The hidden double tax behind public debt

Martín Cabrera

There are multiple ways in which a state can obtain financing. The primary and most traditional source of revenue is taxes. However, tax revenue can eventually pose a challenge for the state. Indeed, taxes represent a visible extraction of income by the state from its citizens, and therefore, at some point, it will encounter resistance. To overcome this problem, the state resorts to other forms of financing. One of these is public debt. However, very few people realize that public debt represents an even greater burden on citizens than taxes, and behind it lies a double tax. Government borrowing can, firstly, be inflationary or not, depending on who the lender is. When the state borrows from the banking system, inflation is created: the state's activities are funded with money that the banking system creates out of thin air and without backing from real savings, so the money supply increases, and, consequently, prices rise. This represents a burden and a hidden tax for citizens, who become impoverished as their money loses value, while the state profits at their expense.

There is another case in which government borrowing is not inflationary. This occurs when the government borrows directly from the public, thus avoiding financing through credit expansion. Since the money supply does not increase in this case, the debt is not inflationary. However, it does place a burden on the private sector in another way: savings lent to the government are no longer available for lending to the private sector. Consequently, while public spending increases, private investment decreases. This diverts resources from their most urgent uses, those to which they were allocated in the market, to finance public sector waste. Savings are squandered, and, moreover, because fewer savings are available for lending, interest rates rise.¹

In this way, public debt preys on the private sector and impoverishes it to the citizen even when it is not inflationary.² But, in addition, there is another way in which public debt, regardless of whether the financing is obtained through the banking system or the public, preys on the sector private enterprise impoverishes citizens, and it is for this reason that we assert that public debt represents a double tax on citizens. This is because the debt must eventually be repaid. To do so, the State has no alternative but to collect taxes. Ultimately, the taxes paid by citizens will be used to pay off public sector debts, which means paying for the expenditure that was originally financed with debt, plus interest.

The population, which was already plundered once when the State went into debt, is now being plundered again when it is time for the bills to be paid.³ This is how public debt represents a double tax on citizens. When the government announces a budget financed through debt, alarm bells should ring: it signifies present plundering through inflation, the squandering of savings, and rising interest rates, and future plundering when taxes are levied to repay that debt—that is, the original public spending plus interest. It means the politicians' feast continues while the rest of the population grows poorer.

1 See Murray N. Rothbard, Man, Economy and State with Power & Market, Scholar's ed, 2nd ed. (1962; Auburn, Ala.: Mises Institute, 2009), pp. 811-815, 989-994, 1014-1018, 1025-1026. Also Ludwig von Mises, Human Action, Scholar's ed. (1949; Auburn, Ala.: Mises Institute, 1998), pp. 405-421.

2 See Murray N. Rothbard, Man, Economy and State with Power & Market, p. 1026.

3 See Murray N. Rothbard, Man, Economy and State with Power & Market, pp. 1026-1028.