National Debt with Regards to Taxes - Essay Example

? National debt with regards to taxes Grade (December 10th, National debt with regards to taxes National debt refers to the money that is owed by the government, in form of the federal governments debts, state government debts and the debts owed by the local authorities, which may be owed to the central bank, to the public or to the private sector, in form of government bonds, or to the foreign creditors and foreign governments (Agonist Learning Center, 2009). While the debt could just be owed by the government, the citizenry and the potential investors have all the reasons to be worried about the increase in the National debt. This is because; the government can only generate money in two different ways, namely; selling the national resources or collecting taxes from the citizenry. Therefore, whenever the national debt is high, there is a likelihood that the citizenry will be affected, since the available national resources could not be sufficient to cover for all the government payments in form of the interest rates that it must pay periodically to the creditors (Boccia, 2013). The consequence is that; the taxes that are collected from the citizenry must then be increased, so that there is enough money to cover for the payment of the interest in the debts that the government owes different creditors. Therefore, while there could be less awareness in relation to the impacts of the national debts on the citizenry to the public, the truth is that the effect of the national debt must be felt by all. Thus, the effects of National debt include: The National debt affects the tax rates that are charged on the common citizens, as well as the private sector through the licensing and other legal requirements that business are required to have. Whenever the National debt is high, the government has to seek for a way to increase the available revenue so that it can be able to meet the debt obligations in form of interest payments that must be made every single financial period (Faulhaber, 2010). Consequently, when the government is unable to meet the interest obligations from the already collected tax revenues, the government turns to the public for more money through raising the tax rates that the public must pay on various essential products and services. The increased taxation on the other hand becomes a financial burden for the common citizens, considering that they are now getting less value for their money. When the rate of taxation has increased, the prices of goods and services that the common citizens consume goes high, which in turn means that the value for their money has now significantly reduced (Boccia, 2013). The increased taxation does not only affect the common citizens, but also businesses, considering that their profitability will be reduced, while the costs of operations will keep increasing. The consequence is that, National debt increases the tax burden on both citizens and businesses, making it hard for businesses to grow, while reducing the purchasing power of the public (Agonist Learning Center, 2009). The net effect is that, investments will not perform well in the situation where the national debt is high. Further, National debt affects the interest in the sense that, the national banks continuously keeps track of the national debt as they are continuously served with such information from the central bank. The relationship between the central bank and the other commercial banks is that; the central bank is the key determinant of the interest rates that the commercial banks will charge on loans and mortgages issued to the banks’ customers (Faulhaber, 2010). Therefore, when the national debt increases, there is a need for more money that is used to cover for the increased interest rates that the government must pay to the creditors. Consequently, the central bank raises the interest rates, which are then increased by the commercial banks in similar proportions (Boccia, 2013). Therefore, the increased national debt serves to increase the burden on the common citizens, through forcing them to pay more, in the interest of the loans and other debts they owe to the commercial banks and other financial institutions. The increased interest rates arises because; whenever tax revenue is collected by the government for the purpose of offering the normal social services that the government must deliver to the people, not all such tax revenues will be used to offer the desired services, since a percentage of the tax revenue will be used to pay the government debt and the periodical interests arising from the national debt (Agonist Learning Center, 2009). Consequently, the interests charged are increased to make-up-for the lost percentage that could cater for the social services, increasing the burden on citizen borrowers, who must pay high interest rates on their loans and mortgages. National debt has an overall effect on the economy, which is detrimental to the welfare of business and citizens, considering that the poor performance of the economy trickles down to affect the businesses operating in the economy, while also robbing off the citizenry affordable goods and services (Boccia, 2013). Whenever the National debt is high, the national deficit is also increased, considering that some percentages of the collected tax revenues will be applied towards the payment of the national debt, leaving the amount available for spending by the government reduced, such that the available income for spending is lower than the amount that is required for the economy to run successfully (Faulhaber, 2010). Consequently, increased National debt reduces the economic activities through reducing the government spending on the economy, which in turn means that there is reduced economic growth, incomes and revenues, which eventually reduces the tax revenues generated (Agonist Learning Center, 2009). This spiral effect means that the growth of economy will stagnate or the growth will be at very low rates, which in turn means that the ability of the economy to support new investments and business portfolios will be highly reduced, making business to earn less profit or even loses. This being the case, some of the business and investments will be forced to close down or move out of the markets, while the entry of new business establishments and investments will be hard, since they will barely earn any revenues and profits, due to reduced spending in the economy from the government, the private sector and the citizens (Boccia, 2013). Finally, National debt affects the ability of the government to deliver social services to the citizens, which in turn means that the government can only deliver selective essential services, or will impose the burden of financing the social services on the citizenry, through introducing the concept of cost-sharing, where the public has to pay a certain percentage of the value of the social services delivered to them, by the government (Boccia, 2013). The cutting of services by the government will mean that the burden is now transferred to the citizens to finance the provision of essential services, which means that their purchasing power and ability to spend on the economy is highly reduced. Whenever the burden of financing the social services is transferred to the public, the cost of living will definitely increase, while the unemployment will soar high, considering that the cutting of certain services by the government will be accompanied by the unemployment of a certain percentage of the population, which had been previously involved in the services provision (Agonist Learning Center, 2009). Conversely, the government may not cut the delivery of social service to the public, but it must increase the taxation of the public to be able to meet the costs of services delivery (Faulhaber, 2010). This means that the tax burden imposed on the public effectively reduces the value of their incomes, while increasing the costs of living. When translated into the business context, increased costs of living and reduced income value, means less purchasing power and thus reduced spending from the public (Boccia, 2013). This simply means that investments will not thrive well in the economy, and thus the investment portfolios will be more risky, while the potential future livelihoods will be costly. References Agonist Learning Center (2009). How Does National Debt Affect You? Retrieved December 9, 2013 from http://agonist.org/Learning-Center/mortgage/howdoesnationaldebtaffectyou.html Boccia, R. (February 12, 2013). How the United States’ High Debt Will Weaken the Economy and Hurt Americans. The Heritage Foundation. Faulhaber, T. A. (2010).How Does the National Debt Affect Me? Business Forum Online. Retrieved: December 9, 2013 from http://www.businessforum.com/debt01.html Read More