Government is expensive, and America is running up the bill to the tune of $40 trillion. Every April, Americans are reminded of this basic truth. On April 15, the IRS forces citizens to confront what the government takes directly from their income. But taxation is only one way Washington finances itself. It also borrows on a massive scale and operates within an inflationary monetary environment that quietly erodes the purchasing power of the dollar. To understand America’s public finances and the broader health, or malaise, of the republic, one must look at taxes, borrowing, and inflation.
Taxes
The first way America pays for government is the most obvious: taxation. By the time a worker’s paycheck reaches his bank account, the government has already taken several bites. Federal income taxes and payroll taxes reduce what he keeps, while the employer paying those wages has already borne taxes and compliance costs of its own. In many states, state income taxes take another share, and in some localities, city or county taxes do as well. What remains does not escape further taxation for long. Once disposable income is spent, it is taxed again through sales taxes, excise taxes, and fees folded into the price of ordinary goods and services.
The burden is not just layered; it is substantial. According to the Tax Foundation, federal, state, and local taxes claim 39.0 percent of the income of a median two-income family. In addition, the organization reports that the average combined state and local sales tax rate was 7.52 percent as of July 1, 2025, while average state and local tax collections amounted to $7,109 per person. Since Liberation Day, the additional tax on consumption from current US tariff policy is estimated at about $600 per household in 2026.
In other words, taxation does not arrive in a single moment. It follows income from the moment it is earned to the moment it is spent. Yet the conversation over taxes too often stops at what Frédéric Bastiat would have called ‘the seen.’ The visible side of taxation is the public service funded, the road repaired, and the school maintained. But Bastiat’s broken window lesson reminds us that what is visible is not the whole story. Before admiring what taxes build, one should ask what gets broken on the other side of the window.
That skepticism points to Bastiat’s unseen side of taxation: the private consumption forgone, the savings never accumulated, the investment never made, and the business never expanded because resources were first claimed by the state. An AP-NORC poll found that about two-thirds of Americans said their federal income taxes, state sales taxes, and local property taxes were too high, while most also said federal income taxes and local property taxes were unfair.
Borrowing
The second way America pays for government is through borrowing. If taxation is the visible bill presented to the public today, debt is the bill postponed until tomorrow. Public choice economics helps explain why this method is so politically attractive. Elected officials seek reelection, and few build careers on openly imposing higher taxes. Borrowing lets them preserve the benefits of spending while muting the immediate pain. The cost is not removed, only transferred. As James Buchanan argued in Public Principles of Public Debt, “The primary real burden of a public debt is shifted to future generations.” That is precisely what makes debt so tempting in democratic politics. Present officeholders get the benefit of spending, while later taxpayers, often not yet born, inherit the obligation.
Treasury reports that, as of February 2026, federal debt service cost $520 billion in fiscal year 2026, equal to 17 percent of federal spending to date. On current projections, interest will be the third-largest item in the federal budget this year, behind only Social Security and Medicare, and even larger than defense spending. Borrowing, in other words, is no longer just a way to postpone costs. It has become one of the government’s largest expenses in its own right.
To whom does the United States owe this money? Primarily to whoever is willing to hold Treasury securities. Treasury data show that, in 2026, the national debt consists of about $31.19 trillion in debt held by the public and about $5.34 trillion in intragovernmental holdings. Debt held by the public is owed to investors outside the federal government, while intragovernmental holdings are Treasury securities held by government trust funds and similar federal accounts.
In practice, this means the United States borrows by issuing Treasury bills, bonds, TIPS, and related securities to a wide range of investors, including pension funds, banks, foreign governments, and foreign private investors. On the foreign side alone, Treasury’s January 2026 data show Japan holding about $1.225 trillion in US Treasury securities, the United Kingdom about $895.3 billion, and mainland China about $694.4 billion.
These are not marginal economies. IMF figures show that China accounts for about 16.7 percent of world GDP, Japan about 3.6 percent, and the United Kingdom about 3.4 percent. Together, they account for roughly 23.7 percent of world output, underscoring a broader point: global demand for US debt remains strong, and with it the dollar’s central place in the international monetary system.
Inflation
The third way America pays for government is through inflation, and that means through the debasement of money itself. The Federal Reserve explicitly seeks inflation at the rate of 2 percent over the longer run. But even this supposedly managed erosion is currently running above the Fed’s own target. BEA data show headline PCE inflation at 2.8 percent year over year in January 2026. In other words, the dollar is not merely designed to lose purchasing power gradually; at present, it is losing value faster than even the Fed says it should.
Research highlighted by MIT Sloan suggests that the recent inflation surge was not merely bad luck or a supply-side accident. Federal spending was the single largest contributor to the 2022 inflation spike, accounting for 42 percent of inflation that year. Nor was the monetary response neutral. According to FRED, using M2 as a broad measure of money, the money supply rose from about $15.5 trillion in February 2020 to about $22.7 trillion in February 2026, an increase of roughly $7.2 trillion. That increase was equal to about 46 percent of the pre-2020 money stock.
That loss of purchasing power is the practical meaning of currency debasement. BLS historical CPI data show an annual average CPI of roughly 24 in 1950 and about 300 in 2023. Put differently, a dollar from 1950 retained only a small fraction of its former purchasing power by 2023, implying a loss of more than 90 percent. What is often described as modest, well-managed inflation becomes, when compounded over generations, a sweeping destruction of money’s real value.
That would be easier to defend if the institution entrusted with monetary stability had a compelling long-run record. AIER’s own Thomas Hogan argues that US economic performance “has not generally improved under the Federal Reserve.” In other words, a central bank established to stabilize money and credit has instead presided over a long decline in the purchasing power of the dollar.
But the deeper problem is one of hubris. The Federal Open Market Committee sets the target range for the federal funds rate, and the Fed explains that changes in that target affect other interest rates and broader financial conditions. One of the most important prices in the economy is therefore not discovered in a market but administered by a committee.
From a Hayekian perspective, that should be deeply troubling. Interest rates are not just policy levers for experts; they are prices that coordinate time, risk, saving, and investment across millions of people. To place them under the discretion of a board is to assume that a small group can improve upon the information generated by the market process itself. The issue is not merely that the Fed sometimes gets interest rates wrong. It is that the institution rests on the conceit that such prices can be centrally managed at all.
Benjamin Franklin, whose image still rests on the hundred-dollar bill, reportedly answered a question outside the Constitutional Convention in 1787 with a lasting warning: “A republic, if you can keep it.” To keep it requires more than patriotic language and constitutional reverence. It requires fiscal honesty. It requires that the burden of government be made visible rather than deferred, diluted, or disguised. A republic is not kept by obscuring its price, but by confronting it honestly.
