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Unformatted text preview: ber, one of the spending categories of the federal government is “net
interest on the national debt.” In 2005,
this amounted to $177 billion. Whoever
paid federal taxes that year helped pay off
some of the national debt. Higher Future Taxes
When the government spends more than
it collects in tax revenues, it has to borrow
the difference. Deficits lead to debt. But what
does debt lead to? Some economists argue
that it leads to higher taxes in the future.
When the government borrows the money
to pay for the excess of its spending over tax
revenues, it has to borrow that money from
people. Those people will have to be repaid
one day; the debt has to be paid off. (If you
borrowed money from a bank, you would
have to repay the money one day, with interest.) What happens when the government’s
debt has to be paid off? Taxes must be used, so
taxes have to be higher than they would have
been had the debt not been incurred in the 14 (364-389) EMC Chap 14 11/18/05 10:59 AM Page 385 first place. Some economists say that as far as
future taxpayers are concerned, current
budget deficits are a form of “taxation without
Suppose that in a particular
year a government needs $2.0 trillion to buy
all the different things that year, and to pay
interest on its national debt. The government calculates that it would need only $1.9
trillion in taxes were in not for the interest
on the debt. Taxpayers would be able to keep
$0.1 trillion for themselves if the government had not gone into debt.
Is it ethical for one generation to buy things
that another generation ends up partly paying
for? Some people say no, but others say it
depends on whether what the first generation
buys benefits the next generation. For example, suppose the present generation decides to
buy an interstate freeway system for $10 billion. The present generation decides to pay $2
billion itself through taxes and to borrow $8
billion. The present generation knows that the
future generation will have to pay off the $8
billion (plus interest), but it reasons that the
future generation will use the freeway system,
so it should pay for some of it. If the current
generation purchased $10 billion of something from which only it could benefit, the situation would be different.
EXAMPLE: Tax Advantages
Globalization sometimes makes
it easier for a company to lower
its taxes. Firms might design a
good in one country, manufacture
it in another, and sell it in a third.
This approach gives these firms some
flexibility in lowering their tax bills by shifting operations from country to country. For example, foreign
subsidiaries of U.S. companies often report higher
profits in low-tax countries and lower profits in hightax countries.
How do you expect the high-tax countries
to respond to growing difficulties in collecting taxes in a global economy?
THINKING If the government spends more than it takes
in, it incurs a debt that must be paid off eventually. Do you think it’s fair to pass on to th...
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This document was uploaded on 01/16/2014.
- Winter '14