America's Fiscal Constitution (88 page)

NOTES

1
. Debt and federal fund receipt figures are based on fiscal years (see Footnote 1 of Appendix A). GDP figures are for calendar years. For comparison with GDP in fiscal years since 1940, use OMB, Historical Tables, “Table 10.1.”

2
. Appendix A.

3
. GDP from Measuring Worth,
http://www.measuringworth.com
(accessed October 10, 2013).

4
. See Appendix C, note 2.

5
. Data for 1791 includes the data for 1789–1791.

AUTHOR’S NOTE

The burden of a particular amount of debt should always be measured against something else, principally the value of the currency and the ability to pay. A public debt of $54 million may seem small today, but it was large in relation to the purchasing power of the dollar and national income in 1790.

This appendix compares unmonetized debt with the levels of both national income and federal funds revenues. Those revenues are the only ultimate source of payment of debt.

Frequently budget commentators refer to “debt owed to the public as a percentage of national income.” That percentage grossly understates the burden of debt on taxpayers, since the numerator—“debt held by the public”—excludes debt owed to trust funds. Debt owed to trust funds is a real claim on federal funds revenues. To understand why, consider the accounting if trust funds exchanged their holdings of federal debt for an equivalent amount of debt issued by large corporations, state and local governments, and foreign
governments. Even though the “debt held by the public” would appear to soar, the amount owed by the US Treasury—the claim on federal funds revenues—would not change.

National income, commonly measured as Gross Domestic Product or GDP, is an artificially large measure of the capacity to repay debt. GDP includes the value of estimated output that will not be available to service debt, such as black market activities or earnings from certain foreign operations that pay taxes abroad. In addition, there would be little economic activity if the government confiscated all income to pay debt service, and a revolution would occur well before then.

As shown in Appendices G and H, since World War II there are distinct limits to the amount of federal revenues that Americans are willing to pay. A relatively small share of all American households pays most of the taxes available for debt service. In 2010, for example, 13.8 million households—10 percent of households filing tax returns—paid for 71 percent of personal income tax revenues. See McBride, “Summary of Latest Federal Income Tax Data.” Regardless of whether one considers the progressive tax system to be fair or unfair, as a matter of math a tax system based principally on the ability to pay will—by definition—rest on a somewhat smaller tax base to service debt.

A
PPENDIX
C

Federal Funds Revenues, Outlays, and Surplus/Deficit 1789–2013