President Obama will run huge deficits in the coming years.  This is a necessary response to a desperate economy.  However, those of us concerned with equity must beware how the United States goes about repaying this debt in the future.  Roughly 45% of the debt is owned by the federal government itself.  A lesser observer may claim that a practical response would be to let the government default on the debt it owns itself.  We must not let this happen.

That debt is owned by entitlements savings accounts that are funded by the regressive payroll tax. That is to say that low-income earners pay a greater percentage of their income towards the tax.  The payroll tax is a 15% tax levied on all earnings up to $97,000 dollars.  Every dollar earned on top of this amount is not taxed.  Consider the person earning $35K.  This person will pay 15% of his income towards the payroll tax.  Now consider the person earning $200K.  This person will pay roughly 7% of his income towards the payroll tax.  This is justified (not making judgement just stating the rationale) by the fact that benefits for entitlements are funded in a progressive manner in that lower income households benefit much more from entitlements (ie. the progressivity of the Social Security benefit formula).

These funds are being borrowed from these savings accounts to pay for discretionary general fund expenditures.  The general fund is funded by the progressive income tax.  That is to say that higher income taxpayers pay a greater percentage of their income.  Therefore, as of now, the federal government is borrowing from low-income families to pay for expenditures that should be funded by higher income families. 

If the federal government were to default on this debt, it would effectively be a transfer from low-income families to high-income families.  Thus, it is absolutely essential that the federal government not default on its debt to entitlement programs.