Introduction

Debt management is a topic of considerable concern in Europe today. Italy, Belgium and Ireland all have debt-to-GDP ratios of around 100 per cent. Debt service consequently absorbs a significant share of government revenues, and shocks to real interest rates or economic growth threaten to launch debt-income ratios onto an explosive path. Substantial attention is devoted to alternative strategies for minimizing these dangers and costs (Giavazzi and Spaventa, 1988). These include budget surpluses designed to retire debt, inflationary policies designed to erode its real value, and capital levies designed to eliminate the debt burden at the stroke of a pen.

A capital levy in which a one-time tax is levied on all wealth holders with the goal of retiring public debt is the most controversial solution to the problem. The reasons for controversy are clear. A capital levy has prominent distributional consequences. It transfers wealth from asset holders to taxpayers who pay in the monies used to service the debt or to the beneficiaries of public programs that are crowded out by debt service costs. Alternatives such as inflation, forced conversion and debt retirement have distributional implications as well, but those consequences are usually less pronounced and hence not so hotly contested.

Moreover, it is not even clear that a capital levy can succeed in lowering the cost of debt service, properly measured, or enable the government to achieve its other objectives.