Re: Refuting supply-side economics

From: Andy F (aft627_at_aol.com)
Date: 09/29/04 

Date: 29 Sep 2004 13:10:35 GMT

William F Hummel wrote:

>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.

But this year's taxpayers aren't the same as last year's.People who retire
during the year will not have to pay for the borrowing. Young people who start
their first job , however, will be paying higher taxes even though they didn't
benefit from last year's low taxes.
So rich old people are dumping a tax burden onto future generations.

  

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