Does the tax go back into paying the bonds? Is this just a big loop in perpetuity?
In: Economics
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The income from bonds does get taxed just like any other income. But taxes only take about 20% of the income, and it is only the income not the investment. So for example if you buy $100 in government bonds, so you loan the government $100. In a year the bonds mature and you get $110 in return. You then need to pay taxes on those $10 you earned so you need to pay back $2. In the end you end up with $108 while the government have lost $8. Hopefully the $100 you loaned them will have ensured they were able to increase their tax income by more then $8.
It’s like when you owe your friend $20, but you babysit for them and get paid $20, and then you buy them a coffee using the same $20. It’s all the same money just moving around different pockets.
To be clear, only the *interest* on treasury bonds is taxable. When the bond reaches maturity, the face value is repaid, and this is not subject to income taxes (assuming you also purchased the bond at face value).
Most of the economy is a loop. That doesn’t make it unimportant. When you buy something, someone else must sell it. And when they use the money they receive to buy something else, it means someone else sold them something as well. If you borrow money, someone must have lent it to you. This means you can spend the money immediately while the lender has deferred their spending and the price that the borrower pays to the lender for that deferral is interest. So this is shifting consumption over time.
It is when everyone contributes their share of production and consumption in this cycle, that it becomes an economy.
Yes, part of tax revenue does go towards paying back the interest and principal of the bond. This is simply asking the bond buyer to save and allows the government to spend more money now. It is still a cycle since what the government spends on (building bridges, paying salaries etc) goes back into the economy as earnings to someone else.
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