A simple measure of the distributional burden of debt

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Article Highlights

  • Since 2001, large annual deficits increase the nation's debt to its highest level as a share of GDP since World War II.

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  • The primary macroeconomic consequences of unchecked debt are a reduction in national savings and future national income.

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  • Large structural deficits are manifest in nearly every budget outlook.

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A. Introduction

A simple measure of the distributional burden of debt

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Since 2001, large annual deficits have increased the nation's debt to its highest level as a share of GDP since World War II. Future prospects for the budget are even worse. While recent increases in the debt were driven by sluggish economic activity and fiscal policy stimulus associated with the recent recession, demographic shifts put additional pressure on entitlement spending. Large structural deficits are manifest in nearly every budget outlook. Motivated by these problems, a large amount of literature assesses the role of fiscal policy and the costs of sustained deficits on the economy's performance. The primary macroeconomic consequences of unchecked debt are a reduction in national savings and future national income and a potential increase in interest rates.1

These macroeconomic consequences have received significant study, while less attention has been paid to the debt's distributional impact. In this article, we develop a measure of the burden of debt service across income groups and use it to assess the distributional impact of current debt and projected debt accumulations. Our main results can be interpreted as showing how much of each income group's annual tax burden is attributable to the debt service on a given amount of accumulated debt. In other words, we show how much lower taxes could be, given a desired level of deficits, if that debt accumulation did not occur.

Our method has two primary applications. First, it offers a measure of the costs of debt that is easily understood. Knowing that government debt forces taxes to be roughly $3,841 higher every year for households earning $100,000 to $200,000, according to our method, is more interesting than knowing the typical factoid that debt per household is approximately $71,000. In an era of high deficits, debt increases can seem ordinary. The household burden of debt service is likely more visceral.

Second, distributional analysis of debt accumulation is necessary to calculate the overall distributional impact of changes to spending and taxes that affect the level of debt. Although the Congressional Budget Office and the Joint Committee on Taxation estimate the distributional effects of most spending and tax changes, their estimates do not account for increases or decreases in the level of debt. If, for example, Congress were to pass a law that lowered everyone's tax bill by one dollar but kept spending constant, the government's distributional scorekeepers would report that everyone gains a dollar of after-tax income and that the law is highly progressive, even though it is paid for with debt. Instead, those dollars must be paid for as debt service, and the progressivity of the bill depends on how the debt service is financed.

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About the Author

 

Aspen
Gorry
  • Macroeconomist Aspen Gorry studies employment and tax policy. His research focuses on jobs, specifically on how labor market policies impact employment outcomes for young workers. He has written about the impact of minimum wages on youth unemployment, optimal taxation over a worker's life cycle and the importance of early career experience for workers' labor market outcomes. Before joining AEI, he taught economics at the University of California, Santa Cruz.

  • Phone: 435-797-2397
    Email: aspen.gorry@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

 

Matthew H.
Jensen
  • Matthew Jensen is a research associate for economic policy studies. He maintains an active research agenda focused on public finance and taxation, and he coordinates the ongoing development of AEI’s International Tax Database. Jensen has written for The Wall Street Journal, US News, and Tax Notes, among others, and he frequently appears on radio and television. Before joining AEI, he worked for a hedge fund in Minneapolis.


    Follow Matthew Jensen on Twitter.

  • Email: Matt.Jensen@AEI.org

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