Q&A of the Day – Would Combating Federal Fraud Fix the U.S. Deficit?
Each day I feature a listener question sent by one of these methods.
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Today’s entry: @brianmuddradio Lets say that 10% of the federal budget is fraud. And lets say that it’s actually fixed. Would that be enough to solve the deficit problem?
Bottom Line: Today’s note comes on the heels of two significant related developments this week. The first was President Trump’s State of the Union announcement that the administration was launching a “war on fraud” and that Vice President JD Vance was being tasked to lead it. The second was the Senate Judiciary Committee’s estimate for the amount of federal spending that’s outright defrauding American taxpayers – is 10%.
As Senator Ashley Moody said on Wednesday: 10%. That’s how much of the federal budget is lost to fraud. Outrageous. @POTUS, @SenJudiciaryGOP and I are laser focused on mitigating abuse of the American taxpayer and their hard earned money. Time for a fraud czar.
I’ve observed two lanes of discussion on this topic. Seeming indifference by the political left on this issue (which is interesting for multiple reasons). And most on the right suggesting that fraud is waaayyyy higher than 10%. Commonly, that’s accompanied by a list of government programs that are believed to be illegitimate.
It is important to note that simply not liking a government program doesn’t equate it to fraud. It means that poor public policy is in place. In order to have a serious conversation and debate about this issue that distinction is important. And given that President Trump and his administration have proven to be serious Washington change agents, what’s been announced this week may, finally, have legs.
In reality, none of us know what the exact percentage of fraud taking place via federal spending is. Therefore, the Senate Judiciary Committee’s estimate, which is predicated on initial fraud findings, a la Minnesota’s prolific Somali engineered fraud, is as good or better than any. So, on that note, let’s dive into today’s question.
Here’s a quick breakout of the percentage of the total federal deficit based on total federal outlays by year for the past ten years:
- 2016: 15%
- 2017: 17%
- 2018: 19%
- 2019: 22%
- 2020: 48%
- 2021: 41%
- 2022: 22%
- 2023: 28%
- 2024: 27%
- 2025: 25%
So clearly the answer is no. The average federal deficit over the past decade has run at 26% above federal revenue annually. Even if you exclude the two COVID years that are outliers, the average has still been a deficit that runs 22% higher than federal revenue. The last year that the federal deficit was at 10% or below federal revenue was 2007 – just prior to the impact of the Great Recession. In 2007 the federal deficit was “only” 6% above revenue. So clearly even if almost all currently estimated fraud was eliminated by the federal government, that progress alone wouldn’t be a panacea for our long-term debt and deficit issues. With that said it would address approximately half of the problem which would constitute massive progress.
For perspective on how significant the savings would be consider this... 10% savings during the 2025 fiscal year would have amounted to $750 billion. How significant is that? It equals $4,573 per federal filer last year alone. So, let’s put it this way. If you filed taxes with the IRS last year, you were defrauded out of an estimated $4,573. How big of an impact would that had in your life and for your family? What’s more is what’s happening annually. Another way of looking at this is that given current full-time incomes, for each decade you work, you’re having a year’s worth of wages stolen from you.
A cynical person might say that you wouldn’t see the money anyway, except that isn’t true. If there weren’t fraud, Congress could literally authorize annual tax refunds of over $4,500 to each tax filer and still end up in the same budget place if they wanted to. Or if they didn’t, you would benefit similarly from lower inflation rates driven by a stronger dollar and less artificial demand for goods.
Moreover, with Social Security and Medicare both facing insolvency next decade based on the current trajectory, solving the fraud issue would add 5 years of solvency to the Social Security program and eight years of solvency to Medicare. That’s a massive amount of money for current and future recipients.
This hopefully illustrates the importance of truly combating federal fraud regardless of one’s level of cynicism or political preferences. The money is the same for all tax filers regardless of political preferences.