Does Government Debt Harm Future Generations?

Does government debt harm future generations, as it is often argued?  Government borrowing is argued to be immoral because of the supposed burden it places on our children, and our children's children, and so on.  Higher debt-financed consumption today makes future generations poorer tomorrow, so the argument goes.  An article in the Telegraph last year entitled, 'It's time to come clean about our national debt' used this very same argument.  Liam Halligan, the article's author, said:

Why should we borrow so much, foisting our profligacy on our children and grandchildren...A spiralling national debt isn't only bad economics, but is also morally repugnant. 

Unfortunately, the Economic View feels the need to point out, the economic logic behind the above argument does not completely hold.  In theory, government debt need not necessarily leave future generations any worse of at all overall - net.  This is because, for every pound the government borrows, there must be someone on the other side lending that money.  So, assuming all government debt is held only domestically, the 'burden' on future generations will be zero.  While some parts of the population will pay higher taxes to service the debt, another section will receive interest payments for lending the government that money in the first place (and these two groups are likely to overlap).  Of course, there are many other reasons that excessive government debt may be undesirable in terms of its effects on future generations, not least the distributional consequences, but in terms of the question of a net burden on society, the case does not hold.

Having said that, around 1/3 of government debt is in foreign hands, and so there will be a net 'burden' on society in the future to an extent.  The assumption that all government debt is held domestically is not completely accurate in Britain.  

Although, even then the argument over whether government debt burdens future generations is not settled.  It depends on how the government spends the money it borrows.  If it is being used to finance short-term consumption, then, yes, the fact that around 1/3 of our debt is foreign owned will mean that we are enriching ourselves at the expense of future generations.  But, if the money is used to finance vital, beneficial long-term investments in, say, infrastructure, then future tax payers will feel the benefits of that spending, as well as the costs, and so not necessarily be worse off overall.

So, while in theory government debt needn't leave a net burden on future generations, in reality it probably will to an extent.  However, as shown, when government debt is domestically held (as 2/3 of British government debt is), hyperbolically stating that government borrowing is 'morally repugnant', irresponsible and so on, is clearly a huge exaggeration.  As the economic logic shows, the majority of British government debt will, in fact, not leave future generations worse off.

Tax Avoidance Is Not Wrong

With revelations today about HSBC's part in helping the rich avoid (and possibly evade) tax, the blogosphere has become clogged with high-minded moralising over the wrongness and immorality of tax avoidance more generally.  In recent times, companies like Starbucks and Amazon have been vilified for 'aggressive' tax avoidance, despite avoiding tax being perfectly legal and within the bounds of the law.  The distinction between tax avoidance and tax evasion is important.  Recently, the line between the two has become blurred as people have condemned both, often without realising the difference.

Tax evasion is illegal and clearly wrong.  There is not any disagreement about this.  Companies or individuals found to be breaking laws with regard to their tax liabilities should be made to pay the entire amount originally required (as well as any compensation that may be warranted), and the full extent of the law should be pursued.

Tax avoidance, however, is perfectly legal, and it is here where The Economic View has concerns over the aforementioned recent 'high-minded moralising'.  It is also too easy to criticise and condemn companies for avoiding tax, complaining of the wrongness morally of doing so.  But, if a company is complying with all laws, then what is the right amount of tax to pay, if not the current amount?  What is the moral amount of tax to pay?  Much of the discussion around these issues is very generalised and vague about the wrongs of Amazon or Starbucks or whoever paying a certain amount of tax deemed 'too low'.  But, if it is within the bounds of the law, then what is wrong?  What amount should they pay instead?

As any tax accountant will tell you, there are a million different ways for individuals or companies to manage their tax affairs.  Tax liabilities can be structured in an infinite number of different ways, varying in efficiency and the amount of tax paid.  Who is to say which of these infinite number of different tax structures is more moral, or 'better' than any other, if they are all legal?

Lastly, while it is easy to condemn companies for tax avoidance, who among us does not avoid tax?  The Economic View certainly does not know anybody who voluntarily pays any more tax than is legally required, yet this is not seen as wrong.  Many people will buy things in duty free while going on holiday each year, avoiding VAT, yet this is seen as permissible.

While it is all too easy to moralise about the wrongs of tax avoidance and evasion vaguely and generally, specificity is needed as to whether the activity in question is legal or illegal.  Clearly, illegal tax evasion is wrong, but what about legal tax avoidance?  It is unfair to expect companies, or individuals, to pay anything more than the minimum amount required by law.  If we want rich individuals and large multi-national companies to pay more tax, we need to change the laws to force them to do so.