The Congressional Budget Office (CBO) projects that interest costs on the federal debt will total $892 billion in 2024 — a jump of 36 percent from the previous year and following increases of 35 and 38 percent in each of the two years before that.
Interest on the national debt was 7.6 percent of federal spending in 2022.
The cost of servicing the debt keeps rising because the federal government spends more than it takes in and so has to issue more and more debt just to pay the bills.
The CBO projects interest costs to reach 15.8 percent of total federal spending by 2031 – an all-time record.
President Biden, and now Kamala Harris, pledge that people making less than $400,000 a year won't pay more in federal taxes. That means only the affluent and rich would be on the hook for paying down the debt.
Per Joy Taylor at Kiplinger, and assuming Harris wins the election and makes good her pledge, Harris’s tax proposals would include:
Increase the top income tax rates.
Increase the long-term capital gains tax rate for the wealthy.
Possibly tax unrealized gains upon death
Impose a 25% minimum income tax on people with at least $100 million in wealth. The tax would apply to taxable income plus unrealized capital gains, meaning the gain on appreciated assets not yet sold or disposed of.
Raise the current 21% corporate tax rate to 28%.
Increase the 15% alternative minimum tax on very big corporations to 21%.
Quadruple to 4% the existing 1% excise tax on stock buybacks by publicly held corporations.
Harris has also proposed several programs that would increase federal spending or reduce revenue. These include:
Expand the child tax credit from $2,000 per child to $3,600, with monthly payments and full refundability.
Give eligible first-time home buyers a tax credit of up to $10,000.
Extend expansions of Obamacare subsidies, which are currently slated to end in 2025.
Let childless workers claim a higher earned income tax credit (EITC)
Make tipped income tax-free for workers in the hospitality and service industries.
According to the Federal Reserve, the cost of servicing the federal debt is expected to be around $1 trillion this year.
To achieve meaningful debt reduction, the federal government would ideally pay down the principal as well as debt service costs - each year.
Per the Organisation for Economic-Cooperation and Development (OECD), about 45% of federal tax revenues in the US comes from individual income taxes.
Given that individual income taxes cover almost half of federal spending, I thought it reasonable to expect income taxes to cover around half the cost of servicing the federal debt, roughly $500 billion this year. Which led me to the following back-of-the-envelope calculations:
Nope, limiting tax increases to the affluent and rich simply is not doable, especially when you consider other ways the same group is being targeted, mainly through increased taxes on capital gains and unrealized gains. They simply do not have enough money to pay the $500 billion bill, whether “they” are the top 1% or 5% of earners. For example, a 35% average tax increase for the top 5% taxpayer group would have to be progressive within the group, because there’s no way those near the income split point could pay an additional $65,000 in taxes. But if the tax increase is progressive within the top 5%, that would likely double the tax burden at the higher echelons, e.g., for the top 1% the average income tax rate would be over 50%, and that’s not even counting the higher capital gains tax they’d also have to pay.
If we’re serious about paying down the federal debt with higher income taxes, the pain must be spread around - at least down to the top 25%. And the federal government will have to get much more serious about cutting spending and growing the economy.
But you can’t grow the economy without an investor class with plenty of cash to invest. Hitting the investor class - also known as the affluent and rich - with a huge tax bill would only undermine economic growth and make it that much harder to cut the federal debt to a manageable size.