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Public Principles of Public Debt: A Defense and Restatement; Buchanan, James M.
1 paragraph found.
Ch. 7, Consumption Spending, the Rate of Interest, Relative and Absolute Prices
We may compare this conclusion with the statement made earlier that, in the classical model, inflation can best be considered as a tax. Since the effects of inflation are such as to cause individuals to be confronted with opportunities unfavorable to them which they did not expect, is this not equivalent to the case with the disappointed borrower? The equivalence is only apparent here. In inflation, which is designed to allow government purchase of real goods and services without taxation, the amount of real goods and services available for private disposition is reduced. There are, of course, individuals who gain and individuals who lose by such inflations. But, in net terms, individuals in the aggregate must give up the share of resources which the government, through inflationary finance, purchases. A second comparison may be drawn between this case and that of a partial excise tax on a particular good. This causes the price of the good to be increased. We say that consumers "bear" the incidence of the tax. Is this not equivalent to the debt case; and may we not say that borrowers forced to pay the higher rates "bear" the burden of the debt? Again the equivalence is only apparent. We say that the consumers or purchasers of the taxed commodity "bear" the tax because they are the only ones in the economy who give up real goods and services in the process of government's action. If the government operation merely increases the retail price of a good, along with the factor prices for resources going into its production, we would not call this shift in relative values a "burden." The increase in price would have harmed net consumers of the commodity, but it would have benefited net producers. The excise tax differs in that it places a "wedge" between product price and factor price. Government debt issue places no "wedge" between the private lending rate and the private borrowing rate. Its action serves merely to shift the terms of trade between borrowing and lending groups in the economy. These shifts in real income are secondary repercussions which are quite different from the primary real burden which is attributable to the debt itself. For a discussion of the distinction between the "incidence" of an excise tax and the "horizontal shifts in retail product value," see H. P. B. Jenkins, "Excise-Tax Shifting and Incidence: A Money Flows Approach," Journal of Political Economy, LXIII (April, 1955), 125-49.