Re: Refuting supply-side economics

From: William F Hummel (wfhummel_at_comcast.net)
Date: 09/28/04 

Date: Tue, 28 Sep 2004 16:11:31 GMT

On Mon, 27 Sep 2004 22:36:34 -0400, "Mark Monson" <m_monson@ztech.com>
wrote:
>
>"William F Hummel" <wfhummel@comcast.net> wrote in message
>news:f11el01h99hhig6kvtr0gp83igbj60a5pi@4ax.com...
>>
>> Taxing or borrowing represent equal cost to the tax payers.
>
>But not equal benefits. With taxation alone, all the goods the government purchase
>are in
>theory going for purposes of mutual benefit. With borrowing, the interest payments
>definitely benefit only bond holders at the expense of tax payers.

Bond holders benefit from interest payments, but not at the expense of
tax payers. That's the fallacy.

Let's go back to my original model in which the government plans to
spend 10 billion on a new program, presumably for the benefit of all.
Taxes will ultimately have to pay for the program. Tax payers could
pay up front with a tax surcharge, for example. Or the government
could borrow the money from those willing and able to buy the bonds,
which we will assume are one-year bonds at 5%.

Now suppose the debt is to be paid off at the end of the year. The
taxpayers would have to cough up 10.5 billion to cover the principal
and interest. The bondholders receive their money back plus 0.5
billion in interest.

The cost to the tax payers is exactly the same as it would have been
if they paid the taxes up front, namely 10 billion. Why ? Because in
principle they could have invested 10 billion (in proportion to their
tax liabilities) in one-year bonds at 5%. That would return exactly
what they need to cover the taxes due at the end of the year. If you
think about, that's equivalent to tax payers having bought the
government bonds themselves.

The bondholders gain nothing that they wouldn't have gained in some
other investment. If they had held their savings in cash instead,
they would have suffered an opportunity cost of at least 0.5 billion.
Bottom line: The interest earnings of the bond holders do not come at
the expense of the tax payers.
>
>Interest
>> on government bonds is simply the cost of deferring the tax payment to
>> cover government spending.
>
>As you correctly state above, costs to taxpayers are the same whether borrowing or
>taxing. Since taxpayers are not allowed to defer payment of interest, benefits
>received are reduced in the public debt system.

The benefits received are simply what the government program offers.
Those benefits are not affected by interest payments in any way.
>
>In either case, the public gets the same
>> amount of NET (after interest) government spending , whether the
>> result of that spending is good or bad.
>
>???
>
>Public goods and services are certainly increased in the case where all
>revenues are collected via taxation rather than in the case where 14% of public
>contributions to government are spent on interest.
>
This implies that the government can either spend on goods and
services or on interest payments. That's another hoary fallacy. What
the government spends on public goods and services is independent of
the interest paid on the debt.
>>
>> >The bond holder as bond holder is the privileged recipient of tax dollars without
>> >giving anything of value to taxpayers in return.
>>
>> No. The taxpayers receive value in whatever the government spends the
>> money on, just the same as the bond holders (most of whom are tax
>> payers). I've explained this in some detail in another post.
>
>You have yet to explain how taxpayers are served by the private goods consumed
>through bond interest.
>
It appears you are saying that interest on the debt consumes private
goods. If so, that is the same fallacy that I just noted. Interest
payments consume nothing in terms of private goods.

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