A record because my memory fails me.

What the national debt actually means

politicians, media, general public fly off the handle about the national debt. what does national debt actually mean? most people compare the national debt to personal debt- fallacy of composition, they can’t be compared at all. generally, debt is what keeps the economy growing…(not as motivation to pay it off or anything like that.) here’s a simplification. when a corporation has a good money-makin’ idea, they go to a bank, present the idea and business plan, and obtain a loan, produces the product, and pays the bank back with the return, right? govt national debt is the same concept except they are investing in the american people. the govt borrows to invest in education, infrastructure, health care, and etc. and the return is taxes collected.

to simplify :    total taxes collected by the govt = people’s salary  X   tax rate

people’s  ill-conceived fear about the national debt: future people’s salary increases at a slower rate than debt, meaning, the govt wouldn’t be able to generate enough total tax dollar, unless we increase the tax rate. However, people’s aggregate salary = GDP is mostly on the rise. or else we’ll all be screwed. trust me, we are a sound investment.

legit fear: our debt increases beyond the amount of taxes the govt would normally collect under full, expected GDP/people’s salary, therefore, a tax raise is inevitable.

to individuals, tax increases suck, but why does the economy care? it’s shown that when tax rate reaches a certain level (like now in France) it de-motivates people from participating in public economy, and instead, people opt for the black market or bartering* .

*okay, i don’t think the frenchies are trading baguettes for berets. but what I mean is ..under a proper tax rate, a teacher who would work 40 hours, get paid, hire a painter to paint his house, and so on and so forth. but, under, let’s say, a 40% tax rate, that teacher will only work 30 hours, and instead, he’ll use the extra 10 hours to paint his house. essentially, he’s “trades” his 10 hours of teaching for 10 hours of painting. by “trading” , these services are not paid with money, never gets converted into currency, and avoids getting taxed.  This is terrible for the economy for a number of very important reasons:

  1. when service values are converted into currency, you can give it to someone else, who in turn gives it to another person.. so on so forth i.e. teacher to painter to grocery..etc. this value is “multiplied” by perpetual circulation. in this case, the teacher can’t use the fact that he painted his house to buy other things, so that 10 hours value cannot be circulated. value ends there.
  2. gov’t/various institutions manage the economy/world through the control of economic values. their vehicle of control is money. if some services never get converted into currency, those in charge can’t effectively manage. woo hoo…not really. govt and banking institutions stimulate growth through policy and lending.
  3. lastly, under the first tax system, the govt collected a greater amount of taxes. the teacher, painter, grocer, farmer…so on all got taxed every time they spend that money (not to mention the teacher is taxed on a higher salary). now, the gov’t collects less taxes even with a higher tax rate.

so with a disproportional tax rate and terrible reasons #1,2,3 , total GDP/people’s salary will decrease (in growth). this means, under pressures to pay off the national debt, the govt would need to raise the tax rate, creating a vicious cycle. (unless someone has a better idea)

ahhh, after 542 words and what i’m saying is there’s a necessary level (debt to GDP ratio) national debt, but there’s also an upper threshold for disaster. too bad no one agrees on what that threshold

I LOVE THIS BLOG-IT DOES A MUCH BETTER JOB MAKING MY POINT. his theory about taxation is not wildly accepted.

after much research, this article talks about the national debt from an academic, factual pov. http://www.npr.org/templates/story/story.php?storyId=99927343

Filed under: Economics

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April 2010


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