The Economics Book

76

BORROW NOW,

TAX LATER

BORROWING AND DEBT

S

hould government spending

be financed by borrowing or

taxation? This question was

first addressed in detail by British

economist David Ricardo during

Britain’s expensive Napoleonic

wars against France (1803–15).

In his 1817 book Principles of

Political Economy and Taxation,

Ricardo argued that the method

of financing should make no

difference. Taxpayers ought to

realize that government borrowing

today will lead to more taxation in

the future. In either case they will

be taxed, so they should set aside

Should government spending

be financed by borrowing

or taxation?

If the government

borrows now...

... people will know that

they will pay more tax later

to repay the debt.

... people will have to

pay more tax.

If the government

increases tax now...

It makes no difference whether

the government chooses to tax now

or “borrow now, tax later.”

IN CONTEXT

FOCUS

Economic policy

KEY THINKER

David Ricardo (1772–1823)

BEFORE

1799 Britain introduces

income tax during war with

revolutionary France. Public

debt approaches 250 percent

of national income.

AFTER

1945 Following World War II,

government spending,

taxation, and borrowing rise in

developed economies to meet

new welfare commitments.

1974 US economist Robert

Barro revives the idea of

Ricardian equivalence, which

says that people spend in

the same way regardless of

whether their government

taxes or borrows.

2011 The European debt crisis

intensifies, sparking debate

about the limits of taxation

and public borrowing.