The Lesser Evil: Why Borrowing Beats Tax Hikes in a Low-Interest Economy

 As the United States stares down a national debt of over $36 trillion, a predictable chorus has returned: it's time to raise taxes and balance the budget. On the surface, the logic seems sound. Interest payments are climbing, deficits are widening, and fiscal restraint feels responsible. But this conventional wisdom overlooks a fundamental truth in public (and private) finance: not all debt is bad, and raising taxes isn't free.

In 2024, the average interest rate on U.S. federal debt was around 3.28%. That's the cost the government pays to borrow money. Meanwhile, the economic cost of raising taxes—what economists call the "opportunity cost"—is often much higher. Over the past two decades, private investors in the U.S. have earned significantly higher returns than 3.28%. Private equity investments have yielded average annual returns of around 11%, public equities such as the S&P 500 have returned close to 10%, and private credit has averaged approximately 8.1%. 

So, this isn't just theoretical. It's economics 101. A dollar borrowed at 3.28% has a significantly lower cost than a dollar raised through tax hikes. Especially in an economy as large, productive, and resilient as America’s, government borrowing is not only sustainable—it's smart.

Even if the interest rate on government debt were to exceed the economy's growth rate, borrowing could still be the better path. Why? Because citizens and businesses are better off reinvesting the money they save from avoided tax hikes into productive activity—whether that’s hiring, building, or innovating—than having that money extracted to service interest on a marginally smaller debt load. 

This is particularly true because a progressive tax code places a disproportionate burden on precisely those individuals and entities who are often the most effective capital allocators. When high earners and successful entrepreneurs are taxed heavily, it’s not just their personal wealth that’s affected—it's the broader economy that misses out on the investments, startups, and innovations their capital might have enabled.

Moreover, individual American taxpayers have a practical mechanism to hedge themselves against rising government debt if they so desire. They don't need the Federal Government doing that for them.

They can always estimate the additional taxes they would owe if tax revenues were proportionally increased to eliminate the deficit. Instead of sending that amount to the government as taxes, they could buy government debt by the same amount (so effectively sending the same money to the government but getting debt titles instead of nothing). The kicker? They would then receive the interest payments generated by that debt, so their future "net tax payments" (tax payments required minus interest payment received) would be the same for them as it would have been in the absence of deficits.

If we’re serious about responsible fiscal policy, we need to consider not just the size of the debt, but the cost of reducing it. And in a world where borrowing costs remain below the return on capital, the choice is clear: deficits, while imperfect, are often the lesser evil.

Let's not sacrifice economic private vitality on the altar of misplaced fiscal puritanism.