The Hidden Tax: How Federal Debt Will Squeeze American Households for a Decade
The Congressional Budget Office projects inflation will miss the Federal Reserve's 2 percent target until 2030 while debt service payments join Social Security and Medicare as one of the top three federal spending drivers, according to a 10-year fiscal outlook released Wednesday. This double squeeze means Americans will pay higher prices for goods through tariff-driven inflation while watching their tax dollars increasingly fund interest payments to bondholders instead of public services, compounding the wage stagnation that has already shifted record income shares from workers to corporations.
The Math That Doesn't Work
Treasury Secretary Scott Bessent aims to shrink the deficit to about 3 percent of economic output, but the CBO projects it will reach 6.7 percent by fiscal 2036, averaging 6.1 percent over the next decade. The gap between political promise and fiscal reality starts immediately: the fiscal 2026 deficit is projected at 5.8 percent of GDP, approximately $100 billion higher than previously forecast, with total deficits from 2026 to 2035 now $1.4 trillion larger than estimated just one year ago. The Trump administration has projected robust growth in the 3 to 4 percent range for 2026, with first-quarter growth potentially topping 6 percent, but the CBO forecasts 2026 real GDP growth at 2.2 percent and average growth of just 1.8 percent for the rest of the decade.
This disconnect matters because growth projections determine whether debt becomes manageable or spirals out of control. At 1.8 percent average growth, debt held by the public rises from 101 percent of GDP to 120 percent over the next decade, exceeding any level in American history including World War II mobilization. The administration launched a Department of Government Efficiency with a stated goal to balance the budget, but the structural drivers of deficit growth remain untouched: Social Security, Medicare, and now debt service payments account for the bulk of spending increases, and none of these appear in efficiency review targets.
How Tariffs Create a Regressive Tax
Higher tariffs are projected to raise $3 trillion in federal revenue over the next decade, which sounds like fiscal relief until you account for how that revenue gets collected. Tariffs function as a consumption tax paid by Americans when they purchase imported goods, and the CBO projects these higher tariffs will cause elevated inflation from 2026 through 2029, preventing the Federal Reserve from hitting its 2 percent target rate until 2030. Four years of above-target inflation acts as a hidden tax that hits hardest on households already losing ground, particularly those spending the highest share of income on goods rather than services.
This compounds a troubling trend documented in recent analysis showing corporate profits reached 16.2 percent of national income while worker compensation hit historic lows. Workers who saw their income share captured by corporations will now pay inflated prices for consumer goods while their tax dollars increasingly service debt rather than fund infrastructure, education, or other public investments that might improve their economic position. The fiscal 2025 deficit was $1.775 trillion, and worsening deficits are driven largely by increased spending on Social Security, Medicare, and debt service payments, meaning the squeeze on discretionary spending that funds everything else will intensify.
The Interest Payment Trap
Debt service joining Social Security and Medicare as a top-three spending driver represents a fundamental shift in how the federal budget operates. Unlike Social Security and Medicare, which provide direct benefits to Americans who paid into the systems, interest payments transfer tax revenue to bondholders with no corresponding public service. As debt rises from 101 percent to 120 percent of GDP, interest payments will consume an ever-larger share of the budget even if interest rates remain stable, and any increase in rates accelerates the squeeze.
The CBO's forecasts assume that tax and spending laws and tariff policies in early December remain in place for a decade, a premise that has never held true in any previous 10-year forecast. Lawmakers have historically addressed rising federal debt through targeted spending caps and debt limit suspensions, deploying extraordinary measures when the US approaches its statutory spending limit, but these interventions have never reversed the underlying trajectory. The result is a system that lurches from crisis to temporary patch without addressing structural imbalances, and each cycle leaves less fiscal room to respond to the next recession or emergency.
Who Pays, Who Profits
Revived investment tax incentives and bigger individual tax refunds provide a boost in 2026, but this temporary stimulus masks the longer-term extraction. Larger fiscal deficits and reduced immigration are projected to slow labor force growth, which means fewer workers supporting more retirees and debt holders. The combination of slower labor force growth, elevated inflation, and rising interest payments creates a vise: workers face higher costs and slower wage growth while tax revenue shifts from public services to interest payments.
The beneficiaries of this arrangement are bondholders collecting interest on unprecedented debt levels and corporations that have already captured record profit shares and now operate in an environment where fiscal policy compounds their advantages. Tariffs raise prices on imported goods, which corporations can use as cover for broader price increases, while reduced public investment and slower labor force growth weaken workers' bargaining position. The gap between political claims and fiscal reality mirrors recent trade announcements where stated deal values vastly exceeded confirmed commitments, suggesting a pattern of optimistic projections that obscure difficult tradeoffs.
The Structural Bind
The fiscal outlook has deteriorated despite, not because of, any major new spending programs. Social Security and Medicare spending rises automatically as the population ages, and interest payments rise automatically as debt accumulates, creating a structural bind where deficits worsen even without new policy decisions. The Department of Government Efficiency can identify waste in discretionary spending, but discretionary spending is not driving deficit growth. Addressing the structural drivers would require reforming entitlement programs or substantially raising revenue, neither of which appears politically feasible.
This means the squeeze will tighten gradually but relentlessly. Each year, inflation runs above target, eroding purchasing power. Each year, interest payments claim a larger budget share, crowding out other spending. Each year, slower labor force growth means fewer workers supporting the system. The CBO projects this trajectory extends through 2036, but the mechanisms driving it, population aging and compound interest, extend far beyond the 10-year forecast window.
What Happens Next
The next inflection point comes when bond markets demand higher interest rates to hold US debt at 120 percent of GDP, or when inflation remains elevated long enough that the Federal Reserve must choose between its price stability mandate and the government's borrowing costs. Either scenario accelerates the squeeze: higher interest rates mean faster-growing debt service payments, while sustained inflation means continued erosion of household purchasing power. The optimistic growth projections from the Trump administration, if they fail to materialize, will force this reckoning sooner rather than later.
Americans face a decade where their tax dollars increasingly fund interest payments instead of services, their wages buy less due to tariff-driven inflation, and their economic mobility declines due to slower labor force growth and reduced public investment. The political theater of efficiency departments and deficit reduction goals obscures the structural reality: the federal budget operates on assumptions that never hold, promises growth that never arrives, and shifts costs onto workers who have already lost ground. The CBO's latest projections simply make explicit what the mechanisms have long suggested, that the gap between fiscal fantasy and mathematical reality will be paid by those with the least capacity to bear it.