Thursday, July 16, 2009

How much is a trillion dollars of debt ... in the taxes you will pay for it? 

Most people have no idea how much "a trillion dollars" really is. Interviews show this amusingly. In response to which, videos give illustrations and bloggers provide examples of their own, such as "the price of 222 Nimitz class aircraft carriers" of QandO.

But all that still seems rather academic. What are dollar bills stacked a third of the way to the moon or a Nimitz class aircraft carrier to me?

How about this question to bring the matter home: How much will a trillion dollars added to the national debt add to your personal tax bill?

We can work through it easily enough ...

The national debt incurs interest that is paid with taxes. The interest rate on US debt is projected be about 6% annually in the long run, according to the Social Security Administration's actuaries and other such governmental budget projectors. Six percent of one trillion dollars is $60 billion.

There are 80 million payers of income tax in the US. (If that seems low for a population of 300 million remember that 47% of all "tax units", 70 million potential taxpayers, pay no income tax or receive refundable tax credits from the government.)

Now $60 billion divided by 80 million taxpayers equals $750 per taxpayer -- so each trillion dollars of the national debt costs the average taxpayer $750 per year, every year that the debt is carried, forever. (Or until the government pays down its debt ... Ha! Just kidding!)

Thus, Obama’s expected $1.8 trillion deficit for this year projects to add $1,350 to the tax bill of each and every taxpayer on average, forever.

Well, one might judge that to be "not so bad" to mitigate a bad recession, standing by itself as a one-time thing. One can decide for oneself.

Except it is not a one-time thing standing by itself.

As of the end of last year the government’s outstanding explicit and implicit debt was $64 trillion. Add another year's interest on that, plus this year's $1.8 trillion deficit, and we will be well over $66 trillion at the end of this year. Which creates an explicit and implict annual interest liability to just carry the debt of more than $49,000 per taxpayer.

As of today most of that is implicit (for unfunded Medicare liabilities, etc.) but every year from now on (as more seniors retire and start collecting Medicare, etc) more of the debt will shift from being implicit to explicit, requiring cash tax collections to pay for it.

Median household income in the US is about $50,000. So as more and more of the debt becomes explicit, moving the cash tax cost of carrying it towards $49,000 per taxpayer, we will by the year 2027, a mere 18 years away, get to here.

Hmm ... $66 trillion is 22 separate piles of dollar bills each reaching all the way to the moon, or 14,652 Nimitz class aircraft carriers.

So I guess, in this big scheme of things, a mere ‘nother trillion dollars added to the national debt, as a “stimulus” or whatever, may not be so much after all.

Sort of like a tray of ice cubes spilled on the deck of the Titanic.