The $40 Trillion Debt Crisis Was a Policy Choice — and Black America Will Pay a Disproportionate Price
The United States has now crossed a fiscal threshold that once seemed unimaginable: federal debt exceeds $40 trillion. Reuters reports that approximately $32.3 trillion is debt held by the public, with another roughly $7.8 trillion in intragovernmental holdings. It also reports that federal debt has increased by approximately $11.6 trillion during Donald Trump's two terms to date.
For decades, Republican fiscal policy has combined large tax cuts with continued federal spending and then used the resulting deficits to justify demands for reductions in domestic programs. That pattern stretches from Ronald Reagan through George W. Bush and Donald Trump.
The assertion that Republicans as a whole deliberately want the United States to default cannot be dismissed . Concerns about deliberate default strategies are not imaginary. In May 2023, Donald Trump publicly urged congressional Republicans to allow the United States to default if Democrats did not accept spending cuts. We argued at the time that this made it reasonable to examine whether threatened default was becoming an instrument for forcing federal austerity. https://www.impactinvesting.online/2023/05/why-it-is-entirely-reasonable-to-assume.html
The important economic point is simpler: large deficit-financed tax cuts reduce federal revenues and increase the political pressure to cut programs later.
Tax Cuts and the Debt
The 2017 Tax Cuts and Jobs Act illustrates the problem. CBO originally estimated that the legislation would increase deficits by roughly $1.9 trillion over 2018–2028, including macroeconomic and debt-service effects.
Legislation enacted in 2025 extending and modifying many of those tax policies was estimated by CBO to add approximately $4.1 trillion to cumulative deficits over 2025–2034 once additional debt-service costs are included. Of that amount, approximately $718 billion is additional interest expense alone.
Tax cuts do not merely reduce revenue once. When they are financed through borrowing, taxpayers must also pay interest on the money that replaced the lost revenue. The debt therefore compounds. This fact has been left out of every debate on tax cuts.
Democrats Have Tried to Reduce the Debt
Democratic administrations have at important points reduced inherited annual deficits, with the Clinton administration actually producing federal budget surpluses.
For example, before the 2017 tax legislation, CBO projected revenues at approximately 17.8 percent of GDP in 2017, rising over time under then-current law. Following the tax cuts, CBO projected revenues falling to about 16.6 percent of GDP in 2018.
The facts are clear: deficit-financed tax reductions have repeatedly weakened the federal revenue base while disproportionately benefiting taxpayers at the top of the income and wealth distribution.
The Interest Bill Is Becoming the Crisis
The more immediate problem is the interest bill. During the first ten months of fiscal 2026, gross interest on Treasury debt securities reached approximately: $1.170 trillion.
Net federal interest outlays were approximately: $931 billion.
July alone produced approximately $104 billion of net interest expense. Annualizing the first ten months gives us a rough current run rate.
Gross interest
$1.170 trillion ÷ 10 months × 12 months = $1.404 trillion annualized
Net interest
$931 billion ÷ 10 × 12 = $1.117 trillion annualized
CBO's full-year baseline estimate is somewhat lower, at roughly $1.0 trillion of net interest for FY2026, but the direction is unmistakable. CBO projects net interest reaching $2.1 trillion annually by 2036 under current-law assumptions.
Interest has effectively become one of America's largest federal programs—except it provides no healthcare, housing, infrastructure, education, food assistance or transportation. It simply finances yesterday's borrowing.
Why This Matters Especially for Black America
When federal finances deteriorate, the burden is rarely distributed evenly. Black households generally possess less accumulated wealth with which to absorb unemployment, higher borrowing costs, falling housing prices or interruptions in government benefits.
In our 2023 analysis of a possible federal default, we estimated that a prolonged default could impose approximately $132 billion in economic losses on Black Americans, including employment, housing, credit, SNAP and public-service effects. The precise amount would depend upon the circumstances of any future crisis. But the transmission mechanisms remain relevant. Debt-service costs increasingly compete politically with:
Medicaid;
SNAP;
housing assistance;
small and minority-business programs;
education;
community development;
transportation;
federal employment;
small-business lending; and
civil-rights enforcement.
That competition becomes especially dangerous when policymakers first reduce revenues and then point to the resulting deficit as evidence that social spending must be reduced. The solution should therefore attack both sides of the equation: increase revenue at the very top and permanently reduce the stock of interest-bearing federal debt.
A Debt Reduction Plan
We propose a Federal Debt Retirement Initiative centered on three policies.
1. Raise Taxes on Billionaires and Decamillionaires
Congress should create a dedicated high-wealth debt-retirement tax. One possible structure would include:
A 2 percent annual tax on net worth above $50 million and a substantially higher marginal rate above $1 billion, accompanied by aggressive anti-avoidance rules and IRS enforcement.
Penn Wharton previously estimated that a similar wealth-tax structure could raise roughly $2.3 trillion to $2.7 trillion over ten years, depending upon behavioral assumptions.
A broader Sanders-style graduated wealth tax was previously estimated to generate approximately $2.8 trillion dynamically over ten years.
There are legitimate constitutional and administrative questions surrounding a direct federal wealth tax. Congress should therefore create a parallel route based on constitutionally less uncertain instruments:
a high-income surtax;
mark-to-market taxation where legally permissible;
stronger taxation of realized capital gains;
elimination of stepped-up basis for very large estates;
strengthened estate taxation;
restrictions on tax-free borrowing against enormous appreciated portfolios; and
stronger corporate and partnership anti-avoidance enforcement.
For context, Penn Wharton estimates that a recently proposed graduated millionaire income surtax by itself could raise approximately $1.63 trillion over ten years.
The objective should be approximately: $3 trillion to $4 trillion of dedicated high-wealth revenue over ten years.
Crucially, this revenue should not simply finance additional expenditures. It should be, by statute, deposited into a Debt Retirement Trust Account.
2. Retire $4 Trillion of Publicly Held Treasury Debt
The second component should be an explicit debt-reduction target. We would initially set that target at:
$4 trillion
That represents about:
$4 trillion ÷ $32.3 trillion
= 12.4 percent of debt currently held by the public.
Treasury already has statutory authority under 31 U.S.C. §3111 to buy, redeem or refund outstanding Treasury securities before maturity. Treasury's existing buyback program demonstrates that early retirement is operationally possible, although holders participate voluntarily and Treasury purchases securities at market prices. Treasury should therefore progressively purchase and retire selected securities, prioritizing situations where the present value of avoided interest expense is attractive relative to the repurchase premium.
What Would $4 Trillion of Debt Retirement Save?
Current annualized net interest is approximately: $1.117 trillion
Debt held by the public is approximately: $32.3 trillion
That implies a rough effective net interest burden of: $1.117T ÷ $32.3T = 3.46 percent
If $4 trillion of debt were permanently retired at approximately the average effective cost: $4T × 3.46%
= $138.4 billion of annual interest savings
The resulting annualized net interest burden would fall from approximately: $1.117 trillion to $979 billion.
That is before considering the additional benefit from avoiding future refinancing at potentially higher interest rates. If Treasury could disproportionately retire securities carrying an effective 5 percent cost, the annual savings would instead approach: $4T × 5% = $200 billion per year.
The savings would then compound because Treasury would no longer need to borrow as much merely to pay interest on previously borrowed money.
How Much Debt Would Have to Be Retired to Get Interest Below $900 Billion?
We can work backward. Current annualized net interest: $1.1172 trillion
Target: $900 billion
Required reduction: $1.1172T − $0.900T = $217.2 billion
At a 3.46 percent effective interest rate: $217.2B ÷ 3.46% = approximately $6.28 trillion
So retiring roughly:
$6.3 trillion
of publicly held debt at today's average effective interest cost would bring the annualized net-interest burden down to approximately $900 billion, all else equal. That would reduce publicly held debt from approximately: $32.3T − $6.3T = $26.0 trillion. This should be viewed as a longer-term stretch objective rather than an immediate transaction.
3. What Role Should the Federal Reserve Play?
This is where the proposal requires considerable care. The Federal Reserve already owns approximately $4.54 trillion of Treasury securities as of August 19, 2026. One tempting proposal would be:
The Federal Reserve buys another several trillion dollars of Treasury securities.
Treasury then repurchases or extinguishes those securities.
The federal government's interest burden falls dramatically.
Unfortunately, it is not that simple.
Moving the Debt to the Fed Does Not Necessarily Eliminate the Cost
When the Fed purchases Treasury securities, it normally creates reserve balances. Those reserves are liabilities of the Federal Reserve. And the Fed currently pays interest on reserve balances. The FOMC's current federal-funds target is 3.50 percent to 3.75 percent.
Suppose the Fed purchased: $4 trillion of additional Treasuries. At approximately 3.625 percent—the midpoint of the current funds-rate range—the rough annual interest cost associated with $4 trillion of reserve creation could be: $4T × 3.625% = $145 billion annually.
That is remarkably close to the approximately $138 billion of Treasury interest savings generated by retiring $4 trillion at our estimated 3.46 percent effective rate. In consolidated federal-government terms, we have largely moved the liability from Treasury securities into Federal Reserve liabilities. We have not made it disappear.
The Fed Should Therefore Be a Facilitator, Not the Source of Debt Forgiveness
A better structure would be this:
Phase One: Market Stabilization
The Fed may purchase Treasury securities when necessary to maintain orderly market functioning and achieve its monetary-policy objectives. It should not be instructed by Treasury to monetize deficits. Federal Reserve independence matters.
Phase Two: Treasury Debt Exchanges
Treasury can use its existing buyback authority to purchase expensive, illiquid or strategically unattractive securities and refinance them where doing so lowers long-term expected financing costs. Treasury has already expanded its buyback operations in response to market volatility.
Phase Three: Genuine Principal Retirement
Revenue generated by the billionaire/decamillionaire tax would then be used to retire Treasury principal without issuing replacement debt. That is the critical difference.
A Treasury bond purchased using tax revenue and extinguished is genuinely gone. A Treasury bond purchased using newly created Federal Reserve reserves has largely been transformed into another government liability.
Could Treasury Simply Cancel the Debt Owned by the Fed?
In an accounting sense, one might ask why Treasury and the Federal Reserve cannot simply agree to cancel some portion of the approximately $4.54 trillion of Treasuries already held by the Federal Reserve. Economically, the federal government's consolidated balance sheet makes this idea less revolutionary than it sounds. But legally, institutionally and monetarily it would be extremely consequential. Unilateral cancellation could:
impair Federal Reserve capital and income;
create expectations of permanent monetary financing;
reduce confidence in Treasury securities;
increase long-term yields; and
potentially save less money than expected if the market demanded an increased risk or inflation premium on remaining federal debt.
For those reasons, outright Fed/Treasury debt cancellation should not be the centerpiece of the plan. The better objective is fiscal retirement of debt, supported but not financed by the central bank.
A Practical Ten-Year Structure
A serious debt-reduction package could therefore look like this:
High-Wealth Revenue
Target: $3.0–$4.0 trillion over ten years
from billionaire and decamillionaire taxation, capital-gains reforms, estate taxation and high-income surtaxes.
Debt Retirement
Statutorily dedicate: at least $3 trillion directly to principal reduction.
Add additional primary-budget savings and revenue to pursue a: $4 trillion base target
and ultimately a: $6.3 trillion stretch target.
Estimated Interest Effects
Using the current approximate effective net interest rate of 3.46 percent:
These are simplified static estimates. Actual savings would depend on which securities were retired, their coupon rates, market prices, maturity schedules, inflation, new borrowing and future interest rates.
But they demonstrate that debt reduction on this scale could save the federal government hundreds of billions of dollars every year.
The Political Choice
The United States does not have to choose between default and dismantling the social safety net. There is another choice.
Congress can ask households possessing tens of millions, hundreds of millions and billions of dollars in wealth to contribute more toward repairing the federal balance sheet created in significant part by decades of tax reductions. That revenue can then be used not merely to reduce next year's deficit but to permanently retire federal debt.
If Washington's answer to a $40 trillion debt is to cut Medicaid, housing, education, food assistance, minority-business programs and community investment, communities with the least accumulated wealth will bear an outsized portion of the adjustment.
But that outcome is not economically inevitable. It is a distributional choice. The fiscal arithmetic matters enormously for Black America.
The federal government currently spends approximately $1.1 trillion a year on net interest at the recent annualized pace, and current trends point upward. Interest has become one of the largest claims on federal resources. The answer is not default.
The answer is not austerity imposed principally on people who did not receive the largest benefits from the tax policies that helped create the problem.
The answer is to restore revenue at the top, retire a meaningful portion of the debt, protect Federal Reserve independence, and break the debt-interest-debt cycle before interest expense consumes still more of America's fiscal capacity. The United States created the $40 trillion debt burden through policy choices. It can reduce it through policy choices as well.