Tax Lawyer's Blog

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

- Hamlet, Act I, Scene iii  -

From the Associated Press:

In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding. And it says by the next decade’s end the national debt will equal three-quarters of the entire U.S. economy.

Why should we care?

Well, according to Roger McCain, Professor of Economics at Drexel University, here’s what happens when the government operates at a huge deficit:

[T]he increased government debt will not be repaid in the foreseeable future. Instead, when government bonds mature, they will be “refunded” by selling new bonds to get money to repay them.

But this should not be a surprise.

Many large corporations operate in just the same way, raising capital by issuing bonds with the intention, not of repaying the bonds in any foreseeable future, but of refunding them. The corporations can do this because they have a perpetual source of income from which to pay interest, so far as anyone can foresee.

And the government can do the same thing for the same reason: it has a perpetual source of tax revenues from which to pay interest.

However, interest payment — so-called debt service — is a burden.

• Taxes must be collected to pay the interest on the debt, and there is no such thing as a good tax (especially from the point of view of the person who pays it.)
• On the average, those to whom the interest is paid are richer than the taxpayers who pay it, so that a large government debt (at best) has something of a reverse Robin Hood effect.
• If the debt and the debt service increase more rapidly than production itself, the increase is clearly not sustainable, and will eventually be stopped by a crisis if not by deliberate restraint of government deficits.
• Many economists would worry that government borrowing would crowd out private borrowing for investment, so that people would be worse off in the future.

The last of these is most relevant to “the burden of the debt.”  In this vision, the “burden of the debt on future generations” is not that the future generations will have to pay off the debt, but that they will have less capital goods to work with and so be less productive.

That may not be the worst of it. If taxes create inefficiency and waste (and they almost always do), then there is an extra cost in raising taxes to pay interest on the debt. In such a case, revenue faces limits and debt service has to compete with other, perhaps more urgent human needs for the budget dollars.

Bookmark & Share: