A Beginner Reformer’s Manual: How to Cut Government Spending

The latest attempt at spending cuts during Trump’s second term came amid an impending U.S. debt crisis and was meant to prevent it. As expected, that attempt failed. While DOGE’s efforts were accompanied by extraordinary events — constant media hysteria, lawsuits, threats, attacks on Musk, a Tesla boycott, and even arson at dealerships and against vehicles — Musk and his department still managed to cut $175 billion in “improper” spending. But then Trump came along with his Big Beautiful Bill and undermined the prior reforms. Despite the looming debt crisis, U.S. government spending rose once again, and the whole affair ended in a loud falling-out between Trump and Musk — one that ultimately pushed Musk to start building his party.

It’s worth noting that in this situation, the pressure on both Musk and Trump was bipartisan. Naturally, the left played the lead role, skillfully exploiting Trump’s narcissism by constantly emphasizing that Musk was the one stealing the spotlight. But without the help of the RINO Republicans in Congress — keen on the little “pork projects” made possible by Trump’s Big Beautiful Bill — the operation to neutralize Musk and derail the spending cuts wouldn’t have succeeded.

A one-time spending cut, no matter how radical, is simply not enough. In every example we’ve cited (and in countless others we haven’t), government spending surged again after being reduced, and as spending rose, countries declined. There may not be a single nation where government expenditures haven’t increased, not only in absolute terms but also relatively, meaning the state is consuming a growing share of national income. Ukraine currently holds a firm lead in this regard, with public spending making up over 71% of GDP (according to IMF data for 2024).

This is the fact that demands serious attention. And just as seriously, we need to ask how this problem can be solved. The relevant questions are:

As soon as we begin looking for answers, we immediately run into a thick fog of conceptual confusion surrounding the very notion of government spending. This confusion obscures the true scale of the issue and derails those who, under different circumstances, might have taken up the challenge of solving it.

To cut through this fog, let’s start by answering two key questions:

Let’s start by unpacking what “spending” and “costs” actually mean in the market context. From the perspective of the Austrian School of Economics, a cost is the utility an individual sacrifices when making a choice. “Spending” — that is, the money someone pays during a monetary exchange and which accountants dutifully record in business operations — only reflects the external, visible side of this phenomenon. Most real costs are non-monetary.

When it comes to any “legal entity,” real costs ultimately boil down to the costs borne by its owners. I won’t delve into the corporate structure and the fact that a corporation is essentially a mechanism for shifting real costs — otherwise, we’d never finish this discussion. I’ll just note that a corporation’s costs exist only in the legal sense, since it is an “artificial person,” a juridical fiction. In economic terms, corporate spending and costs reduce to the spending and costs of the real individuals behind it.

There’s one crucial element missing from this discussion: the fact that acting individuals are owners. This fact is often left unstated — on the one hand, because it seems self-evident; on the other, because costs also exist in the “economy of Robinson Crusoe,” where property rights are essentially absent. However, once we shift our focus to the state and its spending, this fact becomes central. This matters because property rights, when analyzing the actions of individuals in society, can tell us who is making the choice, in whose interests it is made, and which alternatives are being given up.

Let’s imagine a king in an absolute monarchy who owns all the land within his realm. If such a king builds a bridge or a road, whose interests do such an action serve? Few would claim he’s acting “in the public interest.” For such a state (we’ll set aside taxation here and assume the king earns purely through land rents while holding all the standard monopoly “functions” of government), the concepts of spending and cost still apply. The king is improving his property in pursuit of his goals. He could have drunk the money away, but instead chose to build a road. The fact that you or I might end up using that road is either part of the king’s plan or a “positive externality.”

Now, if we replace the king with a “firm” — a group of people who own and manage the territory for their own ends — nothing in our model changes. That group bears the costs, which are reflected to some extent in their monetary outlays. That said, there’s an interesting and important feature in this model. In both cases — whether it’s an absolute monarch or a “firm” — the matter of “government spending” is purely an internal technical issue of the state itself. For the inhabitants of the territory, it has no real relevance. It affects “the economy as a whole” only as an externality, more often positive than negative.

Now let’s bring taxes into the picture. Unlike rent or other lease terms, taxes are not subject to contract or consent from the resident. Taxation, then, is a forced extraction of income for the benefit of the state, which now takes on a parasitic character — a negative for “the economy as a whole.” Even so, we can still speak of the state’s costs and spending — whether monarchical or firm-like — because the king or the “firm” still owns the territory. In this setup, the “population” must simply be viewed as a managed resource, not unlike livestock on a farm. Again, while residents may resent taxes, it would never occur to them to worry about government spending, let alone cheer for its increase. Their only real concern is the size of the tax burden.

But once we turn to the modern model of the “democratic state,” the clarity of the earlier examples evaporates.

In a democracy, the “firm” is run by managers who are supposedly elected through voting. This “firm” taxes the entire adult population, claiming to spend that money not on itself, but for the benefit of the very people it taxes. It is free to change the level of taxation and how the money is used at will. The only constant in the system is that a portion of those taxes always goes toward maintaining the firm itself. What’s more, the firm formally owns neither the taxpayers nor the territory.

In such a setup, we can’t say anything meaningful about the firm’s spending or its costs. The firm merely organizes a flow of money from some taxpayers to others, while skimming off a cut for itself. Since it owns nothing and has no clear owner, it serves; we can’t speak of it “managing” anything, let alone “investing” in anything it builds. There are no individuals or organizations that carry out these actions in pursuit of their own goals — no one who earns a return from these so-called investments. In this light, the term “government spending” as applied to such a system fails to capture what’s going on and is, at best, misleading.

In systems where property rights are clearly defined, the direction of reform is always obvious — and fruitful. In a country where the king owns all the land and squeezes taxes from the people, the residents can demand that taxes be replaced with rent (i.e., demand a shift to contractual relations) or even push for the permission to own property privately (thus placing them on equal footing with the king on their land).

In our system, everything is deliberately murky. The state behaves like the absolute owner of everything, but refuses to admit it. Worse still, it imposes the fantasy that “we” somehow collectively own the state and its property. Any serious reform effort is doomed to sink into this swamp of contradictions and incoherence — unless we can find a single thread to pull that will unravel the whole tangle.

That thread is the idea of the tax flow. By turning to the method of first principles — where Musk, perhaps unwittingly, follows in Aristotle’s footsteps — we can easily identify the tax flow as the fundamental building block of the state.

Still, the idea of the tax flow alone won’t be enough. We need to take one more step and make sure we clearly understand what we’re dealing with when we talk about reforming the state: is it a product of deliberate design, or the result of social evolution that formed around the tax flow?

If the state is purely a product of intentional planning, then the reformer’s job is reduced to drafting a new blueprint — rearranging inert squares and arrows on a diagram and passing fresh rules, which bureaucrats are assumed to cheerfully implement, no matter what those rules say. This, more or less, is how reform is imagined by the general public and most of the academic world.

The flaw in this view is easy to spot: within its framework, bureaucrats are either angels working solely “for the good of society” or robots following instructions with mechanical precision. The idea that a bureaucrat, like any other human being, acts primarily in their self-interest — and that their behavior is shaped by the incentives surrounding them — is sheer heresy to this model. It’s no coincidence that after the death of James Buchanan (who built his entire “public choice” theory on the premise that bureaucrats are no different from anyone else), Nancy MacLean published “Democracy in Chains,” a book that vilifies Buchanan without even attempting to engage with his actual ideas. After all, Buchanan dared to question the sacred.

We don’t need to dive into a long (though fascinating) investigation of whether the modern state is purely a product of intentional design. What matters here is defining the direction of the reformer’s efforts. For that, plain common sense will do — because it’s obvious that, if bureaucrats differ from other people at all, it’s usually not in a flattering way. This means their actions are driven by self-interest and shaped by the incentives that surround them.

So, the state in its current form is the result of institutional evolution centered around the tax flow. The driving force of this evolution is, above all, incentives. It’s important to note that the understanding of incentives is woefully underdeveloped. For many, an “incentive” is just a quarterly bonus or something similarly superficial. But an incentive should be understood as a persistent external factor that influences the choices of different people in similar ways. It’s like a prevailing wind or ocean current in navigation. Sure, you can sail against the current — but very few people will.

It’s this difference in incentives that creates the gulf between the “private” and the “public,” between a soviet «gastronome» without food and a supermarket. Grasping how incentives work also answers the question of why the state’s noble intentions so often fail — and helps predict which kinds of projects the state will succeed in, and which it will botch. (Spoiler: success tends to follow projects that expand the state’s power and revenue.) It’s not about the bureaucrats’ qualifications, patriotism, or work ethic. It’s about the incentives that shape their behavior.

The earliest states were the result of conscious intent — to establish systems of regularized plunder. But the longer a state exists, and the larger it grows, the more its behavior is shaped by incentives rather than intention. These incentives gave rise to bureaucracy, replaced aristocratic rule with “democracy,” and gave us the modern Leviathan. And that Leviathan is incredibly effective — not because of some grand conspiracy, but because millions of people, driven by the same set of incentives, act in the same way without needing to coordinate or collude. That is a terrifying force.

This is precisely what the “COVID epidemic” revealed to us: most states eagerly set up their miniature internment camps. It’s the same dynamic we saw in Musk’s failed attempt to cut spending, and in Trump’s equally futile efforts to rein in agencies that, according to the Constitution, were supposed to be under his direct control.

In light of this, incentives become the central focus of any true reformer’s efforts. A reformer operating within the state is limited to norm-setting — that is, the very rearranging of boxes and arrows we mentioned earlier. But if they want to succeed, they must restrict themselves to only those rearrangements that alter the incentives of the key actors involved.

To carry out this plan, we must identify the “real constitution” — that is, offer an alternative description of the state, one based on incentives rather than the imaginary boxes and arrows dreamed up in civics textbooks. In other words, we need an analytical description of what the state does, not a fantastical one centered on what it supposedly “can” or “ought to” do. And for that, the tax flow must serve as the foundation of our analysis. Of course, defining a “real constitution” is no simple task. But for this note, we can keep things manageable by relying on a standard systems approach. The key stakeholders in a system built around the tax flow can be divided into three broad groups:

Bureaucrats are the only group that can be described as pure recipients of tax revenue. They don’t pay taxes themselves. This simple fact defines the structure of their incentives. Accordingly, bureaucrats have a direct interest in the continued existence of the tax flow, since their income depends on it entirely. They prefer a situation where neither politicians nor taxpayers challenge their status or their paychecks. They want politicians to ensure the tax flow keeps flowing, and ideally, grows over time. And they certainly want taxpayers to part with their money smoothly and without resistance.

A second layer of incentives arises from the hierarchical organization of the bureaucracy itself. This structure naturally fosters incentives for expansion — more layers, more departments, more positions. A bureaucrat’s power and income are determined by their position in the hierarchy, which means their primary motivation becomes pleasing their superiors, not “serving the public good,” as popular mythology insists. Finally, because bureaucrats stand between the extraction of national wealth and the distribution of government spending, they are entirely indifferent to the scale of that extraction. A bureaucrat will happily prefer a project that extracts $1 million from taxpayers and boosts their department’s budget by $100, over a project that extracts only $1,000 but increases their budget by “just” $95.

Bureaucrats are vulnerable only to politicians. But even there, they’ve developed effective defenses.

Politicians form a numerically small, but crucial group within the system built around the tax flow. Regular elections serve to legitimize the tax flow in the eyes of the taxpayer by keeping alive the hope that “things can change” in four years. Beyond that, politicians are the ones who shape the flow itself, deciding who pays in and who benefits. (Bureaucrats, by contrast, don’t care where the flow goes, as long as it exists.) Thus, politicians have a direct stake in both the existence and the expansion of the tax flow. By manipulating its direction, they effectively purchase votes.

A politician is a pure recipient of taxes only while holding office. In that role, they tend to act in the system’s interest. The incentives of politicians stem from their ability to reshape reality once in power, by passing laws and regulations. Unlike bureaucrats, politicians are dependent on voters. They must track public sentiment, both in opposition and while governing. In theory, a politician could even dismantle the existing tax flow system — if they manage to articulate a compelling enough alternative agenda. This makes politicians potentially dangerous — and the system knows it. That’s why it not only shields bureaucrats from political interference, as we’ve already noted, but also seeks to domesticate politics itself.

Like bureaucrats, politicians are protected by administrative law from liability for decisions made “while in office.” This legal immunity raises the value of holding office and makes politicians more cautious about advocating for state reduction. After all, a position where you can do just about anything without consequences is one worth preserving. This lack of accountability also strongly incentivizes politicians to engage in lobbying for various interest groups. And again, lobbyists are immensely useful to the system — they have every reason to keep it alive and thriving. Public financing of political parties is another brilliant invention. Along with mandatory registration and the possibility of party bans (as seen in many countries), this gives the system leverage to control politicians before they ever come to power. Politicians are also interested in shielding themselves from voters, reducing citizens to passive onlookers. This interest is served in many ways, one of which is the principle of “universal suffrage.” We’ve moved from a democracy where a candidate personally knew most of their voters, to one where a single representative is elected by tens of thousands of people.

At the same time, politicians also want protection from bureaucrats — they want room to execute their grand plans. But so far, bureaucrats are winning that battle. That’s because politicians, too, have strong incentives to preserve the system — and with it, the autonomy and invulnerability of the bureaucracy.

The most complex dynamic arises with the largest group: the voters (i.e., taxpayers). When it comes to the tax flow, taxpayers are pulled in two opposing directions by conflicting incentives. On the one hand, they want to maximize their gains from wealth transfers. On the other hand, they want to minimize their losses from taxation.

The losses from wealth transfers themselves — the inefficiencies, distortions, and long-term costs — are usually invisible to them, which of course benefits the system. The only thing they can recognize is the link between rising spending and rising taxes — or, occasionally, inflation.

This is why politicians lean on two major talking points when it comes to government spending. The left-wing slogan is “tax the rich” — let the wealthy shoulder the cost of untouchable state expenditures. The right-wing version is a call for “cleaning up the budget” by eliminating waste — like funding transgender operas in Brazil — without questioning the basic structure of “generally useful” government spending.

In such a system, organized interest groups can successfully push for either an increase in the tax flow directed toward themselves or a reduction in their share of the tax burden, at everyone else’s expense. This creates an incentive for voters to support the transfer system and the electoral process, clinging to the hope that in this “war of all against all,” they’ll eventually get their cut.

Both politicians and bureaucrats have a vested interest in convincing the voter that the tax flow — i.e., redistribution — is the only true source of prosperity. That’s why the political climate steadily shifts leftward over time.

But above all, politicians and bureaucrats are united in one critical interest: keeping the voter completely in the dark about how much they give to the state — and how much they get in return. This is why such absurdities as the “taxation” of bureaucrats exist. It’s also why tax systems around the world are deliberately constructed as Kafkaesque nightmares. For this reason, we have corporate taxation, where taxes are paid by legal fictions. For the same reason, the state uses companies as tax agents that extract money from their employees on behalf of the government. And so on.

We won’t dive here into other practically significant groups, like the clergy (intellectuals) or crony capitalists. Technically, they fall under the umbrella of taxpayers.

Let’s imagine you’re a reformer with enough power to rearrange the boxes and arrows on the organizational chart of the state. In other words, you have the authority to carry out a reform that leaves the outer appearance of the system mostly intact, while dismantling its toxic incentives from within. Ideally, you’d also eliminate the tax flow. So, what needs to be done?

Now we can outline the general structure of a reformed system—the boxes and arrows—in which, in my view, the harmful incentives of the state are reduced to the lowest level realistically achievable within such a framework. Each year, elections are held to choose a team (you can call it a “party” if you like) that will “manage the budget” for the coming year. Competing teams present their proposed budgets during the campaign. The winning team receives the collected taxes and carries out its projects. For the voter/taxpayer, the central issue in the election becomes the size of the tax they will pay, since the tax amount is calculated as the total suggested state spending divided by the number of taxpayers. This creates an incentive opposite to the one that exists today: to vote for the team that proposes a smaller tax. The tax rate cannot be changed until the next election cycle, and in practice, it can’t be changed, because payment is due within a limited time frame. The tax is paid once, immediately after the election results are finalized, and it is the only payment a person makes to the state for the entire year. Only taxpayers may vote. Tax recipients do not vote and do not pay taxes. The cycle repeats the following year.

In the end, we no longer have a “standing government” with its ministries and agencies that must invent work to justify the tax flow. Instead, we have a set of projects and competing teams that carry them out. Both the set of projects and the teams can change, as can the size of the budgets needed to implement them. Any state function that appears continuous can be organized as a project with a defined timeframe (these can even be repeated identical projects). This applies to “defense,” “foreign affairs,” and beyond.

Moreover, in this system, a “parliament” is no longer necessary. The legal framework required for even the most complex forms of human life has long been established and is contained in civil and criminal codes. Judicial precedents may be added to it. No new “laws” are needed. “Legislation,” in its modern form, is a byproduct of the tax flow. The fact that “money is constantly flowing into the treasury” creates an irresistible incentive to appropriate a portion of that flow through “laws.” But when state revenue is fixed, and the state won’t receive more, the incentive to produce an endless stream of new laws disappears, along with the “organ” that carries out this process.

The first: Will there be enough money? It’s often assumed that government spending is so high that if you divide it by the number of taxpayers, you’ll get an unbearable sum — one that people simply won’t be able to pay. Those who ask this question assume that public expenditure is a fixed figure, something “given” in the problem, and that the role of politicians and bureaucrats is to “secure” the means to cover these “needs.” If there’s one idea I’d like the reader to take away from this essay, it’s this: the size of “government spending” is simply the amount the state can extract from the productive economy under given conditions. The amount spent on a particular sector is determined by the effectiveness of its lobbyists. These “expenses” are not at all the same as what a private company — focused on solving that same problem (say, education) — would spend in a free market. Countless incentives drive these so-called “necessary expenditures” far above any reasonable level. As we’ve discussed, bureaucrats couldn’t care less how much is taken from the productive economy. Their incentive structure includes no brakes. It encourages the growth of spending, since expanding bureaucracies and lengthening administrative chains are accompanied by growing budgets. Meanwhile, lobbyists — on whose behalf 99% of regulations and directives are passed — have a direct interest in maximizing the funds extracted on their behalf. In different sectors, the “overstatement coefficient” varies, and likely differs across countries as well. Estimates of this coefficient can vary widely. For example, it’s known that private education in India is twice as cheap and more effective than public schooling. Or consider the classic study by David Laband and John Sophocleus, which claimed that rent-seeking reduces U.S. national income by as much as 45%. In any case, whenever you see a figure labeled “government spending,” you should mentally divide it by at least three. And finally, nothing prevents you from cutting spending before transitioning to the new system.

You, dear reformers, can carry out these exercises right now by taking pre-war budgets as a reference point and removing the corresponding categories of spending. As a result, you’ll arrive at a perfectly reasonable annual payment — one that the average voter would find entirely acceptable.

The second question: What do we do about non-payers? After all, in such a system, there are many taxpayers, and you can’t keep track of everyone. What if the tax payment window closes, and it turns out there isn’t enough money to start the work? Will we have to rebuild a “tax service” and go hunting for delinquents in the woods?

When there are only two tax statuses — “paid” and “unpaid” — and they are easily identifiable, it’s not difficult to exclude non-payers from access to public assets. You pay your tax and receive something that identifies you as having done so: a QR code on your phone, a barcode sticker on your car, and so on. After that, you gain access to public roads, government ambulance services, state police, public schools, etc. Access is also granted to tax recipients. But those who were obligated to pay and didn’t are denied access. No need for a tax authority, no need to chase anyone down.