George Shultz, secretary of state in the early 1980s, was also a first-rate economist. As a good economist, he put out a press release showing how little the average taxpaying household paid for aid to El Salvador. As I recall, it was about $34. (I can’t find a source.) Shultz seemed to think that $34 was a small number. But he quit talking about it pretty quickly. My guess is that he got a lot of feedback from average Americans expressing outrage at paying $34 a year for something that they valued less than that.
Steven E. Rhoads, in The Economist’s View of the World, points out what seems to be a constant in opinion polls. When people are asked whether they want the government to do something, a majority says yes. But if they are asked whether they want the government to do that same thing if it means their taxes will increase, that majority shrinks to a minority. There’s a lesson here: If you want to make a case against a government program or an increased government expenditure, tell people what that will cost an average family.
This is from David R. Henderson, “How Much Does $100 Billion in Federal Spending Cost You?” TaxBytes, Institute for Policy Innovation, November 22, 2023.
Another excerpt:
You might not be average. Based on a Tax Foundation study using 2019 data, I calculated high-income households, those in the top 20 percent of the income distribution, paid about 65 percent of all the tax revenue the feds collected. To be in the top quintile that year, you needed to have an income of $125,748 or more.
Assume for simplicity that these numbers, adjusted for inflation, are about the same today. Also, I’ll assume, even though I know it’s false, that this $100 billion will be paid entirely out of taxes rather than new debt. It’s not as bad an assumption as it looks. To the extent it’s paid out of new debt and to the extent future taxes pay off that debt, based on a progressive tax structure such as the one we have now, it’s a pretty good assumption.
So, the top quintile would pay 65 percent of $100 billion, which is $65 billion. That works out to $2,481 per top-quintile family.
Read the whole thing, which is not long. I’ve actually quoted over half of it here.
Caveat: There are a lot of people in the top quintile whose share of the $100 billion is well below $2,481, probably more like $1,500 to $1,800. The reason is that the $2,481 is an average and that average is high because of people in the top 5% who are paying much more than $2,481. Unfortunately, with the tight word constraint I’m given at IPI, I didn’t have room for that caveat.
READER COMMENTS
Scott Sumner
Nov 22 2023 at 2:51pm
You can also look at things in terms of share of total taxes paid. Federal spending is a bit over $6 trillion, so $100 billion is 1/60th of federal spending. Your share is 1/60th of your federal tax liability (including your share of corporate taxes, etc.) For many people, their tax burden is close to twice what they might estimate, because of all of the indirect taxes.
Vivian Darkbloom
Nov 22 2023 at 3:17pm
Nearly all new federal government spending is financed though new debt. That’s not an assumption, it is reality. I’m not sure why one would assume otherwise, even if to try to stay within a word count limit.
As to the issue of who is going to pay for new spending and how much they will pay, I think there are two important amendments I would make to this (too) brief analysis.
First, who will pay depends not only on whether one pays tax. If the US government incurs $100 billion in new debt, in practice this will never be “repaid”. The cost to finance $100 billion of debt indefinitely well exceeds the $100 billion principal amount (not including the additional inflation tax). The total costs are also certainly well above the CBO’s 10 year budget window estimates.
Second, the cost of that debt will be borne primarily by the younger cohort of Americans. At my age, I will pay much less for that spending than, say, a 21 year old.
Of course, the issue remains as to who (if anyone) will benefit from that spending. Americans deserve to judge additional spending, and politicians held to account, by these metrics. Although Henderson wildly underestimates the costs, this is the type of analysis that those opposed to run-away government spending need to drive home to voters, particularly younger Americans.
BC
Nov 22 2023 at 8:04pm
Debt is paid with future taxes. Each dollar of current debt will be repaid with future taxes whose present value is one dollar, even if that stream of future taxes is indefinitely long. Since Henderson is calculating how much spending costs taxpayers today, it makes sense to calculate everything in present value terms. So, the result is the same whether one assumes that spending is paid for with debt (future taxes) or with current taxes.
Vivian Darkbloom
Nov 23 2023 at 4:39am
No, the article does not assume that future payments are reduced to NPV to arrive at $100 billion. The article clearly states that the entire $100 billion is (current) *new debt* and assumes the debt is fully repaid by future “taxes”. I quote:
“I know it’s false, that this $100 billion will be paid entirely out of taxes rather than new debt. It’s not as bad an assumption as it looks. To the extent it’s paid out of new debt and to the extent future taxes pay off that debt, based on a progressive tax structure such as the one we have now, it’s a pretty good assumption.”
This is, on the one hand, an admission that the new debt will never be repaid in the sense of amortizing a loan with payments of principal and interest and, on the other, a highly misleading statement that the “debt is fully repaid by future taxes”. We may as well assume a can opener. The *interest* on the debt will be serviced primarily, if not exclusively, with new debt (at then prevailing interest rates) and the principal never “repaid”. Henderson needs to make the above-referenced assumption to adhere to a literal definition of of “tax”. But, as I contended above, this understates the real *cost* (to actual taxpayers and others) of that $100 billion of new debt and therefore the “tax” in the most meaningful sense to those who will be affected.
In order to reduce the future NPV *cost* of that new $100 billion of debt to merely $100 billion, one would have to assume that inflation is not in itself a cost to Americans and therefore not a “tax”. You would also have to assume that the NPV of future costs of servicing that debt are zero (using a constant rate of interest?!). This simply isn’t the case as even investors in US Treasury’s expect and demand a real rate of return. To assume otherwise simply defies reality (and math). Note that of the current $6 trillion in US spending as referenced by Sumner above, roughly 19 percent of that is currently interest to service the debt and about 16 percent is “net interest”. Is that current cost also zero if reduced to its NPV? Somehow, I have acquired a naive belief that the inverse of compound interest for savers is reflected by the cost of compound interest for debtors. And, nota bene, Americans would not owe all that $100 billion and the future servicing costs solely to themselves, so that this is not, on balance, a “wash”. At least I can agree with Ahmed Fares, below, on that…
While I appreciate the effort and the difficulty of explaining in layman terms what the cost to taxpayers is of incurring new debt, I fear that this attempt substantially underestimates real costs. This isn’t nearly as bad as MMA fanatics; but, despite the right intention, it may be more harmful than helpful. Sumner’s approach, as reflected above, has the advantage of being simple and understandable and is fine as far as it goes; however, that, too ignores the fact that the future servicing costs of currently incurred debt ae substantial in addition to the principal amount.
Again, all of this needs to be weighed against any possible benefits of the spending that debt is supporting; however, to revert to the original example of El Salvador, on the cost side of the ledger the real cost to Americans of that aid must be something north of $34 and the total real cost of that $100 new debt is also significantly higher than $100 billion.
Ahmed Fares
Nov 22 2023 at 4:22pm
If we look at the Kalecki expanded profit equation, we see that increased government deficit spending leads to increased corporate profits, which flows mostly to the rich. While it’s true that they may pay increased taxes in the future according to the assumptions made in the quote above, they will pay those taxes with those increased profits. As such, they don’t bear the burden. In point of fact, the burden of that deficit spending lands mostly on the poor because of the monetary offset. This is because monetary policy is a stealth tax on the poor.
https://economistwritingeveryday.com/2021/01/19/the-kalecki-profit-equation-why-government-deficit-spending-typically-must-boost-corporate-earnings/
As for the monetary offset, this from Scott Sumner:
As an aside, there’s an article titled: “You can’t build a bridge in 2019 using steel produced in 2029.” It reminds me to always think in terms of real resources.
Assuming an economy operating at capacity and without increased imports, ask yourself who, in the current time period, is bearing the burden of that $100 billion of increased deficit spending in terms of giving up real resources?
Hint: It’s not the rich.
Creigh Gordon
Nov 23 2023 at 9:23pm
Thinking in terms of real resources is always the right thing to do (not to disparage what accountants do, but you know what I mean).
This is why the public debt as such is irrelevant. The future will be built using future resources — primarily the industriousness and ingenuity of our children and grandchildren. Which are not available for us to borrow. A pile of green paper will do them no good, a bucket of red ink will do them no harm.
Last paragraph though. MMT is very clear that subjecting an economy operating at capacity to additional deficit spending would be inflationary.
Ahmed Fares
Nov 22 2023 at 4:31pm
A quote from an article I mentioned above by Ralph Musgrave, which should make my point more clear:
Ken P
Nov 23 2023 at 2:01am
I’ve been doing the calculation assuming there were 100 million households. Not sure where I got that. Maybe old or I rounded to make math easier. I guess I could stick with that for the average family and subtract 25%.
Like Scott, I think about annual spending. My perspective is that the federal government is spending $60,000 per household (minus 25% is $45k) every year. So I really don’t buy the argument that the problem is politicians don’t have enough money to spend. Good to remember that this is just federal spending, too.
Floccina
Nov 23 2023 at 11:02am
And then there is the question of who consumes less because this money is spent.
Creigh Gordon
Nov 23 2023 at 9:57pm
Individual bonds will be repaid, but the debt, which is fungible, will roll on. It will be rolled over indefinitely until one day hopefully far in the future it will become, like the unresolved public debt of the Hittites and Assyrians and many other empires, irrelevant.
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