macroeconomics, debt, gdp, interestSince the money for the public debt comes from those who have money to invest (the “wealthy”) and the interest is payed by those who pay taxes (the “working”), it seems that the people that actually lend money to government (through buying its bonds, for instance) are the net beneficiaries?
This may be a gross oversimplification, but I’m interested in whether there are any scientific or economic theories or models, that show that, if government debt – as used by modern states (be it the US, EU, Russia, or China ) – cause a greater burden to be carried by those working and paying taxes while increasing the wealth of the rich by paying them interest on that debt?
Your question makes a fairly large assumption which must first be clarified: who actually buys bonds? Is it only the wealthy of that particular country?
According to the Federal Reserve of New York (in a release from 2007, i.e. just before the current crisis):
The investor class data show that dealers and brokers alone account for 75.4 percent of Treasury securities sold to the public, on average. Foreign and international investors account for the next largest share, 12.5 percent, followed by investment funds (6.5 percent), depository institutions (0.5 percent), individuals (0.5 percent), and private pension and retirement funds and insurance companies (0.0 percent). “Other” investors, not captured in any of the classes cited, accounted for 4.6 percent of the Treasury securities sold to the public. Again, there is significant variation in purchase shares across auctions, with depository institutions buying as much as 31.6 percent of an issue, investment funds buying 46.1 percent of an issue, and foreign and international investors buying 38.6 percent of an issue.
The last is important: 31.6% are depositary organisations (i.e. retail banks), 46.1% are investment funds (i.e. everything from investment banks to insurance companies) and 38.6% are international investors (i.e. sovereign wealth funds and foreign investment funds).
In other words, anyone who has a bank account, insurance policy or pension is involved in purchasing government bonds - not just the "wealthy".
Next, how bonds work. They're a loan. Governments claim that they can invest this money to drive greater economic growth or support social goods which will reduce risk on economic stability. Governments borrow based on the assumption that the investment will be worth more than the future cost of borrowing.
In exchange for money today, investors ask for a return for taking on risk of default and the opportunity cost of not using that money elsewhere. So it is a trade and both parties should benefit from it.
If the government fails to invest that money wisely then, certainly, the investor may come out of it better-off than the borrower (as long as the borrower doesn't default).
However, the reason that bonds are considered such a "safe" investment is that the lender / investor is also a taxpayer. Government can nominally raise taxes on everyone to cover its debt to those self-same taxpayers. Not only the wealthy and workers, but everyone is both borrower and lender (government borrows money from the people and then pays the people back with money it generates by taxing the people).
The fly in the ointment is foreign investors who cannot be taxed directly. Unfortunately, they can be taxed through trade tariffs. As debt becomes unsupportable the drive to raise trade tariffs is growing.
As should be clear: governments have the upper-hand in bond negotiations; they can raise taxes or tariffs, debase their currency, or simply default. Investors can only hope for the return they were originally promised.
No sources, just some reasoning based on broad numbers (for Germany): Around half of the citizens don’t pay income tax in Germany since they have an annual income of below 8.000 € (16.000 for couples), this lower half only pays VAT on its consumption, and no further taxes assuming no capital income. I think it is likely that for the larger part of this group, Government transfers are above their taxes paid on VAT. Insofar interest payments to the gain of bondholders most likely come from the upper half of the income distribution. Around 50% of income taxes and likely more than 50% of capital gains taxes come from the highest 10% of incomes.
Defining this upper 10% as “the rich” and the 50%-90% incomes as middle class, we can stack this house of cards a bit higher, and look at two cases:
In the first case, only the rich hold bonds. In this case half the interest rates are payed by the rich and half are payed by the middle class, and we have redistribution from the middle class to the rich.
In this case, bonds are spread evenly among the upper half of the income distribution. With interest payments having the same sources as in the first case, 80% of them go to the middle class and 20% to the rich. In this case the redistribution is from the rich to the middle classes.
What should become clear is that any redistributional effects depend on the distribution of the bonds in the population (directly or indirectly through investment vehicles), and certainly are not uniform within the income groups (a person living off an endowment in the middle class may profit, a person with a high income from the job may suffer, even if the average effect for the groups may be reversed).
All content is licensed under CC BY-SA 3.0.