How do you fund a nation?
British PM Clement Attlee said,
If a rich man wants to help the poor, he should pay his taxes gladly.
Half a century later, Australian mogul Kerry Packer delivered this counterpoint to Parliament:
If anybody in this country doesn't minimise their tax they want their head read. As a government I can tell you you're not spending it that well that we should be paying extra.
Sentiment-wise, most of us lie somewhere in between gladly rendering tribute unto Caesar (Mark 12:17) on one hand, and hiding our shekels to stop them being appropriated to fund distant aqueducts or Gallic campaigns on the other.
What if you could support government spending without paying tax?
Enter bonds.
Essentially debt, the first sovereign bonds were issued to fund special projects like wars.
Okay, all the special projects initially were wars.
The difference with taxes is that bonds give you your money back. Plus interest.
That is, assuming that your side wins the war. If it doesn't, you have bigger problems than collecting your coupon.
Of course, there are non-government bonds, just as there is non-government debt, like owing your cousin a fifty, but here when I talk about 'bonds' I mean government borrowing.
Or the government doesn't desperately start printing money, wiping out your real returns through inflation or currency devaluation.
Bigger picture though, your bond-holdings getting cut in half is still better than losing 100% of whatever you pay in tax.
Aren't bonds and taxes two different things?
They're intertwined. Bonds means income and income means tax.
However, in the US at least, you don't pay tax on interest from municipal bonds.
And in Australia and a lot of other developed countries, investment expenses like interest are tax-deductible, even if limited to the associated investment. For example, if I take a loan out to buy bonds, the interest I pay on that loan will offset the distributions I get from the bonds when it comes to assessing my taxable income.
It is possible then to minimise your onshore income and thereby tax, and get a feel-good hit from buying bonds with that low-tax (or no-tax) income, and minimise the bond income through deductions.
Are bonds revenue-raising or investments?
They're both.
Government spending as a proportion of economic activity (percentage of GDP) has steadily risen over time, spiking during the pandemic.
Understandable. Voters want nice things. Not only wars, mind you, but also entitlements and facilities.
At the same time, taxation's share of the economy has remained rather flat. Also understandable. Voters don't want to pay for them.
So it's no surprise that government debt is a growing part of all major economies.
Governments are keen to sell debt, which are bought by creditors as investments.
Yes, but are those investments any good?
They're considered safe but lacklustre when compared to their flashier cousins, stocks. Because governments are generally bigger than companies, and therefore have more resources with which to meet their obligations, this perceived safety leads bond buyers to accept lower returns.
And so even though bonds are often considered part of a balanced investment portfolio, it is also recognised that they stocks will outshine them in the long run.
People invest in bonds for reasons other than performance.
My wife is a bit of an ESG/SJW investor. Doesn't want to touch big corporates because 'poisoning the earth', 'entrenching inequality', 'might make a rivet that goes in a landmine', yada yada yada.
But government debt? It might build a road. It might build a school. The potential to fund necessary work is greater with developing country bonds, as is the default risk and hence expected yield.
My wife is psychologically at ease with sacrificing some yield for social justice, so into bonds she goes.
The beauty of being a creditor over a taxpayer then is that even if the government's spending does not directly benefit you, the interest you are owed does.
Is expecting yield ... ethical?
For the debtor, the need to repay principal and interest is the spice that theoretically encourages prudence.
The question then, is whether prudence is ever un-ethical.
Research (translation: I chatted with an ethicist friend) leads me to conclude that government prudence could be harmful if it risked market failure.
Some activities which benefit society are so unprofitable that if the government did not intervene, supply would not meet demand, and the market would fail. For example, there could be a demand for aged pensions, but few see returns in simply handing out money to old people. Conversely, there could be little private demand for agricultural products like U.S. corn and Japanese rice at prices that would sustain farmers.
'Prudence' would dictate that the vulnerable yield too little to support.
Furthermore, the person who insists that governments borrow their money rather than tax it would seem then to imprudently favour depriving - and potentially destabilising - society out of a callous sense of commerciality.
Yeah, I feel kinda judged.
But focusing on misers distracts from the many ways through which governments can both provide loss-making services and deliver to their creditors. For example, a government could ensure that it directs enough debt and taxes into profitable investments to cover lossy spending, much like proceeds from sovereign wealth funds subsidise public services.
Entering unethical but lucrative ventures could then be tempting, but it would be wrong to blame that on prudence, as to knowingly profit from wrong requires an intervening positive choice, as opposed to refraining from going deeper into debt to do right.
As an alternative to prudence, governments could rally the populace behind a project so unifying that it gets them to abandon theirs.
I had thought/hoped that the environment and decent broadband would be issues that everyone could agree to be taxed for.
The voters spoke, and they said, "LOL, nope."
In defending parsimony another Attlee quote comes to mind:
No social system will bring us happiness, health and prosperity unless it is inspired by something greater than materialism.
Until then, I want to be repaid with interest.
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