sum, but the government spends nearly four times as much subsidizing private retirement savings, whose benefits flow disproportionately to the affluent.

The US government, and by extension the states, offer tax breaks for contributions to these investment accounts and on the stock profits that accrue in those accounts over the years, benefits that add up to just under $2.5 trillion over five years. But unlike Social Security, private retirement plans are far from universal. Participation varies widely by income. According to the Federal Reserve Board’s latest (2022) Survey of Consumer Finances, only 41 percent of families in the lower half of the income spectrum had a private retirement account, whereas 96 percent of families in the top-earning 10 percent have one (or more). And among the participating families, average savings for the lower-income half was $54,700 vs. $913,000 for the top 10 percent.

Encouraging people to save is laudable. The wasteful part is that there’s no ceiling. In 2021, the JCT reported that more than 28,000 Americans had IRA (individual retirement account) balances exceeding $5 million, and nearly 500 had holdings of more than $25 million—Peter Thiel, using dubious tactics, even managed to accumulate more than $5 billion in a Roth IRA, a type of account intended for middle-class savers. And that’s just IRAs, which a person can own alongside other pensions and 401(k)-type accounts. See my piece, “How Congress Made Sure the Rich Retire in Luxury—at Our Expense.”

The fix: Once a person amasses a total of $2 million in their combined retirement accounts, remove them from the federal teat. If they need more, they can save without the government’s help. (For a pre-emptive fix, Musk and Ramaswamy might also urge Congress to reject this potentially disastrous Project 2025 proposal, should it ever arise.)

Exclusion of capital gains at death: $309 billion

This aberration, known as the “step-up in basis” rule, resets the value of long-held investment assets as they pass from parent to child or grandchild. Suppose I bought $10,000 worth of Amazon stock way back when and now it’s worth $10 million more than I paid. That’s a huge capital gain. If I sold the stock, I would owe roughly $2.4 million in federal tax. But if I die and leave it to my kids, the cost basis for taxation “steps up” to the new fair market value of $10,010,000, and neither my kids nor my estate owes the IRS a dime.

The rationale for this giveaway? Well, for estates subject to gift and estate tax (which are now only imposed on inheritances exceeding $13.6 million, or $27.2 million for a couple), the notion is that resetting the value of inherited stock avoids double taxation. But in the real world, most super-wealthy people already deploy strategies to sidestep gift and estate taxes. A second rationale is that it is difficult for heirs (and the IRS) to determine the cost basis of older investments—but that’s become far less of an excuse in the digital era.

The fix: Kill the step-up rule. And speaking of tax avoidance…

Grantor Retained Annuity Trusts (GRATs): $1 trillion*

In the late 1990s, while trying to rein in a type of trust rich people were using for tax avoidance, Congress accidentally opened the door to something far worse: GRATs. Ever since, America’s dynasties have widely embraced a variation known as the “Walton GRAT” as a way to channel mind-boggling sums to their offspring without paying any inheritance tax. We’re talking hundreds of millions of dollars, or billions in the cases of guys like the late casino magnate Sheldon Adelson and Nvidia head honcho Jensen Huang—who employs additional legal tricks that are now popular among billionaires, and also need to be addressed. “I think the ease with which the ultra-rich can just make their taxes disappear is becoming more visceral to people,” an aide to Senate Finance Committee chair Ron Wyden (D-OR), told me earlier this year.

*This five-year figure is based on an estimate given to the New York Times by Daniel Hemel, a tax expert at New York University.

The fix: Enact limits on GRATs that render them useless for tax avoidance. Sen. Wyden introduced a bill in March to accomplish exactly that. Will it pass? Not on Trump’s watch.

Tax deductions for charitable gifts: $379 billion

Okay, now you probably think I’m some sort of Grinch. What’s wrong with a deduction for charitable giving? A lot, it turns out.

The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the standard deduction, which about 70 percent of taxpayers had been claiming on their federal returns. As a result of the change, nearly 90 percent of families now claim it. But that means the remaining 10 percent, mostly affluent taxpayers who itemize their deductions, are the only ones who get to subtract the value of charitable gifts from their taxable income. In short, we are all paying to subsidize the charitable inclinations of America’s richest. If you are a middle-class taxpayer who donates $500 to a food bank, that’s $500 out of your pocket. If billionaire Scrooge McDuck makes the same donation and takes the tax break, it only costs him $315.

Philanthropy has its place. Private giving can support bold initiatives that the government won’t, which sometimes brings about positive outcomes—though also bad ones and silly ones. But expending billions of public dollars to subsidize unelected philanthropists is profoundly undemocratic, in part because the rich differ so notably from the masses in terms of the things they support. In 2010, a team of political scientists led by Benjamin Page at Northwestern recruited a sample of 1 percenters for interviews—not an easy task—and compared their policy views to the preferences of the broader public, as gleaned from surveys. Fifty-eight percent of his subjects were Republicans. From my book, Jackpot:

Most Americans wanted environmental protections strengthened; the 1 percenters wanted them slashed. Nearly nine in ten public respondents said the government should spend whatever is necessary to ensure high-quality K–12 public schools, versus just 35 percent of Page’s subjects—who, after all, could afford private schools and tutors and coaches. Only about half of the wealthy group felt it was the government’s responsibility to make sure minorities and whites had educational parity. They also favored less spending on Social Security, health care, food stamps, and jobs programs. The affluent group “tilted toward cutting all the income-redistributive or social insurance programs we asked about,” wrote Page et al.

Scrooge McDuck, like Elon Musk, also has a private foundation that he funds (like Musk) with shares of his company stock, which means he not only avoids paying a tax on their gain in value over the years, he also gets to deduct their current value from his taxable income! The McDuck Foundation, like any private foundation, is only required to spend 5 percent of its assets each year on charitable activities, even though its investments are growing by 15 percent annually. And its donations go to nonprofits that are working to eliminate the federal regulations that prevent McDuck Enterprises from polluting rivers and streams. For more, see my piece, “Philanthropy in America is Broken.” (No more ducks, I promise.)

The fix: Kill the charitable deduction. Replace it with a tax credit available to all, and cap it at $5,000 a head.

Reduced rates on dividends and long-term capital gains: $1.2 trillion

Consider two married couples, each with a combined taxable income of $200,000. (For simplicity, we’ll assume they claim the standard deduction.) The first couple’s income is entirely from their salaries. The second couple gets all its money from dividends and sales proceeds from one partner’s significant stock holdings, inherited from a parent—neither partner is employed. The working couple’s effective federal tax rate is a tad over 16 percent. The nonworking couple has an effective rate of 8 percent. Besides being an insult to people who work for a living, this large disparity—for very high earners, the top capital gains tax rate is about 24 percent vs. 37 percent for wage income—encourages lots of tax avoidance schemes. (Carried interest is another notable one.)

The rationales for rewarding passive investment over work don’t pass the smell test. Investors will invest regardless, and differing capital gains rates don’t appears to have a large effect on economic growth. When the rates are reduced, meanwhile, the windfall goes largely into the hands of people with incomes north of $1 million. Now, you’ll hear speculation, and see some research, concluding that higher capital gains taxes discourage entrepreneurial risk-taking. But since when is risk-taking an unvarnished good? There are lots of “innovations” that haven’t turned out so great for our society. Think Meta. And Purdue Pharma, maker of OxyContin. Are we really better off for the wasteful innovations of meal kit companies like Blue Apron? Heck, Juul was an innovator—one that got a generation of kids hooked on nicotine. When excess wealth is sloshing around in search of lucrative investments, the consequences can be grim. Consider how an explosion of private equity has hollowed out many industries, as fund managers leverage debt to suck the life out of once-healthy sectors and channel profits to investors and partners at the expense of consumers, tenants, and workers. (See our recent packages, “How Private Equity Looted America” and “American Oligarchy.”)

The fix: Treat investment income the same as work income. Boom.

Home mortgage interest deduction: $258 billion

Prior to 2018, a couple could deduct interest on up to $1 million in loans for first and second homes. The Trump tax legislation lowered the limit to $750,000, but because the TCJA also doubled the standard deduction, the mortage interest deduction shifted further in favor of the rich. In 2023, according to the Congressional Research Service, nearly half of the deduction’s value went to the 14 percent of families with taxable income exceeding $200,000. And the deduction has done little to bolster homeownership: “The economic literature,” the CRS notes, “has generally found that the deduction’s structure…does not address the largest barriers to homeownership—the down payment required by banks, and closing costs.”

The fix: Kill the deduction and replace it with a program to help lower-income home buyers with down payments and closing costs, limited to first homes only.

Qualified business income deduction: $199 billion

This may sound like a snoozer, but this generous provision of the 2017 Trump tax cuts, enacted at the urging of Republican Sens. Steven Daines of Montana and Ron Johnson of Wisconsin (who stood to gain personally), was a blatant giveaway to the owners of “pass-through” businesses, a category dominated by S corporations and limited liability partnerships, nearly 70 percent of whose profits flow to the wealthiest 1 percent of the population, according to a 2016 Treasury report, while “virtually no” pass-through income goes to people in the lower 80 percent.

As I wrote in my book, pass-throughs include hedge funds and real estate partnerships, private equity and venture capital groups, landlords and professional firms: accounting, consulting, law, medical, dental. Their owners spent hundreds of millions of dollars on political contributions to get their way on the tax bill. Hedge funds more than quadrupled their contributions to federal candidates, lawmakers, and PACs during the 2016 and 2018 election cycles relative to earlier cycles. Private equity contributions more than doubled, and venture capital and real estate contributions nearly doubled. Those investments paid off in spades.

The fix: Repeal it.

There’s more, but maybe we’ll just end it here. Your bumper-sticker takeaway: Stop the Plunder, Close the Deficit.