My recent overview of US Federal debt and taxes triggered a number of requests for an inflation-adjusted view of the debt and an overlay of the tax brackets with a debt-to-GDP ratio. Today I'll address the first of the two, and in a later post, I'll tackle the second.

Here is a chart (click for a larger view) with an overlay of the nominal and real gross federal debt. The official government debt statistics (sources listed below) are the nominal values for each budget year. I've used the Consumer Price Index (CPI) from the Bureau of Labor Statistics to create a real (inflation-adjusted) overlay. My constant in the calculation is the CPI value for December 2009, so we can say the real overlay is in "Chained 2009 Dollars." In this chart, however, I've made no inflation adjustments for the six years of OMB estimates for 2010-2015.

Here is a stand-alone real debt chart to which I have applied a 3% inflation-adjustment for the six estimates. It may seem a bit fussy to add an inflation factor for the OMB estimates, and 3% is an arbitrary rate, but for the sake of "real" consistency, I just couldn't resist.

The impact of inflation-adjustment, as the chart above illustrates, is not trivial. Older boomers have vivid recollections of the inflation of the 1970s and early 1980s. But there were worse episodes associated with the two World Wars. The first half of the 20th century also had savage periods of deflation, as this snapshot makes clear. Inflation adjustment helps us better understand the debt burden of past generations, which was greater than it appears in a nominal chart.

For long time frames with major value changes, a log-scale vertical axis gives a clearer sense of the velocity and degree of change. A linear chart of gross federal debt (nominal or real) gives an exaggerated "hockey stick" trajectory. Federal debt is indeed increasing at an alarming rate, but the real log-scale version is a more appropriate way to read the numbers.

Debt and Taxes

Does the real log version of the chart change our view of the disconnect between tax brackets and gross federal debt? Not at all. The debt level remained fairly consistent from 1950 to the early 1980s, despite the major tax cuts in the 1960s. However, the tax cuts in the early 1980s saw the beginnings of the disconnect between federal inflows and outflows.

With the 2001 and 2003 tax cuts expiring this year, will the gross federal debt be a factor in determining the direction of future tax rates? Perhaps, like a young household with good jobs buying a home, the US can afford the rising level of debt. Or perhaps this analogy is false. In a future commentary we'll look at the relationship between Gross Federal Debt and Gross Domestic Product (GDP) for an additional clue.

Source for historic U.S. tax data: www.taxfoundation.org.