Eli5: How does national debt pay bonds, but those bonds are then taxed?

Question

Does the tax go back into paying the bonds? Is this just a big loop in perpetuity?

In: Economics

Answer 1

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.