How Treasury Bonds Help Corporations and the Rich

This is Richard Wolff from Democracy at Work responding to another ask Prof Wolff question from a supporter, namely David and I want to thank David for posing the question very simply and clearly: what the roles are, or the role if you like of U.S Treasury bonds in the functioning, the problems, the failures of modern capitalism. What are treasury bonds is where I’m going to start, because they are a very important part of the story.

Treasury bonds are simply the borrowing by the United States government, the U.S Treasury to be particular a branch of the government in Washington D.C. It borrows money in part to pay for the services it provides: Social Security checks, manning the harbors, regulating the businesses, the defense department, all the things that the federal government does. The many different things. Now, let’s be clear. The government could pay for the services it provides by taxing. Governments do that on a regular basis. The government of the United States has in various points, and this is true for state and local governments as well, relied on taxes for 100% of the revenue they need to perform the public services we ask our government to do and the only time the government borrows is if it wants to spend but does not want to tax to raise the money it wants to spend. That is a political choice always.

No one should believe that there’s anything automatic or necessary or handed down, as if by God, to have governments borrow. So, let’s begin. Corporations and the rich in our society don’t like to pay taxes. The mass of people doesn’t like to pay taxes. It’s kind of a truism. You want the government to do all kinds of things to help you, but you don’t want to foot the bill in taxes to pay for it. That’s pretty much universal. The problem is corporations, and the rich have the profits of our society in their hands. We all work, we all help to produce the profits, but the corporations get them and one of the things they do with them is pressure the politicians not to tax them. And the politicians have to be listening and behaving accordingly.

The mass of people doesn’t have that money. The mass of people doesn’t make the donations the way the corporate rich do and, so over time, the taxes get shifted in most capitalist countries off of corporations and the rich to a large extent and on to the mass of people. But you can’t do that forever. Let me give you an example.  Here, in the United States, a hundred years ago more than we passed a federal income tax designed from the beginning to hit the richest people. Over the last hundred years the richest people worked their political magic buying the politicians who shifted the burden of taxation, so today only half of our federal government’s receipts come from taxes. Where do they come from?

Not the tax system we set up a hundred years ago because that was progressive: the higher your income the more of it you had to pay in taxes. The rich don’t like that, so now half the taxes the federal government gets come from the Social Security System where everybody is taxed at the same rate. That’s a wonderful thing for rich people and puts the burden of taxes on average people. Serious problem. What can the mass of people do? Well, they can have a tax revolt and Americans have done that: we can’t stand any more taxes, you can’t tax us anymore and they vote against politicians who propose another tax and for politicians who say I won’t tax you. Whether they really do or not as we all know is another matter but now the politicians in our capitalist system are stuck.

They can’t dare tax the rich in the corporations and they don’t. They attack the mass of people. What are they going to do because the corporations and the rich and the mass of people all want government services and lots of them. Solution: borrow money. And the way that’s done is the U.S Treasury prints a piece of paper: federal government will pay you X dollars in this year in the future if you give us those X dollars now, so it’s a way of raising money for the government called a treasury bond. Why is that important? Well, first of all, it is a colossal waste of our money. Why? Because if you tax corporations and the rich and it would have to be them, because the mass of people don’t have the money, that for this government to tax more than it already does. So, if you tax corporations and the rich a hundred dollars that’s the end of the story. The corporations and the rich have a hundred less and the government has a hundred more to pay for their services.

If you don’t do that, you must borrow the money. But from whom do you borrow? Answer: from corporations and the rich because the mass of people don’t have the money. If you look at who the government owes money to, its corporations and the rich, and a few others but the mass of the American people are not a significant lender to the United States government so it’s the corporations and the rich, who refuse to pay taxes, so that the government has to come back to those same people and borrow from them the money it did not tax from them. This is wonderful for corporations and the rich. It’s a no-brainer to prefer having a debt. Lending a hundred dollars to the government that the government pays you back plus interest over the years while you wait is way better for corporations and the rich than being taxed. So, of course, they support government borrowing if they feel it’s their tax money that they’re not going to have to pay in taxes that instead they can lend.

But you also all know, if you think about it, that if the government gets a hundred from the corporations by taxing them that’s the end of the story. If the government gets a hundred-dollar loan issuing that treasury bond to get it, they are going to have to pay that money back and pay interest. It is a much more expensive way to raise money for government services than to tax corporations and the rich. The treasury bond is therefore a subsidy for corporations and the rich they’re the ones who get out of the taxes because they’re the most able to pay and they’re the ones who benefit from the treasury bond because it’s a substitute for paying taxes that keeps the money in their hands and earns them interest. There is much more to say, but I wanted this basic understanding to show you that it’s a system geared towards corporations and the rich and not to the rest of us.