We spend a lot of time debating the distributional impact of policies to cut the deficit. Gallons of ink (and millions of pixels) have been spent debating who gets hit most by tax increases, or changes to Medicare, or cuts to Social Security. But what if we don't cut the deficit? The would presumably hurt some folks more than others. Who gets hit hardest?
American Enterprise Institute's Aspen Gorry and Matt Jensen have a new paper that tries to answer that question. They note that the federal government has to regularly pay out the principal plus interest on bonds it sells, a process that has to be paid for out of tax revenues. So the cost of the debt burden will be borne primarily by those who pay most federal taxes, to whit the upper-middle and upper classes. Assuming that the debt is continually serviced in this manner rather than paid down ahead of time, they estimate how much this process will cost each year given our current debt load ($11.254 trillion as of last week), and which groups pay most of the taxes that pay for it.
They find, unsurprisingly, that debt payments are highly progressive, and will grow more so if Obama passes his budget. Here's how much each income group pays, under current policies and under the revenue provisions of Obama's proposed budget*:
None of this is particularly shocking. The main sources of general revenue — the income tax, estate tax, corporate tax, capital gains tax, etc. — are quite progressive. The payroll tax is regressive, but it cannot be used to pay for debt servicing, as its proceeds are dedicated to Social Security and Medicare. If those programs are in surplus, payroll tax revenues can be used for general purposes, but as the baby boomers age it has stopped posting surpluses. So the taxes that are paying for new debt fall heavily on high earners.
All of which is to say that deficit reduction isn't distributionally neutral, even apart from the cuts to programs for the poor that could come with a debt deal. In fact, it'd function much like the the Bush tax cuts. Everyone would pay less if we didn't have to service debt anymore — but the wealthy would get the biggest break by far.
* I used Gorry and Jensen's numbers in conjunction with the average incomes for each income group in 2013 under the Tax Policy Center's baseline to calculate the average tax burden.