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  • mbablitz mbablitz Sep 25, 2013 2:54 PM Flag

    Guess what percentage of IRS taxes will go to service the debt if interest rates rise to normal rates

    The markets were surprised when the Federal Reserve did not announce a tapering of the quantitative easing bond buying program at its September meeting. Indeed, its signal to the market that it was keeping interest rates low was welcome, but there may be a hidden agenda. Since it began in late 2008, QE has spurred a vigorous debate about its merits, both positive and negative.

    On the positive side, the easy money and low interest rates resulting from quantitative easing have been a shot in the arm to the economy, fueling the stock market and helping the housing recovery. On the negative side, The Fed accomplished QE by "printing money" to buy Treasurys, and through the massive power of its purchases drove interest rates to record lows. But in the process, the Fed accumulated an unprecedented balance sheet of more than $3.6 trillion which needs to go somewhere, someday.
    But we know all this.

    I believe that one of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.

    Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should. But that is where we may be heading. Thanks to the Fed, the interest rate paid on our national debt is at an historic low of 2.4 percent, according to the Congressional Budget Office.

    Given the U.S.'s huge accumulated deficit, this low interest rate is important to keep debt servicing costs down. But isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years? That rate is 5.7percent, not extravagantly high at all by historic standards. So here's where it gets scary: U.S. debt held by the public today is about $12 trillion. The budget deficit projections are going down, true, but the United States is still incurring an annual budget deficit by spending more than we take in in taxes and revenue.

    The CBO estimates that by 2020 total debt held by the public will be $16.6 trillion as a result of the rising accumulated debt. Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.

    Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes. In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried. Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate. We just don't know what the effect of all this will be but many economists warn that it can only result in inflation down the road.

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    • This is a good piece on the "tip of the iceberg".

      Then, there's the iceberg itself.

      In addition to the $12 trillion in debt held by the public, there is also another $5 trillion held by the government out side of the fed... most of which is the so-called "social security trust fund".

      Yes, Virginia, the social security trust fund is made up entirely by government IOUs.

      Further, a couple of years ago, Pimco's Bill Gross dissected every promise currently being maintained to the country by the government to every american citizen or entity of any kind currently in existence and added it all up. The result was in excess of $75 trillion.

      Basically, Gross's calculation takes the deficit and adds in the expected cost of social security for everyone currently alive... but then added in every other "promise" as well... like the total amount that will be spent on food stamps for portion of everyone alive today that will qualify for them during their lifetimes. AFDC, medicaid, medicare, etc. etc... these are all government promises, entitlements and non-entitlements alike

      Add them all up, and you are talking about huge numbers that would make Greece appear conservative in contrast.

      It's clearly a time bomb... which is why I say... "if not now, when?... when is the time more ripe?"


    • Great article. Wish more people cared. I have known about this for many years and it makes me sick to know all the taxes I pay go to pay mostly interest and no real services. Has been this way for quite some time now. Just imagine how much lower our taxes could be and actually have MORE services if we had no debt / interest. I can't control what they do with the money they "take" from me, but I can control what I do with the money I earn that they "let" me keep.

      Will ObamaCare make this problem better or worse?
      Rhetorical question of course.

      It won't be much longer now, all those Obama Voters that thought they would be getting free insurance will find out it will be costing them money to buy this insurance and if they don't buy the insurance they will receive a fine through the IRS. But Obama said it would save my family $2,500 per year, how can this cost me more?

      In my state it appears they decided not to expand Medicaid, so the poor who are below the 100% of poverty level ObamaCare was designed to ensure are now covered do not qualify for any subsidies in my state. Basically the poor people don't make enough money to qualify for any discounts.

      In my state someone who makes 101% of the poverty level gets nearly free insurance through federal subsidies, but if they make only 99% of the federal poverty level they will have to pay FULL price for insurance with no help and no subsidies whatsoever. The federal subsidies DO NOT apply to people who earn less than the federal poverty rate. What a great bill.

      Oh and smokers will be in quite for shock as well when they find out how much they will be paying compared to non-smokers making the insurance unaffordable for many.

      You can run some sample cost scenarios by searching for this site "Subsidy Calculator | The Henry J. Kaiser Family Foundation"

      Sentiment: Strong Buy

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