used by Professors Seligman and Scott seems to do, that they imply a direct objective burden on posterity equal to the amount of the debt repayment is paradoxical in the extreme. Posterity will possess the new capital which it has been induced by the fiscal expedients of the state to create. What right have we to ignore this possession? To do so is as tho one should say that a man who has been induced by circumstances to put £100,000 into a factory instead of into a yacht or a bean feast was thereby made poorer to the extent of £100,000 than he would otherwise have been. If there were reason to suppose that the world would end immediately after the investment had been made, there would indeed be something to be said for this view. But at present no cosmical catastrophe is in sight and posterity may be expected to reap the fruit of its investments in the same way as its ancestors. Thus, tho it is true, as Professor Seligman asserts, that the bondholder gets no benefit from debt repayment, it is also true that the tax-payer suffers no loss. What he in effect does is to make an investment of certain funds, the proceeds of which will serve in future years to keep the bondholders' position intact without any further call upon the tax-payer himself being required. On posterity as a whole no direct objective burden is imposed by debt repayment of an internal loan, any more than by payment of interest upon it. We may conclude therefore that, apart from the consequences produced through reaction on the conduct of the persons affected at the time, the choice between the levy and the loan method makes no difference to the direct objective burden thrown on future generations. The payment of interest and the repayment of principal alike are transfers, not costs, and to whatever there is somewhere lost there corresponds elsewhere an exactly equivalent objective gain. It does not, however, follow and, in so far as tax-payers and war loan holders are identical, from one pocket to another pocket in the same coat. Plainly in a transfer of this kind it is impossible that any direct objective burden- I am not at present concerned with other sorts of burden — can be involved. There remains the money raised for repayment of principal through a sinking fund. As regards this it has been claimed by certain writers that the preceding argument is inapplicable. They reason that, when a holder of war loan has the principal of his loan paid off by the government, he receives no benefit, but is simply left in his old position - possibly a slightly worse position, because he will have the trouble of finding a new investment — and that, therefore, there is nothing to set against the objective burden thrown on the tax-payer in the form of taxation to provide the money to pay him. Professor Seligman writes: "The fallacy involved in the contention that the sacrifice imposed upon the future tax-payer is counter-balanced by the benefit accruing to the bondholder consists in the failure to realize that there are no benefits thus accruing to the bondholder.” 1 Professor Scott arrives by similar reasoning at the same conclusion: "Speaking quite generally, the effect of a loan (he is discussing an internal loan) is that posterity is rendered liable to do the amount of work which is necessary to pay it off." 2 The substance of this argument is that, since, in the main, repayments of principal made to holders of war loan are certain to be reinvested, posterity as a whole will be forced by the process of debt repayment to create new capital, and so to refrain from consumption, to approximately the extent of the debt repayments. Let us provisionally accept this presentation of the facts. Even so to suggest, as the language 1 Annals of the American Academy, January, 1918, p. 64. used by Professors Seligman and Scott seems to do, that they imply a direct objective burden on posterity equal to the amount of the debt repayment is paradoxical in the extreme. Posterity will possess the new capital which it has been induced by the fiscal expedients of the state to create. What right have we to ignore this possession? To do so is as tho one should say that a man who has been induced by circumstances to put £100,000 into a factory instead of into a yacht or a bean feast was thereby made poorer to the extent of £100,000 than he would otherwise have been. If there were reason to suppose that the world would end immediately after the investment had been made, there would indeed be something to be said for this view. But at present no cosmical catastrophe is in sight and posterity may be expected to reap the fruit of its investments in the same way as its ancestors. Thus, tho it is true, as Professor Seligman asserts, that the bondholder gets no benefit from debt repayment, it is also true that the tax-payer suffers no loss. What he in effect does is to make an investment of certain funds, the proceeds of which will serve in future years to keep the bondholders' position intact without any further call upon the tax-payer himself being required. On posterity as a whole no direct objective burden is imposed by debt repayment of an internal loan, any more than by payment of interest upon it. We may conclude therefore that, apart from the consequences produced through reaction on the conduct of the persons affected at the time, the choice between the levy and the loan method makes no difference to the direct objective burden thrown on future generations. The payment of interest and the repayment of principal alike are transfers, not costs, and to whatever there is somewhere lost there corresponds elsewhere an exactly equivalent objective gain. It does not, however, follow from this that no difference is made by the choice between the two methods in the subjective burden borne by future generations. There is reason to believe that it is of this rather than of the objective burden that both Professor Seligman and Professor Scott are really thinking tho to interpret them so involves a rather generous straining of their language when they claim that the need to repay internal war debt throws a real burden upon posterity. Let us, therefore, consider the effects upon subjective burden. To simplify the discussion I shall begin by studying a representative man so situated that what he pays in taxes to finance the debt exactly corresponds to what he receives in interest and in repayment of the principal of his war loan holdings. In these circumstances it is obvious that the interest money merely comes out of one pocket and goes into another, and that a subjective burden is excluded as completely as an objective one. But with the part of the tax used to repay principal the position is a little different. In effect £100 has been taken from our representative man in taxes and then paid back to him as a price for cancelling his £100 war bond. If this procedure had not been gone through, this £100 would have remained in his disposable income and would, we may suppose, have been spent. As the procedure has been gone through, he realizes that, should he spend it, his "capital" will be £100 less than before and his future income therefore £5 less. He will, therefore, it would seem, need to save the greater part of that £100 and invest it so as to keep up his capital and conserve his future income; and this new need will obviously involve a real subjective burden. Such reasoning, however, ignores the fact that, tho if he does not save that £100, his future income will be £5 less, his future taxes, out of which his war loan interest is paid, will also be £5 less, since the £100 of war loan to provide interest on which the taxation is required has ex hypothesi been cancelled. When account is taken of this fact, it becomes apparent that the representative man's net income, after taxation has been deducted, will be exactly the same in the future as it has been in the past. His position as a whole, therefore, is not damaged in any way, and there is no reason why, to safeguard himself, he should save that £100 which he would normally have spent. It may perhaps be replied that the prospective escape from taxation will not balance the prospective loss of interest because he may reckon that, as general wealth increases, the amount of taxation which he personally will have to contribute will fall. But this reply is illicit, because he must be taken as a representative man whose wealth and (in his family) numbers expand in the same ratio as that of the whole community. A second possible reply that the tax will fall through loan conversion is obviously irrelevant since conversion would reduce loan interest equally with the taxation made to provide that interest. We may conclude, therefore, that, if he realizes the whole situation, the representative man will suffer no subjective burden in consequence of debt repayment. No doubt it is probable that in practice he will not realize the whole situation and will not perceive that his loss of capital is balanced by his saving of prospective taxation. So far as he fails to perceive this, he will be pushed into saving part of the £100 which he would normally have spent, and so will suffer a subjective burden. This appears to be the leaven of truth in Professor Seligman and Professor Scott's reasoning. Naturally this is not a complete account of the position. For, in actual life, as I have urged strongly elsewhere,1 when money is raised for a war, such a vast 1 The Economy and Finance of the War, pp. 66 et seq. |