Why are there taxes?

Great Debates
1

Weird question, and I wasn’t sure where to put it.

I don’t mean a historical explanation, I mean a justification in light of the fact that in the US economy anyway (and I’m referring specifically to economies that work this way) the fed creates money by pushing buttons and distributing the created funds to various banks.

So then… why are there taxes? We don’t need taxes to pay for stuff, we can just create the money to pay for stuff. So instead of taxing income to, I guess, supplement money creation (?) why not just create the money and distribute it in some way that in the end is arithmetically equivalent to the current system? (I.e. if I would have paid $3000 in taxes before, instead the feds just create that $3000 and spend it where they would have spent my $3000, and they let my income end up falling wherever it might due to economic forces. If I would have received $3000 in like, unemployment benefits or whatever, the fed simply creates that $3000 and spends it to give me unemployment beneifts rather than charging other people for my benefits).

I don’t mean this as a moral question. It’s almost like, an arithmetical question, plus a lot of “what incredibly dense misunderstandings am I under about how things work?”

2

Perhaps the increase in money supply, too rapidly, would be counterproductive due to inflation?

3

You can’t fund a government of the size of the USA’s this way without runaway inflation. You’re talking about injecting $4 trillion in new, printed-out-of-thin-air money into the economy.
Qatar used to be able to fund its government with oil revenue and no taxation, IIRC, but they’re an exception.

4

I guess in addition to money creation, without taxation there would have to be a mechanism for money destruction (aside from burning dollar bills is there a such thing in our economy?).

5

I tried imagining this in a toy nation of three citizens with different economic roles, and very quickly got into a planned controlled economy (currency ended up being certificates giving people a right to take others’ stuff–I was surprised it seemed to have to go that way but otherwise, yeah inflation). Hm

6

The real reason for taxes in a fiat money supply is to prevent inflation and stagnation of the money supply.

You are correct that the govt doesn’t actually need to levy taxes on its citizens to pay for things, it could just print the money.

But, if it printed the money, then the money would become less and less valuable (which is does anyway, but at a sustainable rate), and hyperinflation starts to become a probability.

So, the govt taxes the money to prevent it from pooling up, creating an inflationary bubble without creating any extra demand or supply.

This is why tax policy should be geared toward removing money from the areas it has pooled up and is not actively participating in the economy, and moving it to areas where it is scarce and will create the most multiplicative effect in the economy as possible.

This would involve taxing the rich, and giving the money to the lower class.

7

I do see the best method of a UBI being one where people are sent coupons that can be sued to purchase necessities or get slightly less necessary things at a discount, with remittances by the govt.

8

Please critique the following simple analogies

We have a toy nation with three citizens. Farmer creates four apples a day. Builder creates apple sculptures. Hippie sleeps all day.
Each citizen requires one apple a day to survive, but likes it if they can have more.
However Farmer likes sculptures more than he likes having more apples to eat.
And Builder keeps a fraction of each apple he sculpts and eats it, which he enjoys more than having his sculptures.

ALSO it is actually possible for the three by agreement simply to create an apple out of nothing. Just as edible and sculptable as the ones Farmer grows.
I envision three possible systems:

System A:
No taxes, and no apple creation because no one finds it in their individual interest to agree to it. So, farmer charges whatver he wants, builder charges whatever he wants, hippie dies while farmer and builder trade apples for sculptures at a rate pleasing to both.

System B:
The three have agreed to put three of Farmer’s apples each day into the community pot. And each citizen has a right to one apple a day from the community pot. Meanwhile, farmer and builder trade that extra grown apple for sculptures, and hippie lives to nap.

System C:
They agree to just have three apples created each day. Each of them eats every day as a result, so hippie survives, and farmer and builder trade apples for sculptures.

System C is almost completely disanalogous to anything in reality of course, because you can’t eat fiat currency! But we can imagine Farmer and Builder might get super bored with the whole sculpture trade much more quickly when they’re doing three a day instead of one a day. This is like inflation I think?

So I imagine a system D, which introduces scarcity. Sometimes Farmer ends up with only three apples. Sometimes with five.

System D:
Three of farmer’s apples go into the pot each day. BUT on those days when he only grows three apples, and ONLY THEN, they have agreed to create a fiat apple. It is specially apportioned to Farmer out of the pot, and the other three in the pot are distributed to the three citizes as per system B above. However in exchange for this special right to the fiat apple, Farmer is required, on the days he manages to grow five apples instead of four, to give the extra apple to the pot and it is specially apportioned to Builder, who can do whatever he wants with it. (Because Builder demanded this extra occasional apple in order to agree to Farmer getting the fiat apples.)

I think (?) this is kind of a picture of deficit spending in times of scarcity etc?

I can imagine a system E much like D but in which the extra fifth apple is simply destroyed, preventing the inflation that occurs in D (which was not as bad as in C but which still existed) at the cost of a seeminly senseless destruction of a resource. I suppose this is like what I remember reading about in Grapes of Wrath with crops being burned to lower the supply?

9

Alaska has almost no taxes due to the oil but I think that is changing soon due to the oil running low.

10

I once read an interesting theory that taxation is necessary in order for money to have value.

Suppose I started making my own money; colored pieces of paper with their value in nemos printed on them. The question then would be who would want to own nemos? What gives them value? In general, nobody is going to have a reason to want to own nemos and they won’t have any value.

Now suppose I own a grocery store and I announce I will accept nemos in exchange for groceries. At that point, nemos would have some value. People get hungry, they want to buy groceries, and they can exchange any nemos they own for groceries. It can even begin working indirectly; you might buy groceries in the next town over but your neighbor shops at my store. So if you offer him five nemos to mow your lawn, he accepts because he’ll use them to buy groceries. And it the neighbor on the other side offers you five nemos to walk his dog, you’ll accept because you’ll know you can use them to get your lawn mowed.

So now step it up to where the government comes in. Some ancient king issues pieces of clay with their value in shekels printed on them. And he tries to build an economy around them. But nobody has any interest in owning pieces of clay and shekels have no value.

So the king tells his subjects that there’s a new thing called “taxes”. At the end of the year, his guards will go from house to house and collect a hundred shekels from every household. And any family that doesn’t hand over the shekels gets their house burned down. Now everyone wants to make sure they own at least a hundred shekels by the end of the year. Shekels now have value. Farmers will trade crops for shekels, bakers will trade bread for shekels, brewers will trade beer for shekels, etc.

The king can now base his economy around the shekels. He can buy his fancy food and fine wine for shekels. He can spend shekels to buy the things he wants for his palace. He can pay his soldiers and servants with shekels. And at the end of the year, he’ll get a whole bunch of shekels back and do it all again for another year. All because taxation created a demand for shekels.

11

I think that is more than an interesting theory, I think that is the basis for fiat currency. At least, I’ve heard that from numerous sources over decades.

“Fiat money has value because you pay your taxes with it.”

12

Who would decide that it’s $3000 that is created to represent you and how would that change over time? I mean, why not just make it $3500 next year if we need more services? Now multiply that by the number of taxpayers.

The thing is, money represents labor. US taxes are based, mostly, on income tax (IIRC the majority of the rest is from payroll taxes, with corporate taxes and other taxes making up less than 20% of the remainder) as represented by people working. Obviously, there are other ways to tax people, but that’s how we have done it in recent history. If you wanted to do away with taxes and just create the money you have to have something that is backing it, even if that something is just the belief in the US and the dollar. What would back it in your scenario? Also, presumably you’d have the federal government basically being the sole provider for every person income in your scenario…I mean, somehow you have to take that same $3000 in value from you per year (and whatever else from everyone else), and you’d do that by, what? Creating the payroll for everyone who works by creating the money they receive (who decides what that ‘should’ be?) for the work they do less the money you create to represent their taxes?

You see the issues with all of this? If you are just going to magically create the money without including the current taxpayers (i.e. everyone gets a 100% tax cut and you just fund the whole thing by fiat) then what is the value of your currency actually based on and why would anyone accept it? Why would, say, China buy US currency in this case? Or the EU? Or Japan? Or anyone else?

13

What has been puzzling me about it is that we already magically create money, so that doesn’t seem to be a problem in principle. You said dollars represent labor, but since dollars can be created by fiat I’m not sure that’s what they represent. Literally, “I’m not sure.”

14

We do create money by fiat, but we don’t arbitrarily create all the money we want. However, here you are getting into deeper waters from my perspective, as I am neither an expert nor even someone who is well versed in this aspect, so maybe one of the sharper monetary 'dopers will wander in with a good explanation of this. I can offer this YouTube thread about creating money if it helps (here is one on the Fed perspective). IIRC, there is also an older article by Cecil on this subject you could do a search on.

15

The US government has experimented with government issued money in times of war. This includes the continental and the greenback. Both were miserable failures. The reason why the federal reserve note is not a miserable failure yet is because it is at some remove from the US Congress. The Fed has been highly accommodating for US debt and has been known to play politics throughout its history, but the currency isn’t as bad as a straight government created money.

16

I’m sure if we looked hard, we could find a few governments that didn’t have taxes, but if the people of Sumer and Ur had to pay taxes, and the Roman Republic and Empire, and Ancient China (every dynasty), going to businesses in the most conservative parts of the US in the modern world, I don’t see how a country could operate without taxes.

Printing money would simply lead to runaway inflation. See Zimbabwe, or Germany and Eastern Europe before World War II (and in some countries, like Serbia, afterward too).

I think that’s a tax. They’re taxing oil revenue, though, rather than income in general.

17

Dollars don’t represent anything. They are a medium of exchange. If you think of dollars as just another good, you will be on the right track. They’re just something people trade with and they allow for economic calculation.

18

Some information may be found here at the Research Asssociation on Monetary Innovation and Community and Complementary Currency Systems. They also host this exhaustive-looking searchable database of papers. a cursory browse made my head spin, but more experienced deep-divers may have better luck.

19

Yes but we would also be leaving trillions of dollars in unpaid taxes in the economy.

I think the Scandinavian countries get close and do a lot of middle eastern countries.

20

They’re opening up the ANWR.