Your taxes pay for nothing. They never have and they never will. You will have been told countless times that your taxes pay for all the things the government spends on; from defense to roads, to hospitals, to education, and so on. But any government that owns its own currencydoesn’t use tax money to pay for a thing, and that accounts for most national governmentsin the world today (apologies to those with the Euro and countries like Ecuador that use the US dollar, this part isn’t for you).
For the purposes of this article, we are talking about national governments with a sovereign currency. Government spending with an owned and controlled currency occurs not by taking money from taxes or other revenue, but by creating new money, which the government has the power to do in unlimited amounts. A government in this position spends by creating new money electronically: someone at the central bank type new numbers into a screen and new money is made.
There is no need to take money from somewhere else if you can create it just like that, nobody likes paying taxes, and we all expect to get something in return for paying them.So if the government doesn’t spend your taxes, what are taxes for? In the first instance, taxes are what give a currency its value. The coins, notes, and numbers on a screen don’t have inherent value to them, so what gives them the value we all accept them as having every day?
When a government introduces a new currency there is no real reason for anybody to want it. Nobody will accept a currency as payment unless they are confident that other people they are going to buy from will want the currency too. To instill value the government requires taxes to be paid in that currency, then everybody who pays taxes needs some of that currency, so demand for it is created. The government can now spend the currency for the things it wants because all the population wants some.
Importance of Paying Tax
This also highlights the fallacy of the idea that a government taxes you and then spends the money. No one can pay taxes in the currency if the government hasn’t spent any of it yet, because no one will have any of that currency. Spending must come first and taxes second.
- Taxes also regulate the amount of money in the economy. When the government spends by creating money the total amount of money in the system goes up and up, by a considerable amount each year if you look at an average government budget.
- If there is a lot more money available the supply is high, so the value of the currency falls and you have inflation. Taxes are the government taking some of that money back out of the system. What the government actually does with your taxes is destroy them. The currency is deleted fromexistence in order to maintain a stable amount of money in the economy.
- As grim as the idea of the money you pay in taxes going up in smoke is, doing that prevents the money you still have from going down in value, so it’s a win in the end.
- Taxes also prevent inflation in a more specific way. If the government decides to buy up all of the available resources, it can. It can create as much money as it chooses and can buy any amount of anything that is for sale in its own currency, be it steel, wheat, pencils, or even human labor. If the government wants to keep buying the resource beyond the amount that is in surplus, the private sector will begin to compete for the amount it wants by trying to outbid the government.
Back-and-forth outbidding can cause the price to jump up, as the government has caused demand to significantly exceed supply, and if this happens across a wide range of resources then we have inflationagain. Taxes can reduce private businesses’ ability to bid higher against the government and prevent the price from rising out of control. By controlling inflation the value and stability of money have been maintained. Finally, taxes are also used to influencebehavior. Making something more expensive makes it less likely for people to buy it.
Stability of a National Economy
Tobacco is taxed for this reason, as is alcohol and a range of other things that the government doesn’t want to ban, but wants to discourage. Taxes are vital to the health and stability of a national economy, but they play no direct role in funding government spending. That spending is all done by currency creation as long as the government owns its currency.
Whenever someone says that the federal government can’t afford something, or that to fund some spending they will have to raise taxes, or even just that your taxes are being wasted on something they don’t like, they are trying to deceive you. The government doesn’t need your money to spend it, they need to take it to give the rest of the money value.