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Terry Newell

Terry Newell

Posted: January 2, 2011 09:45 AM

The Debt Tax

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Don't look now, but Congress just raised your taxes. How can that be? Didn't they just approve a bill that will keep Bush-era tax cuts in place, lower the inheritance tax, and lower the Social Security tax for a year?

Call it the "debt tax." Whenever the federal government enacts a bill that it does not pay for, we go further into debt -- in this case $900 billion. When you buy something you can't afford, you borrow the money and pay interest on what you borrow. The interest the government has to pay on its debt has to come from you, the taxpayer, and thus it acts just like a tax -- your tax dollars pay it.

In 1940, the federal government paid $10.3 billion in interest on the debt, $78 for every man, woman and child in America at the time. In 1980, the government paid $111.6 billion in interest, or $491 for every American. Fast-forward to 2010, where the comparative figures were $168.4 billion and $545. Chump change. According to the President's Budget for 2011, interest on the debt will be $474 billion by 2015, a per capita cost of $1,454. In short, the "debt tax" will increase nearly 300 percent in just five years.

If this sounds like "so what, I don't actually have to pay more," think about it another way. If the federal government had no debt in 2015, it could lower your taxes by $1,458. For a family of four, that would amount to a tax bill nearly $6,000 less.

According to the bipartisan Congressional Budget Office (CBO, in 2020, when net interest on the debt is projected to cost $937 billion, that net interest will be 14 percent of federal spending, nearly as much as we will spend on Defense (15 percent) and Medicare (17%). Oh, and the per capita cost of the interest will by then be $2,789.

In 1985, the entire federal budget was $946 billion. By 2020, based on CBO's estimates, we'll pay nearly that just in interest. In short, the "debt tax" in 2020 will equal what the federal budget was in 1985.

One more thing. When you pay the debt tax, you might at least take comfort in the fact that your tax dollars are doing back to good old Uncle Sam, right? Well, only partially. The U.S. government owes nearly a third of its debt to foreign creditors (over $4 trillion). So, roughly 30 cents of each "debt tax" dollar goes to a list of countries that includes China (our biggest creditor by dollar volume), Japan, the U.K, Russia, the oil exporting countries of the Middle East and Brazil. Isn't it comforting to know that our "debt tax" dollars are financing the growth of our competitors?

On the brighter side of all this, you might think: well, Republicans, Democrats, and the White House finally stopped shouting at each other and agreed on something. They compromised. But how hard is it really to compromise on spending more money? Maybe each bill coming before Congress should have to report what impact it will have on the "debt tax."