A New Structure for U. S. Federal Debt
A new paper by that title, here.
I propose a new structure for U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of the following:
- Fixed-value, floating-rate debt: Short-term debt has a fixed value of $1.00, and pays a floating rate. It is electronically transferable, and sold in arbitrary denominations. Such debt looks to an investor like a money-market fund, or reserves at the Fed.
- Nominal perpetuities: This debt pays a coupon of $1 per bond, forever.
- Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI).
- Tax free: Debt should be sold in a version that is free of all income, estate, capital gains, and other taxes. Ideally, all debt should be tax free.
- Variable coupon: Some if not all long-term debt should allow the government to vary the coupon rate without triggering legal default.
- Swaps: The Treasury should manage the maturity structure of the debt, and the interest rate and inflation exposure of the Federal budget, by transacting in simple swaps among these securities.
Of these, I think the first is the most important. Think of it as Treasury Electronic Money, or reserves for all. Why?....Consols.
The Grumpy Economist
A New Structure for U. S. Federal Debt
John Cochrane | professor at the University of Chicago Booth School of Business, a Senior Fellow of the Hoover Institution, and an adjunct scholar of the Cato Institute
John Cochrane | professor at the University of Chicago Booth School of Business, a Senior Fellow of the Hoover Institution, and an adjunct scholar of the Cato Institute
Coming from the University of Chicago Booth School of Business, a Senior Fellow of the Hoover Institution, and an adjunct scholar of the Cato Institute, one would expect a proposal for tax-free rent to subsidize the financially ailing rentiers.
4 comments:
Maybe you should read the paper where I prove the opposite -- tax free debt raises the amount rich people pay, by harvesting tax avoidance costs for the Treasury. John Cochrane
Thanks for stopping by and providing the correction. I've tried to locate that paper without success. Perhaps you could provide a citation, or at least the title.
Lacking that, in "A New Structure for US. Federal Debt" you say the following:
Currently, the market for Treasury debt is heavily segmented, with few taxable investors holding any debt. Eliminating the taxation of Federal debt will draw taxable investors back to the market, broadening demand for the debt.
Offering the debt in tax free form is likely to reduce the government’s interest costs, and save substantial costs of tax evasion and sheltering. These costs are at least in part borne by the government.
The theory of optimal taxation strongly discourages the taxation of rates of return. Taxation of interest distorts the decision to consume now vs. consume later, and discourages saving and investment. Perhaps in bit by bit real-world accommodation to these ideas, the government now maintains a complex system of tax-sheltered investment vehicles. Tax-free federal debt would be a far simpler security to provide for some of the same purposes.
Some of us think that optimal taxation involves taxing rent over work instead of work over rent. Those of us who favor taxing rents instead of work, or at least taxing rent at the same rate as work, would argue that not taxing work or reducing the tax on work relative to rent, encourages work and operates as an incentive eliciting increased productivity. After all, work is the basis of both production, labor being factor of production, and also consumption in that income from work is the primary driver of demand, savings being largely a residual of previous income and debt drawing future income forward.
Those favoring reducing taxes on rent usually also favor reducing taxes on firms to encourage production and capital formation. In a similar vein reducing taxes on labor would enhance and incentivize labor, increasing productivity, for instance. What is the rationale for favoring capital over labor? See, for example, Abraham Lincoln's First Annual Message for a traditional Republican argument.
This would also reduce the skew of income and wealth distribution in the direction of a flatter and more normal distribution curve, which some of us view as healthier socially, politically and economically by reducing the effect of luck and endowment, for example,
Anyway, under the current monetary system the bond market doesn't sets rates based on supply and demand. Central banks sets the policy rate and the yield curve is a forward projection based on anticipated changes in the policy rate, the slope of the curve reflecting the effect of inflation expectations on future monetary policy. The central bank can also target the yield curve if it desires. There are no "bond vigilantes," as Bill Gross and many others found out the hard way as they watched the monetary base grow wildly while the curve flattened and yields fell to unprecedented lows .
However, our approaches differ much more fundamentally, but that's beyond the scope of a comment, which is already getting too long.
It may help to move the needle towards the understanding that these accounts are IN REALITY savings accounts not "loans" or govt borrowings...
These securities have the characteristics of savings accounts or savings bonds...
Hey John suggest you drop the word "debt" from your proposal here these are SAVINGS accounts... sell your ideas THAT way...
We have an entire population going around thinking that we are "borrowing from our grandchildren" and/or "borrowing from the Chinese" both equally nonsense statements...
These are govt issued savings accounts...
if you dont join us to correct these amateur-hour, sophomoric, mistaken beliefs peddled by idiots working for some Pete Peterson funded debt-doomsday moron factory then you are NEVER going to see any of your ideas put into policy....
as the voters are being made to think our nation can go bankrupt and instead prefer a "balanced budget" policy in which the idea would be that NO UST securities will be issued of ANY kind.... yours or any body elses...
You either can be working to provide a solution to the current environment of fiscal policy ignorance or not .... your ideas will get NOWHERE if the conventional wisdom remains....
"The theory of optimal taxation strongly discourages the taxation of rates of return."
Much as Islam bans the use of debt.
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