Thursday, July 23, 2015

Who Owns the Debt?

A while back I talked about how the decision was made to cut taxes on the rich and borrow from them instead. The rich prefer buying bonds to paying taxes because it gives them a safe, low-risk place to park their cash which they get back in the exact proportion they paid in, plus interest. By contrast, if they paid taxes, that money might be redistributed somewhat and spent on things that don't benefit the rich personally, and there is no guarantee they would get that money back in the same proportion they paid in (although since so much of government spending ultimately goes to the "private sector" they probably would, but still...). And, of course, with taxes the government is not obliged to return that money with interest, as it is with bonds. But where does the interest come from? The general revenue, in other words, from the rest of us who pay taxes instead of buy bonds. People like you and me. Thus more and more of the taxes we pay are redistributed to the rich in the form of interest payments instead of being spent on things like infrastructure, education, or jobs.

This assumes that the people funding the national debt are disproportionately the wealthy. I didn't have evidence then but now I do.
The chart below, taken from his 2013 article in New Political Economy, shows the share of the U.S. public debt held by the Top 1%. This share follows the general historical contours of the overall distribution of wealth, and is currently hovering around 45% – approximately the same level as at the turn of the twentieth century. 
Equally startling is the extreme concentration of debt holdings by the first decade of the millennium, 2,675 firms – representing a tiny 0.05% of all corporations – owned a whopping 82% of the public debt held by corporations. This concentration is significantly higher than it was in the 1950s, when a similar number of firms, representing 0.2% of all corporations, owned 66% of the debt held by corporations.
Who owns the public debt? (Real World Economics Review blog)

No wonder profits are so high!

This also explains why even though the government is perennially underfunded, the Republicans can simultaneously portray the deficit as an existential threat while making it their central policy to reduce tax rates for the wealthiest Americans. In fact, they just passed the "Death Tax Repeal Act" (HR 1105) which would eliminate taxes on the country's richest people while increasing the deficit by 269 billion dollars over the next ten years. Yet they will still turn around and claim things like the deficit is too high, and unemployment insurance must be eliminated.

This drives more borrowing, which is the point. Republicans then go one to claim that the solution is to just to reduce spending to whatever the tax rate happens to be, yet when they get in office, they never do that! In fact, both government spending and budget deficits have historically risen far more under Republicans than Democrats. And the claim that reducing taxes on the wealthy somehow supercharges the economy and increases revenue is failing year after year everywhere it has been tried.

So the next time someone says that "we" own the deficit, or try to portray the people owning saving bonds as salt-of-the earth ordinary people like grandma saving for retirement, you can call bullshit. The concept of "national debt" is a redistribution scheme pure and simple, whether here or in Greece.

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