The Sky Is Not Falling

Steve Conover at The Skeptical Optimist writes to deflate the fear over treasury debt held by foreigners. Foreigners invest in our treasury debt because they believe that our treasury is the best, safest place to put their money. It is a sign of the strength of our economy that foreigners invest their money here rather than at home or in another county. Also when principle is owed to the foreign debt holders they are most likely to do with that money what they have done before, reinvest it in our treasury. What is good for foreigners is also good for local bond holders. Anyone who directly or indirectly owns treasury bonds receives their own share of the interest on the national debt. It also means that the government also already has some of their money which reduces the amount of taxes the government must collect. It is unfortunate that some people think that voluntary debt is a problem and want us to solve the "twin deficits" problem by hiking taxes to turn our country into a tax hell so that foreigners will no longer choose to invest here.

Over on the spending side, Perry Eidelbus finds a 1996 Joint Economic Committee Report that concludes that "at current spending levels the last dollar government spends reduces private sector GDP by $1.38. In other words, the economy experiences a net loss of 0.38 cents." On the tax side, the same JEC report notes that "Economists have studied the burden of taxation and have estimated that every dollar raised from taxes reduces income from 17 to 56 cents."

Meanwhile, the White House (pdf page 37) has updated their tax collection forecasts for 2005 and the CBO has updated their tax receipts through June. The expected increases are quite significant. Note that the increase in social insurance receipts is greater than the best increases during the bubble years. This shows solid gains in employment and wages in addition to the rich getting richer.

        Percent Increase in Tax Collections, 2005
Tax                     OMB     CBO
Individual Income       14.8    17.6
Corporate Income        40.3    40.8
Social Insurance        8.2     6.9
Total                   13.8    14.6

But a final warning: both taxes and debt crowd out private capital, and nothing crowds out private capital more than taxes on private capital. We must make sure that the large increase in non-withheld taxes does not hemorrhage money from the markets and cause "the money to run out" like it did in "the bubble". We also need to make sure that the increased supply of savings from supply-side tax cuts does not supply increased government spending like it has in the past.