Don't Pay Down the National Debt

How the dismal science applies to your life.
Sept. 14 2000 3:00 AM

Don't Pay Down the National Debt

It's a great deal. 

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Who will do you more good: the guy who wants to cut taxes or the guy who wants to pay down the national debt?

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Well, why pay the debt at all? The answer—the one and only answer—is that it has to be paid eventually, and if we don't pay it now, we'll be taxed to pay it later. The more we pay up front, the lower our future taxes. In that sense, a payment on the national debt is a tax cut—it's a cut in tomorrow's taxes instead of today's.

So, the choice is not between tax cuts and something completely different; it's between tax cuts now and tax cuts later. That's a tough choice, because it's hard to predict what the "tax cuts later" might look like. At least the guy who calls for big immediate cuts has to tell you what kind of cuts he's got in mind: George W. Bush wants to lower income taxes and eliminate the inheritance tax. You might or might not like the package, but at least you have enough information to form an opinion.

By contrast, Al Gore wants to defer the bulk of his tax cuts to some time in the unspecified future—which means he's also deferring all the decisions about which taxes to cut. We don't even know who will be in office when the choices get made. That's a bit of a pig in a poke. Given all the surrounding uncertainty, you might even call it a risky tax scheme.

Still, Gore's unspecified future cuts might be a good bet if you expect your income—and consequently your tax bill—to rise over the next 10 years. The best kind of tax cut is one that kicks in when your tax bill is at its peak.

On the other hand, if you've got a lot of credit-card debt, you should demand your tax cut up front. Gore wants to pay down your share of the national debt, which accrues interest at about 6 percent a year. Bush wants to give you cash that you can use to pay down your Visa cards, which probably accrue interest at about 18 percent a year. That choice is a no-brainer. If Gore uses a dollar to pay down the national debt, you save $1.06 in future taxes. If Bush gives you a dollar you can use to pay down your Visa card, you save $1.18 in future credit card payments.

One of the first rules of fiscal sanity is: Never pay off a 6 percent loan when you've got an 18 percent loan outstanding. That rule applies equally to your 6 percent student loan and your share of the national debt. By reversing those priorities, Gore makes himself the candidate of fiscal irresponsibility. (In fact, for subtle reasons, the national debt costs you a bit less than 6 percent, making it an even better deal. Click for an explanation.)

Student loans aside, the national debt is just about the only low-interest loan you can find nowadays. Ironically, life would be a lot easier for borrowers if we brought back the debtors' prisons. The threat of prison reassures lenders that you'll make timely payments, so more lenders want your business and they compete by offering lower interest rates. Paradoxical as it might sound, debtors' prisons are good for borrowers.

And fortunately for borrowers, we do have debtors' prisons, at least in a limited sense. True, you'll never go to jail for defaulting on your Visa card. But just try defaulting on your share of the national debt—in other words, just try not paying your taxes. Suddenly, jail is a real possibility. So when it comes to the national debt, the institution of debtors' prison is alive and well. That's what keeps the interest rate on the national debt so low—lenders know that the government stands ready to compel timely payments.

You get a great deal on the national debt because lenders know it's the only debt you have to pay. Great deals should never be discarded lightly. If he preserves the national debt, George W. Bush will make himself the borrower's best friend.

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