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President Obama doesn’t think Americans should fret about the exploding national debt. As he told talk show host David Letterman recently, “We don’t have to worry about it short term. Right now interest rates are low because people still consider the United States the safest and greatest country on Earth, rightfully so. But it is a problem long term and even medium term.”
So, in Obama’s view, dealing with the debt is more of a tomorrow thing than a today thing. Or maybe even a day-after-tomorrow thing.
But every day that the debt grows, the burden on Americans grows, too. Servicing that debt will need to be met by either increasing taxes or decreasing spending.
So who exactly bears that burden. And how much does the burden weigh in dollars?
Well, according to the Congressional Budget Office, the latest White House budget would add $7.6 trillion of debt from 2012 to 2022. In a new paper, AEI’s Aspen Gorry and Matt Jensen looks at the real annual cost of servicing the debt for households at various levels of income — including a potentially higher tax burden.
As the table below illustrates, a household making between $100,000 and $200,000 a year could find its tax liability higher by roughly $2,400 every year. Over ten years, that works out to $24,000.
And when you add in the debt already accrued the past four years under President Obama (the second table), that’s another $1,600 a year. So now we are now talking about $4,000 a year, $40,000 over ten years.
A couple of caveats: To compute these annual costs, Gorry and Jensen use the long-run average effective real interest rate on U.S. debt from the Congressional Budget Office. According to the CBO, the average effective real interest rate on U.S. debt will be 2.7% in 2025 and then remain at approximately the same level until their projections end in 2087. Of course, as real income grows over time,a fixed cost of debt service becomes less burdensome. Second, it should be noted that interest rates are currently much lower in the U.S. Using the long run average instead of current implies that the numbers should be interpreted as a long run expected cost of servicing the debt.
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