COVID-19 Stimulus Spending: How Much It Will Cost You
Fiscal stimulus is not free. You will pay it on future tax increases.
Wwith With all of the trillions of dollars hovering around government policy these days, it’s easy to lose sight of the scale of recent federal spending. We decided to put last year’s politics into perspective by calculating the future tax hike that would be required to pay the high bills since January 2020. What the average American owes for the stimulus will shock you.
Exercise is not far-fetched. Rumors spread across Washington last week that the Biden administration is considering tax hikes to pay for the COVID-19 relief enacted this year and last year. To some extent, it’s astonishing that the United States experienced a 32% drop in GDP in the second quarter of last year and not plunged into a depression, and some of the credit is surely due to those who have developed stimulus bills. On the other hand, the five bills passed to bring relief, once you subtract the loans that will be repaid, together added $ 5.3 trillion to the debt that you, dear reader, will have to repay a day. Think of COVID-19 relief as payment for a new car, of course without any delivery of four wheels, an engine, or a chassis. When you see the numbers, you will realize that the comparison is not an exaggeration.
It is not an academic exercise. The problem with debt is that it eventually has to be paid. There is no such thing, annoying economists like us tend to remind all too often, like a free lunch. Even though debt is rolled over ad infinitum, lunch is not free as taxpayers have to pay higher interest each year to cover additional borrowing, crowding out other government services. Milton Friedman spoke out against aggressive stimulus measures because, he said, taxpayers would wait for future tax hikes and save today to prepare for the worst. Anything the government tries to do will be futile.
It’s possible that lower spending will end up offsetting the debt of all of these stimulus measures, but what if, as Team Biden reported this week, the stimulus bill is paid by tax increases? Just to make it personal, wouldn’t you like to know what your tax bill will be for all the stimulus packages, so that you can, with your usual rational panache, save to fund your new liability like Friedman did? suggested to all rational people would do?
To find out, we relied on a methodology that was developed by one of us (Jensen) and his co-author Aspen Gorry in a 2011 article. The idea is that the current distribution of taxes paid is the the result of a political process that has evolved in an almost Darwinian way over time and is therefore likely to persist. Tax hikes come and go, but the basic distribution of taxes paid varies much less than you might think, with the wealthiest paying the vast majority of taxes under the Republican and Democratic administrations. It is highly unlikely that a bill as high as $ 5.3 trillion will be distributed any differently from current taxes. The richest of the rich just don’t have that much money. Once we accept this assumption that the future tax increase will be distributed according to the current distribution of taxes, we can estimate the tax bill for each income level.
How are taxes distributed? According to calculations based on Tax-Brain software Available on PSLmodels.org, we found that in 2020, people with incomes below $ 75,000 paid around 12% of total taxes, while those with incomes between $ 75,000 and $ 200,000 paid about 34% of taxes, and those with more income than that paid the rest.
Assuming this pattern holds, the attached graph shows how a future tax bill associated with COVID-19 relief would be distributed. Even with the strong progressivity of the current tax code, the invoices are extraordinary. For those with incomes between $ 30,000 and $ 40,000, the tax hike needed today to pay for the combined stimulus packages would be around $ 5,000. Those with incomes between $ 40,000 and $ 50,000 would pay around $ 9,000, while those with between $ 50,000 and $ 75,000 would pay more than $ 16,000. This rises to $ 27,000 for income between $ 75,000 and $ 100,000, and $ 51,000 for income between $ 100,000 and $ 200,000. For high incomes, the bills climb so quickly that they jump off the table. The average for Americans with incomes between $ 500,000 and $ 1 million is $ 304,000. A typical American family, with $ 88,000 in income, faces a bill of almost $ 27,000.
What if the debt is never repaid, just renewed and increased? The typical American family can expect to receive $ 350 less in government services or tax cuts, not just this year or next, but forever, just to pay the interest on the debt. That’s if interest rates stay low – the Congressional Budget Office forecasts an average of 1.3% through 2050. Using the same optimistic assumption, a family with an income between $ 500,000 and $ 1 million will assume $ 4,000 a year, forever. If you think the interest rates will be higher, just take the liability listed above and hit it with the interest rate, and you’ll have a good estimate of how much you’ll owe.
A final and downright depressing thought is that these costs do not cover the entire bill that will fall due. They assume that the government can raise taxes to pay down debt without imposing other costs on the economy. But we know this is not true. When the federal government decides to raise taxes – it may be the Biden administration this year or another administration later – the taxpayer will be hit twice. Once when she writes the check to the IRS, and again when her boss, clients, suppliers, and everyone else she interacts with in the economy also has to write their checks and then spend and invest less . An old rule of thumb is that the real cost of a dollar in taxes is about $ 1.50. With this rule, the average American owes around $ 40,000 because of the raise.
A high sugar level can be nice while it lasts, but it doesn’t last long. The fiscal challenge created by last year’s policies will be a huge burden for all of us in the future.