A Simple Measure of the Distributional Burden of Debt Accumulation

October 18, 2012

Distributional analysis is an important feature in discussions of fiscal policy changes. While changes in taxes and spending are typically subject to distributional scoring, the distributional costs of changes in net debt are generally ignored, say Aspen Gorry and Matthew Jensen of the American Enterprise Institute.

A large literature base already exists to assess the impact that fiscal policy and deficits have on the economy and the subsequent macroeconomic consequences. Less is understood about the distributional costs of servicing the debt. Gorry and Jensen's paper looks at the measure of the distributional burden of servicing the nation's debt. By looking at current law, policies and budgets, an assessment is made about the distributional burden of the current level of debt and projected debt accumulations.

  • According to the Treasury Department, the government has $11.254 trillion net debt outstanding.
  • This will require interest payments of about $304 billion per year.
  • However, the current payments are lower because interest rates are at historically low rates.

The distributional burden of payments on the debt are looked at by computing the average annual cost for each income group for $1 trillion of debt and then applying that to the historical and projected accumulations of debt.

  • Under current law, households with incomes between $10,000 and $20,000 pay about $69 per year; households in the $50,000 to $75,000 range will pay about $1,366 annually; and households with incomes between $200,000 and $500,000 pay $9,586.
  • Under the current policy distribution, these groups would bear $33, $1,390 and $9,707, respectively.
  • Finally, under the administration's budget, these groups would bear $36, $1,309 and $9,656, respectively.

For projected future debt, a distributional analysis is done for how much is paid by taxpayers under current law, current policy and the administration's budget.

  • Under current law, it would be $20 for households ranging in income between $10,000 and $20,000; $390 for households between $50,000 and $75,000; and $2,734 for households with incomes between $200,000 and $500,000.
  • Under current policy, it would be $32, $1,350 and $9,425, respectively.
  • Finally, under the administration's budget, it would be $24, $880 and $6,491, respectively.

Source: Aspen Gorry and Matthew Jensen, "A Simple Measure of the Distributional Burden of Debt Accumulation," American Enterprise Institute, October 1, 2012.

 

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