In 2005 this amounted to 177 billion whoever paid

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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 representation.” 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? ECONOMIC 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.

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