≡ Menu

Quotation of the Day…

… is from pages 13-14 of L. Albert Hahn’s July 1943 article, “Should Government Debt, Internally Held, Be Called a Debt at All?”, as this article is reprinted in Hahn’s excellent 1949 collection, The Economics of Illusion:

It is, of course, obvious that it is easier to pay interest and amortization on a government loan if it is possible to tax all those who possess the new assets which correspond with the new indebtedness of the government. But insofar as the necessary taxes are not levied on the “new capitalists” (as they can be only partly), the amounts have to be obtained through increased taxes on other members of the population. To these, it is entirely the same whether the amounts are finally channeled to an internal or an external creditor. If part of the population has to pay tribute, it suffers the same whether those to whom it is paying reside within or without the country.

DBx: If Smith is to be taxed to enable the government under which Smith lives to repay Jones, who holds a bond issued earlier by that government, Smith cares not whether Jones lives across the street from him or across the ocean. Smith will suffer economically, and the imposition of taxes that are the source of his suffering will distort his economic decision-making, causing economic damage also to others in the economy of which Smith is a part. (Whether or not this damage is economically justified depends, of course, on how this damage stacks up against whatever benefits, if any, were created by the government’s use of the funds that it earlier borrowed.)

If Smith, when the government debt was first incurred, personally agreed to be taxed later in order to repay the debt, that agreement would have arisen because Smith in some way benefitted from the debt. His being today obliged to repay would, in this case, not inflict any real damage on him. But if Smith had no real say in the matter when the debt was incurred, then to tax Smith to repay the debt is to force Smith to pay for the benefits of whoever it was who benefitted from the use of the borrowed funds. And, again, this reality doesn’t change one whit with the residency or citizenship either of the persons who benefitted from the government’s earlier expenditure of the borrowed funds, or of the persons currently holding the government bonds.


Many years ago, George Selgin and I wrote this essay on Hahn’s economics.